Non-govt PFs, gratuity funds can now invest in AIFs

The development is part of the central government’s strategy to channelise domestic savings and improve their returns to attract more investment.

The government has brought in changes to the investment pattern for non-government provident funds, and superannuation and gratuity funds, enabling them to invest up to 5 per cent in the units of Category I and Category II alternative investment funds (AIFs), subject to some caveats.

The development is part of the central government’s strategy to channelise domestic savings and improve their returns to attract more investment in the said sectors.

At present, these funds typically invest a minimum 45 per cent in government securities, besides new instruments, such as exchange-traded funds and real estate investment funds, while a portion in equity-related instruments.

According to the finance ministry’s notification, these funds have to comply with certain conditions for investment, such as size and class of AIFs, and investment concentration.

Some of the conditions provide that investments should be in those AIFs that invest in infrastructure, SME, venture capital, and social welfare.

Giving an overview of the caveats, the ministry said these funds will invest only in those AIFs corpus of which is equal to or more than Rs 100 crore.

Exposure to a single AIF shall not exceed 10 per cent of the AIF size.

However, this limit won’t apply to a government-sponsored AIF.

Funds must ensure that investment is not to be made directly or indirectly in securities of the companies or funds incorporated and/or operated outside India.

The sponsor of an alternative investment fund should not be the promoter in the fund or the promoter group of the fund, the government said.

Besides, AIFs should not be managed by an investment manager, who is directly or indirectly controlled or managed by the fund or the promoter group of the fund.

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

Of three categories of AIFs, Category 1 includes venture capital funds (including angel funds), SME funds, social venture funds, and infrastructure funds.

Category 2 includes funds where at least 51 per cent of the corpus is invested in either infrastructure entities or SMEs or venture capital or social welfare entities.

Category 3 AIFs employ diverse or complex trading strategies and may employ leverage, including through investment, in listed or unlisted derivatives.

Apart from the Employees’ Provident Fund (EPF), several companies choose to run their own PF trusts for employees for various reasons, such as better returns and less hassle.

However, they need to follow norms, including notified investment pattern for such schemes recognised under the Income Tax Act, and receive the same tax treatment as the EPF.

The investment pattern was last revised in 2008, and was to be made effective from 2009.

Under the 2008 pattern, there was no provision of investment in exchange-traded funds, index funds, asset-backed securities, real estate units, and infrastructure investment trusts.

Later in 2014, the government expanded the list of eligible securities paving way for these funds to invest.