Safety net in works to widen local funding pool for startups

economictimes.indiatimes.com:

“This is a part of the government’s broader intention to enhance the proportion of domestic capital invested into Indian startups,” one of the officials said.

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Indian pension funds and insurers are not allowed to directly back startups, but can invest 3-5% of their investable surplus into alternative investment funds (AIFs) or fund of funds that support local startups. Having a safety net in place may allow for easing regulations to increase this limit and permit direct investment by these institutions, which managed close to Rs 100 lakh crore of public money at the end of fiscal 2023, into a sector where new funding has dried up in recent years.

The Department of Financial Services under the Ministry of Finance is working on preparing the risk framework for direct investments by pension funds and insurance companies in local startups, the people said.

“Risk cannot be completely wiped away. Even public market investments carry risks. However, once there is a mechanism that minimises it to the farthest extent possible … regulators will be able to issue amendments that allow higher investments,” a second official said.

“The biggest concern is that eight out of 10 startups end up failing… and to have public money being invested in a risky asset class