PE/VC sector hopes tweaks in Budget will get AIFs shining

Our Bureau Chennai | Updated on January 23, 2018

GOPAL SRINIVASAN, Chairman, IVCA, and Chairman & Managing Director, TVS Capital Funds

IVCA suggests streamlining pass-through taxation, attracting foreign pools and encouraging development of domestic funds

The private equity and venture capital industry has said that steps to improve ease of investing can double VC/PE investing to ₹3 lakh crore a year, with half of that coming from Alternative Investment Funds (AIFs).

It has suggested three pillars on which to achieve this — streamline pass-through taxation, attract foreign pools and encourage development of domestic pools.

Hidden gem

The Indian Private Equity and Venture Capital Association (IVCA) hopes that the 2018-19 Budget will have some announcements regarding its requests. Gopal Srinivasan, Chairman, IVCA, and Chairman & Managing Director, TVS Capital Funds, says AIF is the hidden gem in the government actions and a few corrective actions can make it reach full potential.

Specifically, he hopes the Budget will restore pass-through status for losses at fund level in AIF Category I and II. Currently, losses in a fund at the end of its life (funds are typically of 7-9 years duration), cannot be passed on to the investors in the funds.

This is a major issue for VC and infrastructure funds, as a couple of their investments can make losses during the life of the fund. While profits can be passed on to the investors, the losses have to be kept at the fund level. When profits can be passed on to the investors, there is no logic in not allowing losses to be passed on to the investors, says Srinivasan.

The Securities and Exchange Board of India (SEBI) had earlier allowed a pass-through of the losses, but this was changed when it came out with a new set of AIF regulations in 2012.

Srinivasan said funds should be allowed to capitalise their management expenses as cost of improvement and there should be a pass-through system for AIF Category III, public market fund.

GST exemption

To attract foreign pools, according to him, GST should be exempted on fees collected from onshore foreign pools and there should be certainty on non-applicability of GST on profit sharing arrangements. Appreciating the good work being done by DIPP and SIDBI through fund of funds for start-ups, the association wants larger charitable and religious trusts to be permitted to invest in AIFs. The EPFO should be allowed to in invest in AIFs, in line with the pension fund regulator and social venture funds should be permitted to receive CSR flows. Srinivasan said VCs and PEs would invest nearly ₹1.5 lakh crore in India in FY18 and it was growing at 70 per cent. The total VC/PE investment in India since 2005 was around $140 billion. Also, VC/PE backed companied provided 1.3 times more jobs and paid 1.9 times more tax, as a percentage of revenue generated, when compared with other companies. The AIFs had received commitments of more than ₹1 lakh crore since inception, he said.

The AIFs are privately pooled investment vehicles established in India, with ability to collect funds from Indian and foreign investors.

He said onshore pooling of funds from AIF could increase from ₹1 lakh crore to ₹3 lakh crore. While domestic capital as a percentage of total pooling was 16 per cent in India, it was 60 in China, Srinivasan said.

Published on January 23, 2018

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