Safety net in works to widen local funding pool for startups

The government is devising a framework to mitigate the risk for local pension funds and insurance companies when investing in startups, which, despite being significant contributors to employment and the economy, often face business failures. Officials familiar with the initiative stated that this aligns with the government's broader goal of increasing domestic capital flow into Indian startups.

Currently, Indian pension funds and insurers are restricted from directly supporting startups but can allocate a portion of their investable surplus (3-5%) to alternative investment funds (AIFs) or fund of funds that back local startups. The proposed safety net could pave the way for relaxed regulations, potentially allowing these institutions to invest directly. These entities collectively manage a substantial amount of public funds, around Rs 100 lakh crore as of fiscal 2023, making their potential involvement in the startup sector significant, particularly amid recent funding constraints.

The Department of Financial Services, part of the Ministry of Finance, is spearheading the development of a risk framework for direct investments by pension funds and insurance companies in Indian startups. Although risks cannot be eliminated entirely, the establishment of a mechanism to minimize them significantly could facilitate regulatory amendments permitting higher investment limits.