Private Retirement Funds can now invest in Alternative Investment Fund

Private retirement funds will now get a new investment option in the form Alternative Investment Funds (AIF), but with certain conditions.

The Economic Affairs Department, in the Finance Ministry, has notified the changes in the investment pattern for Non-Government Provident Fund, Superannuation Funds and Gratuity Funds. According to the notification, these funds can now invest in units issued by Category I and Category II Alternative Investment Funds (AIF) regulated by the Securities and Exchange Board of India (SEBI).

Category 1 of AIF includes venture capital funds, including Angel Funds, SME Funds, Social Venture Funds and Infrastructure funds. Category 2 includes those funds, where at least 51 per cent of the corpus can be invested in either of the infrastructure entities or SMEs, or venture capital or social welfare entities. Category 3 AIFs employ diverse or complex trading strategies and invest in listed or unlisted derivatives.

Five conditions

The latest notification by the Finance Ministry has laid five conditions for investment by private retirement funds. Funds will invest only in those AIFs whose corpus is equal to or more than ₹100 crore. The exposure to a single AIF shall not exceed 10 per cent of the AIF size. However, this limit would not apply to a government-sponsored AIF. Funds must ensure that investment should not be made directly or indirectly in securities of the companies or funds incorporated and/or operated outside India.

The sponsor of the AIF should not be the promoter in the fund or the promoter group of the fund. And AIFs shall not be managed by investment manager, who is directly or indirectly controlled or managed by the fund or the promoter group of the fund.

SEBI defines AIF as any fund established or incorporated in India, which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

According to Sunil Gidwani, Partner with Nangia Andersen LLP, currently private retirement funds such as PF, SF and gratuity funds are expected to invest largely (80 per cent) in low-risk papers – G-secs and debt securities. A small portion of their corpus can be invested in riskier asset classes such as equity and other papers. Such funds can invest up to 5 per cent in asset-backed and trust-structured investments such as REITS, InvITs and ARC trusts. But with this change, the window of 5 per cent has now been opened up for investments in AIF Category I and II, subject to several conditions.

“The government’s intention clearly seems to be not just to provide for one more avenue for investment by the private retirement funds for bettering their returns, but to attract investments in identified sectors. This is probably the first time that the investment is being permitted in unlisted securities which are not so liquid,” said Gidwani.