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Insurers score big win with nod to invest in fund of funds, but conditions apply
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The regulator has allowed insurers to invest in fund of funds (FoF) -- with conditions. 

For instance, the FoFs they are piling into should not invest in overseas companies and funds.  

Also, no insurer should invest in an alternative investment fund (AIF) which has exposure to an FoF where the insurance firm has already invested. 

“It is a huge win for the private equity industry that insurance companies are now permitted to make investments into FoFs as well, similar to them making a direct investment in an AIF," said  Ashley Menezes, partner at ChrysCapital Advisors. 

"However, such capital from insurance companies cannot be utilised by an AIF to make investments outside India and this is a matter that still needs discussion,” added Menezes, co-chair, regulatory affairs committee, Indian Private Equity & Venture Capital Association (IVCA).

The life insurance industry recorded a premium income of Rs 5.73 lakh crore during 2019-20 as against Rs 5.08 lakh crore the previous year, a growth of 12.75 per cent (versus 10.75 per cent the previous year). 

As on March 31, 2020, the investments made by the insurance industry stood at Rs 42.53 lakh crore as against Rs 38.47 lakh crore a year ago,  an increase of 10.54%.  

Siddharth Pai, founding partner at 3one4 Capital, said, "The FoF system is the perfect vehicle in terms of diversification for Indian institutional capital and insurance companies, whose annual premium flows is larger than the entire Indian AIF universe." 

"This move will help accelerate the quantum of rupee capital going into Indian startups,’’ added Pai, co-chair of regulatory affairs committee, IVCA.  

The total investment income of life insurers stood at Rs 2.3 lakh crore for 2019-20, which includes a loss of Rs 3,105 crore. In the previous year, the total investment income stood at Rs 2.8 lakh crore, with the private sector accounting for over Rs 61,000 crore.  

The investment income of all general insurers during 2019-20 was Rs 28,606 crore, a growth of 8.81% as against 5.13% in the previous year. During the year under review, the investment income of public sector insurers decreased 1.92%. 

Pai said, “One question that still needs to be answered is whether insurance companies can invest in AIFs with overseas investments, provided that the amount invested by the insurer into the AIF will not form a part of the overseas investment." 

He added, "The inflection point for any startup ecosystem is when the domestic institutional capital is allowed to invest. This move by the regulator and the move by Pension Fund Regulatory and Development Authority last month shows the government's intention to accelerate institutional rupee funding for startups, which will help in economic growth and job creation." 

Last month, the government opened the door for “recognised provident funds” to invest in domestic venture capital (VC) and infrastructure-focused AIFs.  

This will allow private provident funds, superannuation funds and gratuity funds managed by large business groups to invest in domestic VC and infrastructure funds.

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