Permit pension funds, insurance funds, provident funds, banks and charitable or religious foundations to invest a part of their corpus in venture funds – Oct’12

Positive Action that must Continue – We appreciate the business incubation support being extended by Department of Science and Technology (DST) along with Technology Development Board (TDB). DST program of business incubation has reward and supported 2400 Indian start-ups resulted in employment generation of nearly 20,000 employees, generating revenues of nearly Rs.7000 crore with minimal financial support. A continued and much higher support by MoF can enable them to incubate businesses at a much faster pace.

Decision Point – Encourage Insurance companies (both private & public), Provident Funds, Pension Funds, charitable or religious foundations, Banks to invest their long-term funds in building and supporting Indian Start-ups and small businesses. They can start funding the Venture Capital Funds (VCFs) or Alternative Investment Funds (AIFs) from the savings available within India. It can be limited to Category 1 AIFs that is Venture Capital Funds, SME Funds, Social Venture Funds, and Infrastructure Funds.

Supporting Points – Indian start-up need capital from within India. Until now the international pension fund and endowment funds are being rewarded for their proactive investments in Indian SMEs and Start-ups. The early stage business offers attractive return whereas the India’s own long-term funds are not participating in this asset class. These institutions have been encouraged to invest in listed equity market in recent times. It is time as the Indian start-ups and small businesses are also supported through SEBI registered Venture Fund for accessing long-term capital from these institutions. Some useful facts are –

1. The International Pension Funds, Superannuation Funds, Endowments Funds, Foundations are finding it highly lucrative to invest in the Venture Capital Funds focused at India. For example, following institutions hold investment in India focused funds –
   • State of Delaware Pension Fund
   • AT&T’s Pension Fund
   • Canada Pension Plan Investment Board
   • Australian Post Superannuation Scheme
   • Unilever Superannuation Trustees Limited
   • Stanford University, The University of Michigan, The University of Minnesota, Yale University, Princeton University, University of Chicago, University of Texas Investment Management Co.
   • Kauffman Foundation, The Ford Foundation, Aman Foundation, Dell Foundation, Niehaus Foundation, Sapling Foundation, Three Dogs Foundation, Alexander Family Foundation, Blood Family Foundation, dob Foundation, LF Foundation, Mahvash & Jahangir Siddiqui Foundation, Partridge Foundation, Peter & Devon Briger Foundation, Skoll Foundation, The James Irvine Foundation, Alfred IduPont Testamentary Trust, The Rockefeller Foundation, The William and Flora Hewlett Foundation, Adelson Family Foundation, Marc and Leigh Cohen Family Foundation.
2. In FY09, following investments were made by the following Funds–
   • Employees’ Provident Funds = Rs.29010 crores
   • Employees’ Pension Funds = Rs.14477 crores
   • Employees’ Deposit Linked Insurance Funds = Rs.877 crores
3. In FY13, fresh investments by these funds are estimated at approximately Rs.60,000 crores with cumulative investment portfolio of nearly Rs.500,000 crores.

Additional Recommendation – A beginning can be made in FY’13, with Provident Funds and Pension Funds allocating only 5% of the fresh investments going towards building a portfolio of equity assets. This will yield Rs.3000 crores towards the risk capital. Gradually, it can be increased to 5% of the total corpus of this funds that will bring additional assets of Rs.25000 crores into equity assets.

Amendments Required

1. Endowment Funds or say Charitable and Religious Institutions (Approved under Sec 80 G of Income Tax Act) – In case of Charitable and Religious institutions or Foundation the Rule No. 17 C in relation to Section 11 (5) of the Income Tax Act, such foundation can invest in Mutual Funds, Incubated companies or National Skill Development Corporation (NSDC). The Rule must allow such institutions to invest in SEBI registered Category 1 AIF and Category 2 AIF. It requires amendment on similar lines as the last amendment carried out for NSDC for example“Income-tax (Ninth Amendment) Rules, 2008 
Notification No. 99 of 2008, dt. 22nd Oct., 2008
 In exercise of the powers conferred by section 295 read with clause (xii) of sub-section (5) of section 11 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962 namely:– 
1. (1) These rules may be called the Income-tax (Ninth Amendment) Rules, 2008.
 (2) It shall be deemed to have come into force with effect from the 31st day of July, 2008.
 2. In the Income-tax Rules, 1962, in rule 17C, after clause (vi), the following clause shall be inserted, namely:–“(vii) investment by way of acquiring shares of National Skill Development Corporation”. “(viii) investment by way of acquiring units of a SEBI approved Venture Capital Fund or Alternative Investment Fund Category 1 or Category 2”.
2. Detailed Investment Guidelines for all Citizens under the New Pension System under PFRDA – The PR will manage 3 separate schemes, each investing in a different asset class, being:
   • Asset Class E (equity market instruments) – The investment by a NPS participant in this asset class would be subject to a cap of 50%. The asset class will be invested in index funds that replicate the portfolio of either BSE sensitive index or NSE Nifty 50 index.
   • Asset Class G (Government Securities) – This asset class will be invested in central government bonds, and state government bonds.
   • Asset class C (Credit risk bearing fixed income instruments) – This asset will be invested in liquid funds of mutual funds, credit rated debt securities.

   Amendment Required in “Asset Class E” to include “within the cap of 50%, a sub-limit of 10% may be invested in SEBI approved Category 1 AIF such as Venture Capital Funds, SME Funds, Social Venture Funds, and Infrastructure Funds”.

3. Regulation of Investment of the Insurance Regulatory and Development Authority (Investment) Regulations, 2000 has provided for “Approved Investment and Other Investments, subject to exposure or prudential norms. These Approved Investments and Other investment can specifically allow for investment in VCF or Category 1 AIF & Category 2 AIF.
4. On similar lines amendments can be introduced in –
   • Employees’ Provident Fund Scheme, 1952
   • Employees’ Deposit Linked Insurance Scheme, 1976
   • Employees’ Pension Scheme, 1995
   • The Payment of Gratuity Act, 1972
5. Banks Investing in Shares or Units of Venture Capital Funds – Banks must also be encouraged to invest in Category 1 AIFs by treating such investment as “priority sector” funding without capital market exposure and provisioning norms being applied. The current “Prudential Guidelines on Bank’s Investment in Venture Capital Funds (VCF)” issued by RBI require amendment for the following clauses –
   • Risk Weight and capital charge for market risk f or exposures in VCFs – Shares and units of VCFs Investments in shares /units of VCFs may be assigned 150% risk weight for measuring the credit risk during first three years when these are held under HTM category. When these are held under or transferred to AFS, the capital charge for specific risk component of the market risk as required in terms of the present guidelines on computation of capital charge for market risk, maybe fixed at 13.5% to reflect the risk weight of 150%. The charge for general market risk component would be at 9% as in the case of other equities.
   • RBI approval for strategic investments in VCFs by banks – Banks should obtain prior approval of RBI for making strategic investment in VCFs i.e. investments equivalent to more than 10% of the equity/unit capital of a VCF.