Startups to gain as investment rules ease for pvt domestic pension funds

Indian startups will have a new source to raise capital after the finance ministry allowed private retirement funds to invest up to 5 per cent of their investible surplus in venture capital (VC) funds and other areas, said experts.

Indian capital has yet played a small role in the growth of domestic startups, but that could change after the ministry freed alternative investment funds (AIFs)

“In a low yield environment, global institutional investors are chasing growth in order to meet their internal return benchmarks and India startups have emerged as a strong engine of growth. With these changes, Indian institutional investors finally have the ability to participate in this growth story and to make asset allocation choices for optimum returns,” said Siddarth Pai, founding partner of VC fund 3One4 Capital, which has startups Licious and Yulu in its portfolio.

Foreign pension funds invested capital in startups through AIFs or direct investments. The ministry’s step allows for much better returns for the funds and domestic ownership of Indian companies. “With interest rates at their lowest in the past 10 years, it will be very tough not just for private pension funds but also for GOI-driven EPFO to deliver the high single-digit returns without allocating a portion of the pool into AIFs which help deliver 20-25 per cent IRR. Thus, it is a welcome first step to allow at least private pension funds to invest 5 per cent of their surplus in venture capital funds,” said Anup Jain, Managing Partner, Orios Venture Partners.

According to Bengaluru-based VC fund Blume Ventures, the decision sends a strong message to the global investors as well as Indian families that domestic startups are here to stay.

“It will help good quality VCs raising capital from Indian sources and will also shore up sovereign wealth over the next decade which is the biggest by product value driver for India's future growth. The key will be to understand the conditions to be complied with to avail of this funding,” said Ashish Fafadia, Partner, Blume Ventures.

The finance ministry’s conditions say that investments should be in AIFs in infrastructure, SME, venture capital, and social welfare. Funds will invest only in those AIFs, which have a corpus of more than Rs 100 crore. Exposure to a single AIF shall not exceed 10 per cent of the AIF size. However, this limit won’t apply to a government-sponsored AIF. Funds must ensure that investment is not made directly or indirectly in securities of the companies or funds incorporated and/or operated outside India.

This new move also indicates a growing recognition of angel investing as a viable asset class and will encourage more investors to look at angel investments. “When done with due research and through the benefits of group investing, Angel investing has an opportunity to become one of the leading asset classes for the future. This is a step in that direction,” said Ankur Mittal, co-founder, Inflection Point Ventures.