New Delhi, Apr 16 (KNN) The Indian government is preparing a framework to minimise risks and allow domestic pension funds and insurance companies to invest in startups, according to officials familiar with the matter.

Currently, these institutions which manage nearly Rs 100 lakh crore (USD 1.2 trillion) of public money are permitted to invest only 3-5 per cent of their surplus into alternative investment funds (AIFs) or fund of fund that back startups. Direct startup investments are not allowed due to concerns over the high failure rates in the sector.

“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 would need a safety net,” said an official.

The Department of Financial Services is now working on a risk framework that could enable regulators to ease restrictions and allow higher allocation of funds as well as direct investments into startups by pension funds and insurers.

“Once there is a mechanism that minimises risk to the farthest extent possible, regulators will be able to issue amendments,” the official added.

The proposed framework is expected to cover aspects like definition of a startup, reporting norms, and valuation guidelines for unlisted firms.

The move aims to enhance domestic capital flow into Indian startups, which currently stands at just 15 per cent of total investments. It comes amid a significant funding slowdown, with startup investments dropping to USD 9.6 billion in 2023 from USD 25.7 billion last year.

Besides the risk framework, the government is also considering expanding the SIDBI Fund of Funds and Startup India seed fund schemes to further catalyse domestic investments.

(KNN Bureau)