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Business News/ Money / Personal-finance/  Investment sources widen
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Investment sources widen

The proposal is to club foreign portfolio investors and foreign direct investors under the same umbrella, which will make things easier for overseas investors

Photo: Pradeep Gaur/Mint (Pradeep Gaur/Mint)Premium
Photo: Pradeep Gaur/Mint
(Pradeep Gaur/Mint)

In a bid to encourage funding for companies, the finance minister has given a boost to Alternate Investment Funds (AIF) by allowing foreign investors to participate in such funds. “Keeping in view the need to increase investments from all sources, I propose to also allow foreign investments in Alternate Investment Funds," said finance minister Arun Jaitley.

Moreover, he has proposed that foreign portfolio investors and foreign direct investors be clubbed under the same umbrella, which will also make it easier for overseas investors looking to invest in AIFs.

Regulations for AIFs was introduced by the capital markets regulator in May 2012 for investment funds, which are essentially pooled-in investment vehicles for investors other than retail investors, and it replaced the erstwhile venture capital regulations. Such funds include private equity funds, venture funds, and so on.

There are three distinct categories under AIF. Category I includes specific sector investments and focuses on the unlisted category of enterprises, where there is need for private funding. Similarly, category II focuses on unlisted enterprises but doesn’t limit the fund to a defined sector. This is akin to many sector-agnostic private equity (PE) funds, which are likely to fall in this category. The last category caters to any other kind of fund—a fund that invests primarily in listed equity.

Details on whether the foreign investment comes through the automatic route or the approval route will matter. If the former isn’t adopted, the changes announced won’t be sufficient. Adopting the automatic route will also help non-resident Indians participate seamlessly through this investment vehicle.

In a related provision, the finance minister has proposed the simplification of taxation regime for AIFs by providing pass-through status to all the sub-categories of category-I and also to category-II AIFs governed by the regulations of the Securities and Exchange Board of India (Sebi). This means that the income will be taxed in the hands of the investor.

Leaving out of category III AIFs has caused some confusion. Andrew Holland, chief executive officer, Ambit Investment Advisory, said, “I am yet to look at the details but it means that even foreign funds which invest in India through category III AIFs will get taxed."

Overall, the objective of the government is to encourage funds for private equity and venture capital that go into financing companies, which helps in the economic growth of the country and in generating employment. To that extent, the category I and II AIFs are most useful as they invest directly in the company and can hold majority stake; category III funds, on the other hand primarily invest in the listed space with minority holding in companies.

Bijal Ajinkya, partner, Khaitan and Co., said, “The pass-through status for AIFs is a relief investors and funds, which were stuck in disagreements over who pays the tax on income. There is still ambiguity as the fine print says, ‘the pass through is available only if the income of AIF is not in the nature of ‘profits and gains from income or profession’."

Ajinkya also said that category III mostly includes hedge funds where the objective is not aligned with the government’s push on infrastructure funding and the churning in the portfolio may be considered high enough to classify as business income.

Both the moves are expected to boost investments in this category of funds, which is fairly new. While this investment segment is still at a nascent stage, the assets under management are growing fast; these doubled in the last one year.

Earlier this month, Mint reported that AIF managers raised capital commitments worth 20,457.45 crore till the end of December from 11,186.36 crore in the previous year. In this time, the second and the third categories of AIFs have grown the fastest. The amount of commitments raised in the second category has grown to 10,302.21 crore from 4,821.58 crore at the end of December 2013, and for category III, AIF commitments grew to 2,336.03 crore compared with 835.87 crore at the end of December 2013, according to the market regulator.

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Published: 28 Feb 2015, 09:44 PM IST
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