IRDAI permits insurers to invest in AIFs with SEBI-compliant excusal rights, provided insurer funds are not deployed in overseas assets and a strict three-layer certification framework ensures zero exposure under Section 27E of the Insurance Act, 1938.
IRDAI Circular of 12 February 2026 – Core Clarification
Through its circular dated 12 February 2026, IRDAI clarified the regulatory treatment of insurers investing in Alternative Investment Funds (AIFs) that contain excusal rights. The clarification addresses operational concerns relating to overseas investments, exposure limits, documentation standards, and audit safeguards. The circular provides regulatory certainty while imposing measurable compliance controls.
Section 27E – Regulatory Position
Section 27E restricts insurers from deploying funds in overseas investments through AIF structures.
Insurers sought clarity on whether investment in AIFs remains compliant if the fund undertakes overseas investments and the insurer exercises excusal rights. IRDAI confirms that such investment is permitted only if insurer capital is completely excluded from overseas transactions and supported by enforceable documentation and audit validation.
The regulatory objective is clear: policyholder funds must remain within domestic investment boundaries.
Excusal Rights – Mandatory Conditions
Excusal rights allow an insurer-investor to opt out of specific overseas investments undertaken by the AIF. IRDAI requires full financial segregation. This means:
- No capital call to the insurer for overseas transactions
- Zero drawdown attributable to the insurer
- Zero beneficial interest in overseas assets
- No allocation of profit or loss from overseas investments
Excusal must operate in substance and in accounting records, not merely as a contractual clause.
Operational Compliance Framework
IRDAI prescribes a structured compliance mechanism to ensure insurer funds are not deployed overseas.
A. Pre-Drawdown Controls
Before issuing a capital call for an overseas investment, the AIF Manager must prepare a “Drawdown Eligibility Schedule” showing zero allocation to the insurer. The Manager must also issue a signed “Negative Assurance Statement” confirming that the overseas drawdown is funded exclusively by non-insurer investors.
This control eliminates overseas exposure at the transaction stage.
B. Quarterly Reporting Requirement
Each quarterly report must include a dedicated Section 27E Compliance Annexure disclosing total overseas investments during the period, capital drawn from the insurer as ₹0.00, and the insurer’s beneficial interest in overseas assets as 0%.
This requirement formalizes documentary transparency.
C. Three-Layer Certification Structure
IRDAI mandates layered oversight across three levels of governance.
At the fund level, the AIF Compliance Officer and Manager must certify quarterly that the insurer was fully excused from overseas investments and that no funds were debited.
At the independent audit level, the statutory auditor must annually verify accounting segregation of excluded units and confirm that no profit or loss from overseas assets was attributed to the insurer.
At the insurer level, the concurrent or internal auditor must quarterly verify bank statements and confirm that no capital outflow corresponds to overseas capital calls.
This multi-tier model creates preventive, detective, and verification controls.
Documentation Requirements
IRDAI requires enforceable documentation that expressly references Section 27E and restricts overseas deployment of insurer funds. Constitutional documents of the AIF must contain specific segregation clauses. Statutory auditor certifications and concurrent auditor confirmations must support compliance.
The framework emphasizes audit trails and measurable accountability.
Governance and Compliance Impact
For insurers, the circular provides regulatory certainty for participation in domestic alternative assets while increasing monitoring responsibilities.
For AIF Managers, the circular imposes structured segregation, enhanced reporting, and audit accountability.
Failure to implement the prescribed safeguards may result in breach of Section 27E, regulatory scrutiny, audit observations, or supervisory action.
Strategic Significance
The clarification achieves two regulatory outcomes. It enables insurers to participate in diversified AIF structures while protecting policyholder funds from overseas exposure. The circular balances investment flexibility with strict compliance discipline.
Key Takeaways
- Insurers may invest in AIFs offering excusal rights.
- Insurer capital must not be deployed in overseas investments.
- Zero drawdown and zero beneficial interest are mandatory.
- A three-layer certification framework applies.
- Quarterly and annual audit confirmations are required.
Source: IRDAI Circular dated 12/02/2026 regarding Clarification on Insurers’ Investments in AIFs with Excusal Rights u/s 27E