Mumbai: The budget proposal that restricted tax benefits to venture capital (VC) in certain businesses has predictably hit investment in sectors such as real estate, media and entertainment.
According to a study done by Grant Thornton, “the quantum of investments into sectors such as real estate, media and entertainment have declined in March-April (after the budget announcement) compared to January-February 2007.
For example, investments in real estate declined from $440 million (Rs1,798 crore) in January-February to $240 million in March-April.
Similarly, investment in media and entertainment showed a downtrend, dropping from $484 million to $156 million for the respective periods, the study said.
The government is, however, unlikely to be taken aback as this is what it had perhaps anticipated when the tax benefits to VCs were restricted.
Originally the tax benefits for the VC funds were given assuming the investment would flow to sectors like technology, Grant Thornton Partner Corporate Advisory Services C. G. Srividya told PTI.
However, subsequently these funds started investing in matured businesses and that could be the reason why the government decided to restrict tax benefits to only certain specified businesses.
According to the figures available, investment by VC funds in real estate had moved up from negligible values in 2005 to about $1.1 billion in 2006 and to $440 million in January-February 2007.
Similarly, investment in media and entertainment had gone up from $142 million in 2005 to $156 million in 2006 and $484 million in January-February 2007.
Investment in financial services rose from $185 million in 2005 to $657 million in 2006 to $312 million in first two months of the calender year.
Of the three segments, VC investment in financial sector has not been affected despite the withdrawal of tax benefits.
Investment in this sector for March-April stands at $460 million which was higher than the investment in the January-February period.
As per the study, the overall value of investment by VC firms has declined from $713 million in January-February 2007 to $320 million in March-April.
According to Srividya, this analysis is for a short period of two months and a better picture may evolve going forward, where there is a longer period for a trend to be seen.