“I believe that in the long-term, rupee capital pools will be large and, therefore, it will be worthwhile for us to pursue that,” says Gopal Srinivasan, Chairman and Managing Director, TVS Capital Funds Ltd, a Chennai-based venture capital firm.

It recently raised a Rs 500 crore rupee top-up fund. The company manages the TVS Shriram Growth Fund I, which is a Rs 600-crore domestic rupee fund. It has invested in 10 companies in sectors such as retail, healthcare, education, food and agri, FMCG and facilities management.

Srinivasan believes a few changes — some that he describes as stroke of the pen and others as heavy lifting — need to be done to make raising rupee funds easier for venture capital firms. “I think in the next two-three years, the liquid pools for institutions will open up. It is the right time to get the changes made,” he says during a recent interaction.

For instance, the Insurance Regulatory and Development Authority does not recognise alternate investment funds as a type of asset class. Explicit recognition of the alternate investment funds would be helpful. Pension funds are the biggest investors globally in private equity.

The Government and regulator concerned need to consider allowing pension funds to invest in private equity. The third stroke of the pen is that the Central Board of Direct Taxes recognises 21 types of assets which can be invested in by charitable endowments. They are allowed to invest in risky investments, yet alternate investment funds which are SEBI approved are not contemplated.

Larger charitable endowments should be permitted to invest in alternate investment funds. For such regulated institutions, India should consider moving away from the quota-based asset-allocation regulations towards the “prudent person” principle, as mandated by ERISA in the US, and also used in quite a few OECD countries. Another benefit of allowing such large pools of capital to participate in alternative investments would be the tending down of debt interest rates, as return expectation of such pools would now be spread over a portfolio which includes high returns from alternative investments.

Second tranche

According to Srinivasan, raising the second tranche was tough due to a number of factors. There was the disadvantage that banks who were the primarily institutional investors in private equity, had realised that private equity funds haven’t returned money within a timeframe that they found suitable. Private equity funds typically give back their money in four-five years, so they really had to wait for seven years. So, marking to market in three years in the private equity fund is like trying to plumb the lowest point of the valuation of the asset. Banks were not investing. Insurance companies were reticent to invest.

However, TVS Capital worked with several partners in the HNI (high net-worth individuals) community. Apart from the ICICI group and HDFC, it roped in some new partners such as Anand Rathi and Avendus. “We also devised products. The HNI of today is different from the HNI of five years ago,” says Srinivasan. There are very large families with very large liquid pools, ranging from hundreds of crores to thousands of crores. Very professionally run family offices, with a full-time dedicated CFO and good advisers, carefully plan their asset allocation strategy.

“It has taken us nearly 15 months or so of work. We did our first close within six months and will probably do a final close by the end of the year. We have currently raised commitments of Rs 500-odd crore, which includes Rs 60 crore of sponsor amount,” says Srinivasan. Another important measure would be the creation of training and education systems, for the regulators to ensure that the companies which invest in alternate investments, have qualified officials to make the investments.

HNIs typically access private equity through a wealth manager. When a wealth manager comes and offers private equity, just like a mutual fund, he has actually taken AMFI exam, should he take an IVCA (Indian Venture Capital Association exam), which sort of tells the client that this person has got knowledge of the subject.

On the tax side there are a couple of issues, especially the pass-through status becomes important because globally you can pay tax only at one level. If you invest in a private equity fund and if the private equity fund declares dividend, whether you get the flexibility that this is treated as dividend income by you and you decide not to pay tax or if it is interest coupon, should they pay tax on your behalf. “Generally in the world the funds are just pooling vehicles. They simply distribute back the money to the investors, who then file tax returns. You need to give the funds comfort that it is the not liability of the fund,” adds Srinivasan.

Last tax issue is when FIIs make investments in private, unlisted companies, and they sell the shares, it comes in for a 10 per cent long-term capital gains tax.

In the Direct Tax Code it is contemplated to eliminate the 10 per cent. Today, you can make 10 per cent un-indexed capital gain, that needs to be retained. Otherwise, it becomes quite messy.

The association is discussing this with the authorities. But rupee capital has not yet perhaps got the attention it deserves. In the last 10 years, only $2 billion of rupee capital has been raised, which is not even 2-2.5 per cent of total PE funds disbursed, may be 3 per cent. But 50 per cent of it has been raised in the last one year, which definitely is a sign of progress. Contrast that with the last five years, $40 billion of Renmibi, Chinese capital has been raised. Moreover, China Insurance Regulatory Commission (CIRC) has relaxed the cap on private equity investments from 5 per cent to 10 per cent of total funds, further injecting about $50 billion of fresh domestic private equity capital. “We see that coming in India.”

India would need to invest about 2 per cent of its GDP in PE. Because emerging companies are more in emerging economies, by very logic. If you take 2 per cent, it is $40 billion. As against that, we are investing $10 billion, half a per cent. As it catches up, should it not be that rupee managers are free to invest their funds. Should it not be that Indian pensioners, Indian charities, Indian insurance companies and HNIs should be able to get better returns to their own long-term pools by investing in asset classes that makes sense, asks Srinivasan.

Strategically for India, it is dependent on foreign money only. No harm in foreign money, but there is no need to get dependent.

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