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India has one of the largest and high growth potential startup ecosystems in the world with over 45,000 startups across diverse sectors. India’s startups are receiving more and more international attention and investments. In 2020, Indian startups closed 924 financing deals to the tune of $11.5 bn, and out of this, enterprise Tech and FinTech sectors have the largest volumes of funds in this period, securing nearly 29% of the funding.

Allowing non-government provident funds, superannuation, and gratuity funds to invest in AIFs

In lieu of the gazette Notification F. No. 1/8/2021-PM dated 15 March 2021, the Ministry of Finance now allows the non-government provident funds, superannuation, and gratuity funds to invest up to 5% of their investible surplus in Category I and II Alternate Investment Funds (AIFs) registered with SEBI. By adding a milestone for Aatmanirbhar Bharat, this step will not only increase flow of domestic capital for the startups but will also open doors for domestic funds into venture capital ecosystem. The participation of private retirement funds in AIFs would increase their yield and lead to higher domestic capital formation.


The surplus money available with non-government provident funds, superannuation, and gratuity funds is governed by the investment pattern laid down by the Department of Economic Affairs, Ministry of Finance. 

The investment pattern was initially revised on 24 January 2005. Subsequently, it was decided to revise the investment pattern to make it more flexible and give the trustees of these funds more autonomy and discretion.  Accordingly, the proposed revised pattern was put up on the website of the Ministry of Finance in draft form in 2007 inviting comments. On 14 August 2008, the pattern entailing suggested proposals was revised and implemented on 1 April 2009. However, there was no provision of investment in exchange-traded funds, debt mutual funds, asset-backed securities. 

In the budget speech of 2013-14, it was announced that the list of eligible securities which pension funds and provident funds may invest in will be enlarged to include exchange traded funds, debt mutual funds and asset backed securities. Subsequently, a Committee on investment pattern for pension and insurance sector was constituted by the Department of Financial Services, Ministry of Finance (DFS) under the Chairmanship of Shri G. N. Bajpai, ex-Chairman of LIC and SEBI, which submitted its report in December 2013. The Committee, inter alia, made certain recommendations regarding revising the investment pattern to provide greater flexibility to subscribers to maximise returns as also to provide long term resources to productive sectors in the economy.

Accordingly, the proposed revised pattern was put up on the website of the DFS in draft form in June 2014 inviting comments. Several comments were received, and these have been examined by the government.

Later in 2015, the government expanded the list of eligible securities paving way for these funds to invest. The investment pattern as per notification dated 2 March 2015 is depicted in the table below: 

S No.


% of amount to be invested


Government Securities and Related investments

Minimum 45% and Up to 50%


Debt instruments and Related Investments

Minimum 20% and Up to 45%


Short-term Debt Instruments and Related Investments

Upto 5%


Equities and Related Investments

Minimum 5% and upto 15%


Asset Backed, Trust Structured and Miscellaneous Investments

Upto 5%


The revised investment pattern explicitly recognises the fiduciary responsibility of the Trustees and the need for the exercise of due diligence by them and gives them greater flexibility in terms of a wider variety of financial instruments as well as greater freedom to actively manage the portfolio.

Historic Change - Investing surplus in AIFs

Including AIFs in the investment pattern is one of the significant announcements made by central government to maximise the exposure of significantly large investible surplus of private retirement funds to startup ecosystem.

As per the notification dated 15 March 2021, non-government Provident Funds, Superannuation Funds and Gratuity Funds are now allowed to invest in units issued by Category I and Category II Alternative Investment Funds, Asset Backed, Trust Structured and Miscellaneous Investments Funds (AIF) regulated by the Securities and Exchange Board of India under the 5th category (as mentioned below) i.e., Asset Backed, Trust Structured and Miscellaneous Investments.

SEBI defines AIF as any fund established or incorporated in India, which is a privately pooled investment vehicle that collects funds from sophisticated or high net worth individual (HNI) investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

Category I of AIF includes venture capital funds, including Angel funds, SME funds, social venture funds, and infrastructure funds. Category II includes those funds, where at least 51% of the corpus can be invested in either of the infrastructure entities or SMEs, or venture capital or social welfare entities. Category III AIFs employ diverse or complex trading strategies and invest in listed or unlisted derivatives.

Non-government funds, pension funds and gratuity funds can now invest the 5% of their investible surplus only in Category I and Category II AIFs registered with SEBI. 

The Ministry of Finance in the said notification has laid down certain conditions for the funds to invest in AIFs:

  • Retirement private funds will invest only in those AIFs whose corpus is equal to or more than ₹100 crore.
  • The exposure to a single AIF shall not exceed 10% of the AIF size. However, this limit would not apply to a government-sponsored AIF.
  • Funds must ensure that investment should not be made directly or indirectly in securities of the companies or funds incorporated and/or operated outside India.
  • Funds must ensure that investment should not be made directly or indirectly in securities of the companies or funds incorporated and/or operated outside India.


India with its burgeoning startup ecosystem aims to touch the goal of self-reliance. However, the lower percentage share of rupee capital has always been a pressing concern for Indian economy. A great majority of funding for startups has its source from other countries. Therefore, mobilising domestic capital not only pitches for financial stability in the Indian startup ecosystem but also boosts the morale of the Indian market. 

The rigmarole of various regulations and lack of access to domestic capital were creating obstructions for AIFs to create an ethos of innovation and capital generation. The new addition of the AIFs Category I and Category II in investment pattern is a great step towards ameliorating various hurdles.

How it will benefit startups

Most of the AIFs pursuing venture capital, SME or social sector investing will be eligible for these investments. The capital generated from mobilising the capital of these funds will provide enormous financial support to startups to raise capital.  The motive of central government is to push towards Self-reliant India and to mobilise domestic capital from private retirement funds for investment in AIFs is a major milestone towards achieving this goal. 

This blog is co-authored by Kritika Narula and Saloni Bhandari. 

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