A 12-member expert committee formed by the Planning Commission has asked insurance and pension regulators to allow investments in venture capital (VC) funds by firms under their respective jurisdictions.
The suggestions are part of a report on angel investors and early-stage venture capital funds titled ‘Creating a vibrant entrepreneurial ecosystem in India’, submitted by the committee earlier this week.
“The Pension Fund Regulatory and Development Authority and the Insurance Regulatory and Development Authority (Irda) could permit investment of part of pension and insurance funds in early-stage VC funds,” the panel suggested. These investments may be capped at one to two per cent and limited to funds registered as VCs under the Securities and Exchange Board of India’s (Sebi) Alternative Investment Funds Regulations. This would address the lack of sufficient institutional capital from the domestic space.
| KINDLING HOPE |
Source: Creating a vibrant entrepreneurial ecosystem in India |
According to the report, a large part of VC investments in India is accounted for by offshore funds that haven’t traditionally invested during the seed stage. Therefore, there is a need to encourage investments of less than Rs 5 crore locally, it stated.
While the VC industry is upbeat, some insurers are sceptical about venturing into the “high risk” space. Nirakar Pradhan, chief investment officer, Future Generali Life Insurance, said, “Given the insurance industry is distinct from other investment funds, as it needs to look at sustainable long-term returns, and keeping in mind the safety and liquidity of the portfolio, it may not be advisable to get into a high-risk, high-return asset class.” However, he added since early-stage investments were critical to the economy, these could be routed through some state-supported funds “in whose rated instruments the insurance companies can be allowed to invest.”
The panel also suggested various measures for regulators such as Sebi, the Reserve Bank of India (RBI) and the Ministry of Corporate Affairs to kick-start the venture capital industry. It wants Sebi to lift the 33.3 per cent cap on debt investments by venture funds registered with it to encourage debt investment. This would “encourage both the creation of venture debt offerings in India and the entry of foreign players.” The 12-member panel suggested RBI include venture investing in the priority sector and exclude lending to VCs (up to Rs 500 crore) from provisioning norms. It added such investments should not be considered “capital market exposure”.
“The central government and regulatory bodies can enable the flow of capital in the entrepreneurial ecosystem. They can create a policy environment that offers fiscal and non-fiscal incentives and easy investment norms for angel investors and venture capital funds,” the report stated, adding, “At least these classes of investments must be exempted from any restrictive policy measure.”