AIF norms: Sebi panel led by Narayana Murthy submits second report

Report follows up on several of the key recommendations that were submitted the first time around

Photo: Hindustan Times
Photo: Hindustan Times

Mumbai: An N.R. Narayana Murthy-led committee set up by Securities and Exchange Board of India (Sebi) to suggest changes in tax and other regulations to facilitate capital raising by alternative investment funds (AIF) submitted its second report to the markets regulator last week, two people aware of the development said.

Sebi had constituted the Alternative Investment Policy Advisory Committee (AIPAC) standing committee under the chairmanship of Infosys Ltd co-founder Murthy in March 2015. The committee submitted its first set of recommendations in January this year.

The committee’s second report follows up on several of the key recommendations that were submitted the first time around, said the people mentioned above, who requested anonymity as they are not allowed to speak to the media.

Most of the key recommendations are around taxation, they said. 

“One of the key recommendations is to accord tax pass-through status to category III AIFs, which has already been provided to the other two categories,” said the first persons.

In 2012, Sebi came out with AIF regulations, which put these funds under three categories. Funds that have a positive spillover on the economy and receive some concessions from the government (such as infrastructure funds and social venture funds) are categorized as Category I AIFs. Funds where no incentives or concessions are given are classified as Category II AIFs (such as private equity, venture capital and debt funds). Category III AIFs include hedge funds.

In February 2015, finance minister Arun Jaitley in his budget speech announced tax pass through status for category I and II AIFs.

An email sent to a Sebi spokesperson for comments was unanswered till the time of going to press.

Other key recommendations of the committee include waiving of service tax to be paid on management fee by funds, introduction of a securities transaction tax and application of capital gains tax for sale of investments in unlisted companies by PE/VC funds.

“If the fund is in Mauritius and the fund manager is in India, no service tax is payable on the management fee. But if the same fund decides to pool in an India-registered vehicle then the fund has to pay 16.5% service tax on the management fee paid to the fund manager,” said the second person cited above.

With goods and services tax (GST) coming in, this rate will increase to 18%, he said, adding the panel feels that this is a major deterrent for funds to move to India and thus has recommended removal of the levy of service tax.

Private equity and venture capital funds generally charge 2% management fee from their investors. 

There has been a strong growth in investments in AIFs in the last two years on the back of the decision to give tax pass through status to Category I and II AIFs, the success of several start-ups, which has driven interest in venture capital as an asset class and the growth in high net-worth households and family offices.

AIFs have cumulatively raised Rs.29,015 crore since August 2012 across all categories, data from Sebi shows. Of this, Rs11,774 crore was raised in the first nine months of 2016 alone. AIFs have invested almost Rs.10,830.8 crore in the first nine months of 2016, the data shows. 

According to Kotak Wealth Management’s Top Of The Pyramid 2016 report, the number of ultra high net-worth individuals in India is estimated to have grown to 146,600 in fiscal 2016 from around 137,100 the previous year. In 2015-16, these individuals had a combined net worth of Rs135 trillion, the report added.

The committee has also recommended changes to the notifications issued by the Pension Fund Regulatory and Development Authority (PFRDA) with regard to pension funds investing AIF categories I and II, people cited above said. Changes have also been recommended to Safe Harbour rules to enable offshore fund managers to move to India without adversarial tax implications.

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