The government of India has opened the door for “recognised provident funds” to invest in domestic venture capital and infrastructure-focused alternative investment funds (AIFs), according to a finance ministry circular.
This will in effect allow private provident funds, superannuation funds and gratuity funds managed by large business groups to invest in domestic VC and infrastructure funds, Gopal Srinivasan, chairman of TVS Capital, told VCCircle.
“It is a small step but in a critical direction of making domestic capital available for AIFs, which is the biggest challenge today,” Srinivasan said.
“Equally, this is a big opportunity for such pension funds to invest in AIFs to enhance their yields, especially given the current low interest rates,” he added.
Some of the large business groups such as Tatas, TVS , Mahindras and the Birlas manage their own private provident funds run by trusts, for which they appoint their own investment managers.
Crucially, this notification will not cover the government-run Employee Provident Fund Organisation (EPFO).
The notification published on Monday specifies that private provident funds can invest in all Category-I AIFs and some Category-II AIFs, according to a circular issued by Anand Mohan Bajaj, additional secretary, financial markets.
Category-I covers infrastructure funds, small and medium enterprises (SME) funds, venture capital funds and social venture capital funds
However, for Category-II private equity and debt funds, this comes with a caveat that at least 51% of the corpus should be invested in “infrastructure entities or SMEs or venture capital or social welfare entities”.
There are some other restrictions.
The circular says that registered provident fund can only invest in AIFs “whose corpus is equal or above Rs 100 crore”.
The provident fund should also limit its exposure to a single AIF to 10% and must not invest in AIFs or companies outside India.
The notification governing recognised provident funds, first issued in March 2015, said they could only invest in specific categories such as government securities, debt securities issued by banks and corporates, rupee bonds and other debt instruments.
A 2019 amendment allowed provident funds to invest in units of debt-exchange traded funds and later equities.
The push to open up investments for infrastructure comes as the cabinet approved the setting up of the development finance institution for infrastructure projects on Tuesday.