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Insurance regulator IRDAI opens the way for insurance money into startups

The Insurance Regulatory and Development Authority of India has relaxed the rules for local insurers investing in domestic fund of funds (FoF), including those which back startups.

The insurance regulator’s move comes as a significant spur to startups looking for alternate financing modes to foreign private equity and venture capital funds. It will also enable insurance companies in the country to grow their portfolios from traditional investments such as government bonds and public infrastructure projects.

But insurers are not authorized to invest in fund of funds that invest in foreign companies, the regulator said in a circular, transforming regulation for insurance firms investing in alternative investment funds (AIFs) approved by the Securities and Exchange Board of India.

The current guideline, which states “no investment is permitted in AIFs which are of fund of funds and leverage funds” has been amended to “no investment is permitted into AIFs which undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted under Sebi (Alternative Investment Funds) Regulations, 2012”.

The new Irdai circular states that insurers who are targeting such investments will now have to obtain a compliance certificate issued by a concurrent auditor every quarter.

“The FoF system is the perfect vehicle in terms of diversification for Indian institutional capital,” said Siddharth Pai, founding partner at 3one4 Capital and co-chair at the Regulatory Affairs Committee of the Indian Private Equity & Venture Capital Association (IVCA).

Pai, however, wondered whether insurance companies could invest in AIFs with overseas investments if the invested amount did not constitute a part of the overseas investment. “The inflection point for any startup ecosystem is when domestic institutional capital is allowed to start investing into the local ecosystem. This move by the Irdai and the move by PFRDA (Pension Fund Regulatory and Development Authority) last month show the government’s intent to accelerate institutional rupee funding to startups, which will help in economic growth and job creation,” he said.

“This allows insurance companies to derisk their exposure. However, such capital from insurance companies cannot be utilized by an AIF to make investments outside India and this is a matter that still needs discussion,” said Ashley Menezes, partner at ChrysCapital Advisors and chair, Regulatory Affairs Committee, at the IVCA.

Insurance companies in India cumulatively handled Rs 38.4 lakh crore in fiscal 2019, as per Irdai data.

As per existing rules, insurers investing through AIFs are not authorized to park their funds in FoFs.

The majority of their investable assets are required to be parked in government securities, approved categories of equity investments, and in-housing or infrastructure-based investments. The law also permits a small part of the investment in ‘other’ categories of investment including Sebi-approved AIFs.

Investments to AIFs are allowed with a 3% exposure cap for term and unit-link assets; and a 5% cap for general insurers.

According to the Irdai annual report for FY19, for life insurers, 66.6% of the conventional funds are invested in government and state securities. The remaining 33.4% is invested in infrastructure projects and permitted categories of investments including AIFs. Over 94% of ULIP (unit-linked insurance plan) funds are invested in approved investments with the remaining in AIFs.

For general insurers, 51.6% of assets are invested in government bonds and low-yielding loans to states, while nearly 45% is invested in approved investment categories and around 3.7% in AIFs.

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