Non-govt PFs investing in AIFs will add to MSMEs’ fundraising options, mobilise domestic capital: Experts

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Updated: Mar 21, 2021 8:30 PM

Credit and Finance for MSMEs: Category 1 AIFs included infrastructure funds, venture capital funds, angel funds, and social venture funds. Category II AIFs covered funds where at least 51 per cent of their size can be invested in either of the infrastructure entities or SMEs or venture capital or social welfare entities.

working women, financial goals, women's day 2021, financially independent woman, PPF, mutual funds, KVP, NSC, FD, fixed deposit, health insurance, personal financesThe conditions for the retirement funds to invest included backing only those AIFs that have Rs 100 crore or more in corpus and that the exposure to a single AIF is not beyond 10 per cent of its size.

Credit and Finance for MSMEs: Enabling non-government provident funds, superannuation and gratuity funds to invest up to 5 per cent of their size in alternative investment funds (AIFs) will help widen the fundraising options for MSMEs and expand the domestic pool of capital, experts told Financial Express Online. The Finance Ministry in a notification earlier this week had allowed private retirement funds to invest up to 5 per cent in the units of Category I and Category II AIFs regulated by the Securities and Exchange Board of India (SEBI), but with certain conditions. Category 1 AIFs included infrastructure funds, venture capital funds, angel funds, and social venture funds. Category II AIFs covered funds where at least 51 per cent of their size can be invested in either of the infrastructure entities or SMEs or venture capital or social welfare entities.

“In terms of diversification of source of funds, it is definitely a positive move as small businesses will get funds from another source as well. However, we need to understand how much of the amount these private PFs would be willing to allocate to AIFs and whether they are even willing to support them to invest in MSMEs. Generally, there is risk aversion from banks to lend to certain segments. Hence, this aversion might be carried forward by these investment funds,” Kavita Chacko, Senior Economist, CARE Ratings told Financial Express Online.

The conditions for the retirement funds to invest included backing only those AIFs that have Rs 100 crore or more in corpus and that the exposure to a single AIF is not beyond 10 per cent of its size. “However, this limit would not apply to a government-sponsored AIF,” the notification said. Also, investment shouldn’t be made directly or indirectly in securities of businesses or funds incorporated and/or operated outside India. Moreover, the AIF’s sponsor must be a non-promoter of the fund, and AIF should not be managed by an investment manager controlled or managed by the fund or its promoter group.

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“5 per cent seems to be a decent number for long-term funds like PF. It makes sense for them also to put money into the long-term asset class. So, it is a good move as domestic money is required for this asset class. Also, it will be easier for funds to showcase returns to Indian limited partners (LPs) than foreign LPs. So, more rupee money is welcome from the industry even as AIFs have to perform for these funds to invest but at least the regulatory restriction is removed now,” Arun Natarajan, Founder, Venture Intelligence told Financial Express Online.

“This is a positive step by the government as it continues the expansion of domestic capital available for Indian venture firms, which is still relatively limited when compared to international capital. Indian AIFs can now tap into another pool of domestic limited partners,” Sameer Nath, Managing Partner, TrueScale Capital told Financial Express Online. Nath earlier headed Citigroup as its managing director.

Meanwhile, the Finance Ministry, which had introduced the ECLGS last year to support Covid-hit MSMEs, has spent the entire amount allocated towards its implementation for FY21, according to the government data. The revenue expenditure incurred by the Department of Financial Services towards ‘assistance to the National Credit Guarantee Trustee Company (NCGTC)’, which is the guarantee provider under the ECLGS scheme to member lending institutions (MLIs), stood at Rs 4,000 crore as of January 22, 2021, according to the data shared by Minister of Finance Anurag Singh Thakur in the Lok Sabha on Monday. The amount allocated towards the same for FY21 was Rs 4,000 crore. On the other hand, the gross bank credit deployed to micro and small enterprises in December 2020 had jumped 6.6 per cent to Rs 11.31 lakh crore from Rs 10.61 lakh crore during the year-ago period, according to the RBI data.

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