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Exhibit 1 Indian Insurance Companies as Limited Partners Insurance funds are an important source of capital for private equity funds worldwide. According to UK based research firm Preqin, globally, insurance companies accounted for 8% of all LPs tracked by Investor Intelligence and contributed 9% (or $128 billion) of capital invested in private equity (PE), as on June 2011. As an asset class, private equity does not enjoy a high allocation by insurance companies, with an average current allocation and target allocation of 2.7% and 3.1% respectively their of total assets. However, in absolute terms, insurance companies are important investors, with 60% of the companies having allocations worth over $250 million to private equity and 1% having over $5 billion allocated to this asset class 1 . Indian insurance companies, however, have not been very active contributors to PE funds. Despite the regulatory easing that permitted insurance funds to invest in VCPE funds, the amount of investment in VCPE asset class has been well below the regulatory limits. The pattern in the insurance sector is very similar to what is seen in the industry as a whole - much of the capital for PE firms came from foreign sources. In 2012, 80% of the investments in PE funds in India came from international LPs 2 . However, tapping domestic capital is important for long term sustenance of the private equity industry. Insurance monies being long term in nature can be an important source of such domestic capital. Tracing the History in Regulations Insurance Regulatory and Development Authority (IRDA), the insurance regulator in India has clearly laid out the regulations which govern the investments of insurance companies in VCPE funds. IRDA issued the first set of regulations for investing in VCPE funds in December 2003: It stated that the overall exposure limits for life insurance companies was 3% of the controlled fund or 10% of the venture fund’s size, whichever is lower. The limit for general insurance companies was specified as 5% of total assets or 10% of the venture fund’s size, whichever is lower. The investment was to fall under “Other than Approved Investments” category. Investments by the venture fund were required to be ‘as far as possible’ in infrastructure projects and result in a diversified investment portfolio. The investment manager of the venture fund was not to be under direct or indirect control or management of the insurer or its promoters. Also, the insurer was required not to make investments in shares or debentures of the venture funds’ investee companies 3 . In August 2008, IRDA released the IRDA (Investment) (Fourth Amendment) Regulations, 2008 in which Clause 8 specified that the overall exposure limits for investments in a venture fund by a life insurance company was 3% of the respective fund or 10% of the venture fund’s size, whichever is lower. For a general insurance company, 5% of investment assets or 10% of the venture fund’s size, whichever is lower was the corresponding upper limit. This circular replaced the words “Controlled Fund” with “Respective Fund” and “Total Assets” with “Investment Assets”. Further, unlike the 2003 circular which disallowed the venture fund’s investment manager to be under the insurer’s direct or indirect control, the 2008 circular specified that Investments in a venture fund managed by an investment manager under direct or indirect control or management of the insurer or its promoter will be subject to Promoter Group Exposure Norms of IRDA (Investment) Regulations, 2000, as amended from time to time 4 . In August 2011, IRDA brought out a clarification with respect to the types of investments specified in the 2008 circular. Accordingly, it was indicated that insurers can invest in any venture fund registered under SEBI Regulations which included venture funds investing in micro, small and medium enterprises as well. It was also clarified that no investments shall be made in a venture fund which was under the promoter group of the insurer and the investment manager should also not be directly or indirectly controlled or managed by the insurer or its promoters. The exposure norms specified in the 2008 circular remained unchanged 5 . Pursuant to a change in the nomenclature of venture fund regulations under SEBI in May 2012 (SEBI Venture Capital Funds Regulations 1996 was replaced with SEBI (Alternative Investment Funds) Regulations 2012), IRDA brought out a circular in March 2013 granting permission to insurers to invest in Category I Alternative Investment Funds (AIFs). 16
Accordingly, insurers were allowed to invest in Category I AIFs which invest in start up or early stage ventures or social ventures or SMEs or infrastructure or other sectors which the Government or regulators consider as socially or economically desirable. This included venture capital funds, SME funds, social venture funds and infrastructure funds. Such funds were not permitted to invest in companies incorporated outside India. The other regulations stayed the same as in the previous circular 6 . Lastly, in August 2013, IRDA notified that insurance companies can invest in Category II AIFs also. So the permitted funds in Category I are infrastructure funds, SME funds, venture capital funds and social venture funds, while in Category II at least 51% of the funds of such AIF was required to be invested in either infrastructure entities, SME entities, venture capital undertakings or social venture entities. All the other restrictions regarding investment of funds outside India and promoter group holdings remained unchanged. The exposure limits specified by IRDA in this notification are given in Table E1.1 7 . Table E1.1: Exposure limits of insurance companies in AIFs and venture funds Type of insurer Overall exposure to venture Exposure to single AIF / venture fund funds and AIFs put together (a) (b) (c) Life insurance 3% of the respective fund 10% of AIF/venture fund size or 20% of overall exposure as per company under the life insurance (b), whichever is lower. company The above 10% limit shall be read as 20% in the case of infrastructure funds General insurance company 5% of the investment assets under the general insurance company 10% of AIF/venture fund size or 20% of overall exposure as per (b), whichever is lower. The above 10% limit shall be read as 20% in the case of infrastructure funds While IRDA has issued strict guidelines in terms of the quantum of investment in venture funds, the overall regulatory environment has been encouraging. The last set of regulations released in August 2013 has expanded the scope of investments, in addition to giving a continued focus on the infrastructure and SME sectors. Investments in VCPE Funds by Indian insurers Although the overall exposure limits to AIFs and venture funds at 3% of fund size and 5% of investment assets for life insurance companies and general insurance companies respectively look restricted, it is interesting to note that currently, the investments made by the insurance companies in India are nowhere close to these upper limits. Investments in venture funds and total investments of leading insurers are given in Table E1.2. Table E1.2: Proportion of investments in venture funds/SEBI approved AIFs by leading insurance players Investments in venture funds/SEBI approved AIFs FY14 FY13 FY12 FY11 FY10 LIC Life Fund (Rs. in crores) 1,485.2 1,204.6 1,154.5 835.9 830.4 - as a % of Total 0.13% 0.12% 0.13% 0.10% 0.12% GIC (Rs. in crores) 159.2 155.9 143.9 132.1 123.7 - as a % of Total 0.58% 0.65% 0.67% 0.67% 0.71% ICICI Lombard General Insurance Company (Rs. in crores) 35.4 39.2 39.7 34.0 32.7 - as a % of Total 0.38% 0.50% 0.64% 0.74% 0.87% United India Insurance Company (Rs. in crores) 124.2 121.7 110.7 103.7 87.0 - as a % of Total 0.58% 0.60% 0.65% 0.65% 0.61% Oriental Insurance Company (Rs. in crores) 59.3 55.1 NA 55.8 52.5 - as a % of Total 0.30% 0.30% NA 0.34% 0.78% Source: Public Disclosures of the respective insurance company. Value of Investments indicate Market Value NA: Not Available 17
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Exhibit 6 Returns from VCPE investm
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