Investment options for non-govt funds widened: FinMin allows private retirement funds to invest up to 5% in AIFs

The finance ministry has allowed private retirement funds to invest up to 5% of their total size in select categories of alternative investment funds (AIFs), subject to certain conditions. The move is aimed at giving the funds more options to widen their portfolio and, at the same time, improving fund flows to critical sectors, including infrastructure.

In a notification, the department of economic affairs has said non-government provident funds, superannuation funds and gratuity funds can now invest in units issued by select Category I and Category II AIFs regulated by the Securities and Exchange Board of India (Sebi). The DEA has tweaked norms governing the investment pattern for such funds.

The permitted Category-1 AIF includes infrastructure funds, SME Funds, venture capital funds, including social venture funds, according to the notification. The Category-2 includes those funds, in which at least 51% of the corpus are invested in either of the infrastructure entities or SMEs, or venture capital or social welfare entities.

At present, private retirement funds are required to invest mainly in low-risk papers such as government securities, and only a small portion of their corpus can be invested in riskier assets, including equity. They are also permitted to invest up to 5% in asset-backed and trust-structured investments (REITS, InvITs, etc). The latest notification will give them more options to widen their portfolio, albeit to a limited extent, and, at the same time, improve fund flows to infrastructure and SMEs.

However, the DEA has laid out certain conditions for these investments. Funds will invest in only those AIFs whose corpus is equal to or more than Rs 100 crore. The exposure to a single AIF will not exceed 10% of the size of the AIF. “However, this limit would not apply to a government-sponsored AIF,” it said.

The funds must ensure that their investments should not be made directly or indirectly in securities of the companies or funds incorporated and/or operated outside India.

Rajesh Gandhi, partner, Deloitte India, said, the sponsor of the AIF will have to be a non-promoter. Also, the AIF won’t be managed by manager controlled by the promoter group.