Government allows domestic private retirement funds to invest in alternate investment funds

The government has allowed non-government provident funds, superannuation, and gratuity funds to invest up to 5 percent of their investible surplus in alternate investment funds (AIFs).

In a big boost to the startup ecosystem, which could possibly result in increased flow of domestic capital, the government has issued a notification to allow private retirement funds to park five percent of their investible surplus into Alternate Investment Funds (AIFs).

AIFs are vehicles through which venture capital firms and private equity players route their money for investment purposes.

The gazette notification issued by the finance ministry allows non-government provident funds, superannuation funds, and gratuity funds to invest in units issued by Category I and Category II AIFs, subject to certain conditions.

The permitted investment segments under Category 1 AIF are infrastructure, SME, venture capital, and social venture capital funds.

The notification said, “Funds shall invest only in those AIFs whose corpus is equal to more than Rs 100 crore”.

Calling it a big breakthrough, Gopal Srinivasan, founder and CMD, TVS Capital Funds, said this decision by the government will open the doors for domestic funds into the venture capital ecosystem in the country.

According to him, the two categories of AIFs have around Rs 2 lakh crore is committed annually but only about Rs 30,000-40,000 crore comes in the form of rupee fund which largely comes from family offices.

“The Indian Venture Capital Association (IVCA) has been working hard with the government to allow such funds to invest in AIFs,” Gopal said.

He believes that the participation of private pension funds in AIFs would increase their yield and also lead to higher domestic capital formation.

The TVS Capital Funds founder said as this is the first step, the government could look at the possibility of opening up public sector pension funds to invest in AIFs.

“These developments send a strong signal that capital is available for domestic venture capital funds,” Gopal Srinivasan said.

The conditions put forth by the government for investing such funds include: funds will invest only in those AIFs whose corpus is equal to or more than Rs 100 crore, the exposure to a single AIF shall not exceed 10 per cent of the AIF size, funds must ensure that investment should not be made directly or indirectly in securities of the companies or funds incorporate and or operated outside India etc.

Edited by Teja Lele