IRDAI allows insurers to invest in startups via fund of funds

India’s insurance regulator has allowed insurers to invest in fund of funds that invest within the country, in a move that is expected to open up more capital options for India’s burgeoning startup ecosystem. 

However, insurers are barred from investing in fund of funds that invest in overseas companies or funds, the Insurance Regulatory and Development Authority of India or IRDAI said in a circular modifying the guidelines for alternative funds or AIFs, dated April 5.

It also barred insurers from investing in alternative investment funds in which the insurer has taken an exposure. Insurers will also have to obtain a quarterly report from a concurrent auditor about their compliance with these conditions and file it along with their quarterly periodical returns, the circular said. 

An Alternative Investment Fund is essentially any fund established or incorporated in India which is a privately pooled investment vehicle and collects funds for investing, according to a defined investment policy for the benefit of its investors. 

A fund of funds is essentially an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. In the context of AIFs, a fund of funds is an AIF that invests in another AIF.

In a 2017 master circular, the IRDAI had said that “no investment is permitted in AIFs, which are of fund of funds and leverage funds”. However, the latest circular replaced that part and said that investment is permitted into AIFs which undertake leverage or borrowing to meet day-to-day operational requirements

Essentially, insurers will be allowed to invest in a fund of funds that invests in various types of funds such as real estate funds and private equity funds, among others, opening up another route for startups to get capital. 

“This would lead to major mobilization of domestic capital for investing into startups,” Anil Agrawal Joint Secretary at the Department for Promotion of Industry and Internal Trade, said in a tweet. 

Last month, the Finance Ministry had allowed domestic private provident funds to invest upto 5% of their surplus in alternative investment funds that back venture capital funds, SME funds, social venture funds and infrastructure funds, among others. 

The move is expected to offer more capital to startups in India who have been asking for private Indian pension funds to be able to invest in AIFs, in addition to foreign pension funds that are already allowed to do so.