The report says a thriving Alternative Investment Fund segment is critical if the government’s start-up policy has to succeed
Pitching for significant changes in norms governing venture capital (VCs) and private equity (PE) funds, a Securities and Exchange Board of India (Sebi) panel has recommended favourable tax regime and steps to bring long-term funds from domestic and foreign investors.
Apart from calling for favourable taxation framework and ways to unlock domestic capital pools, Infosys founder Narayana Murthy-led panel has also recommended promoting onshore fund management and reforming the current Alternative Investment Fund (AIF) regime.
The report from the 21-member panel says streamlining of regulatory issues can see AIFs attracting flows up to two per cent of the country’s gross domestic product (GDP). The report says a thriving AIF segment is critical if the government’s start-up policy has to succeed.
Last week, Prime Minister Narendra Modi announced a slew of initiatives, including three-year tax and compliance breaks, to support start-ups and entrepreneurs. Among the key recommendations are introduction of a securities transaction tax (STT) at an appropriate rate on all distributions of AIFs and elimination of withholding taxes. Post STT, investors be provided a tax-free income from AIFs.
“Reforming the AIF regulatory framework for venture capital, private equity and angel capital will play a key role in success of the start-up policy,” says the report.
The capital markets regulator has sought comments from the public till February 10 on the issue. The report suggests Central Board of Direct Taxes (CBDT) should clarify that investors in the holding companies are not subject to the indirect transfer provisions. Such measures will help attract foreign investors to India-centric PEs and VCs.
Further, the committee advocates for parity in STT for PE and VC investments (including AIFs registered with Sebi) with the taxation of investments in listed securities.
“The tax suggestions with respect to making pass through effective without a 10 per cent leakage, non taxation of capital invested as deemed income, clarity on indirect transfers at fund level and safe harbour effectiveness for Indian management teams of AIFs is much needed. Further, other recommendations on taxability of income of AIF as capital gains as against business income will avoid unnecessary litigation and build in more certainty,” said Girish Vanvari, partner and national head of tax, KPMG in India.
Among the members on the panel were Sanjay Nayar, CEO of KKR, Ajay Piramal chairman of Piramal Group, Manish Chokhani, chairman, TPG Growth and Manish Kejriwal, managing partner, Kedaara Capital.
The committee also recommended that the investment gains of AIFs should be deemed ‘capital gains’ and losses incurred by AIFs should be available for set-off to their investors.
“The report aims to simplify the tax and regulatory implications of AIFs and the suggestions pave ways for the fund managers’ activities to be more practical and easy. There were multiple practical challenges on taxation of all the categories of AIFs which have been presented effectively in the report and practical solution are also offered,” said Hemal Mehta, senior director, Deloitte.
According to the report, large capital pools from pensions, insurance, DFIs, banks, and charitable institutions which currently constitute only around 10 per cent of the total private equity and venture capital invested in India annually, should contribute more to develop the AIF industry.
The AIF industry has not been able to take-off well thus far. Till September in the year 2015 (three quarters), AIFs invested less than Rs 6,000 crore (Rs 60 billion).
AIFs’ investment is not even one-tenth of mutual funds. “The venture capital and private equity industry has contributed considerably to India’s economic growth. Between 2001 and 2015, venture capital and private equity of more than $103 billion was invested in Indian companies. These investments were made in more than 3,100 companies across 12 major sectors, including those critical for the country’s development,” says the report.
The committee, which was set up in March 2015 by Sebi, met four times before submitting its report. “As the field of Alternative Investment Funds has a wide canvas, the committee will meet again to discuss and make recommendations in other areas like the novel instrument of crowd-funding, business development companies and related topics,” said Narayana Murthy in the report.
Photograph: Bobby Yip/Reuters