IRDAI issues clarifications to facilitate investments by insurers in AIFs

Para 1.5 of the Master Circular on Actuarial, Finance and Investment Functions of Insurers, dated 17th May, 2024 (“IRDAI Master Circular”) issued by the Insurance Regulatory and Development Authority of India (“IRDAI”) allows insurers to invest in Category I AIFs  registered with SEBI, which fall under any of the following sub-categories, namely Infrastructure Fund, SME Fund, Venture Capital Fund and Social Venture Fund. Insurers may also invest in Category II AIFs registered with SEBI, provided such AIFs invest a minimum of 51% of their funds in the infrastructure entities or SME entities or Venture Capital undertakings or Social Venture entities in aggregate.

The aforementioned Paragraph 1.5 of the IRDAI Master Circular imposes a number of restrictions on insurers in relation to their investments in AIFs. For example, Insurers should not invest in:

• Any scheme of an AIF that has a priority distribution model or distribution waterfall that may lead to a share of losses higher than pro-rata to the insurer’s holding, compared to other investors in the same scheme;
• AIFs which undertake leverage or borrowing (other than to meet day-to-day operational requirements and as permitted under SEBI (Alternative Investment Funds) Regulations, 2012.
• Fund of Funds (FoF) which do not comply with the requirement of Section 27E of the Insurance Act, 1938.

Section 27E states as follows:

“No insurer shall directly or indirectly invest outside India the funds of the policyholders.”

In order to ensure compliance with Section 27E, the IRDAI Master Circular requires insurers to insert a clause in the Fund Offer Documents executed by the Insurer with the FoF to restrain such FoF investing into AIFs which invest in overseas companies/funds. Insurers should ensure that AIFs do not invest in securities of companies incorporated outside India to comply with the provisions of Section 27E of the Insurance Act,1938 (“Insurance Act”). No Insurer shall invest in an AIF, which in turn has exposure to a FoF, in which the Insurer has taken an exposure.

Insurers have been requesting IRDAI for clarifications the above provisions in respect of investing in AIFs with “Excuse rights” and investee limits for direct and indirect exposure through Fund of Funds (FoF). In response, the IRDAI has issued a circular dated February 12, 2026 (“IRDAI Circular”) which clarifies that compliance with the following conditions will satisfy sub paras 4(b), (c) and 5 of para 1.5 of IRDAI Master Circular:

• The insurers’ investments in such AIFs are with “Excusal Rights” as per SEBI’s Circular dated April 10, 2023, and proceeds of the insurers’ investments are not invested outside India by such AIFs.
• At the time of investing in an AIF, the insurer must provide a formal declaration citing Section 27E of the Insurance Act,1938 as the basis for their inability to participate in overseas investments of AIF;
• There shall be a clause in Private Placement Memorandum (“PPM”) of the relevant AIF stating that the Capital (including any proceeds) received from Insurer shall not be drawn down, utilized or pledged for any investment outside India;
• Statutory auditors of AIF shall confirm that the capital of the insurer is not invested outside India.
• Insurer shall obtain a compliance certificate from the AIF confirming that all overseas investments are disclosed to the insurer, the “Excusal Rights” were validly invoked for insurer’s investments and no cost related to overseas assets were charged to the insurer.
• The Concurrent Auditor of the insurer shall certify the compliance of the provisions of “Excusal Rights” with respect to insurer’s investment in AIFs having outside India Exposure.

Prior to the issuance of the IRDAI Circular, Sub para 4(d) of Para 1.5 of the IRDAI Master Circular provided as follows:

“No Insurer shall invest in an AIF, which in turn has exposure to a FoF, in which the Insurer has taken an exposure.”

The IRDAI Circular has replaced sub para 4(d) of Para 1.5 of the IRDAI Master Circular to read as follows:

“Insurer shall ensure compliance with the single AIF exposure limit specified under column (c) of table under sub para 7 below in respect of their direct exposure and indirect exposure (through Fund of Funds) into such single AIF”.

The table under sub para 7 of Para 1.5 of the IRDAI Master Circular provides as follows:

The IRDAI Master Circular can be found here.
The IRDAI Circular can be found here.
The SEBI Circular can be found here.

We trust you will find this an interesting read. For any queries or clarifications please write to us at insights@elp-in.com or write to our authors:
Vinod Joseph, Partner – Email- – Email – vinodjoseph@elp-in.com
Zaynali Badami, Associate – Email- – Email – zaynalibadami@elp-in.com