Be self-reliant, ease curbs on AIFs to boost start-up funding: Parliamentary Standing Committee

India needs to cut dependence on capital from key destinations such as the US and China for its start-ups and become “self-reliant” by having several large domestic growth funds powered by local capital to support its unicorns, the parliamentary standing committee on finance said in a report, seemingly echoing the government’s latest Aatmanirbhar initiative.

Interestingly, of the 21 Indian start-up unicorns (with a combined valuation of about $73.2 billion) that featured in the Hurun Global Unicorn Index released in August, as many as 11 have got funding from Chinese investors like Alibaba, Tencent and DST Global.

Japanese investor SoftBank has investments in nine of these unicorns, while the US’ Tiger Global has invested in five. Recently, Tiger Global also invested in food delivery start-up Zomato, while Byju’s secured funding from US-based Bond.

The committee, chaired by former minister of state for finance Jayant Sinha, held that Small Industries Development Bank of India’s (Sidbi) fund-of-funds vehicle be expanded and fully utilised to play an anchor investment role. Similarly, major banks should join hands to float a fund-of-funds and their exposure limits to start-ups need to be enhanced. Banks should also be allowed to invest in Category-III alterate investment funds (AIF).

Large financial institutions in India should also be encouraged to channelise a proportion of their investible surplus into domestic funds, which would bring in additional local capital for startup investments, the panel said.

For this purpose, the Pension Fund Regulatory and Development Authority (PFRDA) and the National Pension Scheme (NPS) may invite bids from professional fund managers for running a fund-of-funds programme. Sidbi would be eligible to participate as well.

“Further, the removal of restrictions such as the minimum corpus of AIF being an eligibility criteria for pension fund investment and requirement to invest only in listed AIFs, would considerably ease roadblocks for investment by NPS in AIFs,” the report said. Pension funds can start by allocating small percentage of their corpus into AIFs and then gradually increase it as they gain more experience, the panel suggested.

Even the insurance regulator should give insurance companies the latitude to invest in fund-of-funds. Further, investments by insurance companies in AIFs must be carved out under a separate category while calculating the applicable exposure limits and must not be clubbed with other investments under ‘unapproved investments’, the panel said.

Foreign development finance institutions may also be encouraged to participate with local asset management companies to set up fund-of-funds structure or direct venture capital/private equity funds, particularly in social impact, healthcare and venture/start-up sectors.