Tax pass-through status gives a boost to AIF investments
The total investments made by AIFs increased by nearly 29% to `7,356.81 crore in the three-month period ending March
Mumbai: The government’s decision to give tax pass-through status to two categories of alternate investment funds (AIFs) in the Union budget has led to a significant rise in the quantum of funds raised by these entities.
The total investments made by AIFs increased by nearly 29% to ₹ 7,356.81 crore in the three-month period ending March. Further, the investments made by category I AIFs more than doubled from ₹ 408.96 crore in the quarter ended December to ₹ 960.90 crore as on 31 March, according to data from the Securities and Exchange Board of India (Sebi).
AIFs are grouped under three categories based on their investment structures and risk profiles. In February, while presenting the Union budget, finance minister Arun Jaitley gave tax pass-through status to categories I and II, meaning capital gains will be taxed at the hand of investors and not the funds.
While category I comprises infrastructure and social venture funds and those aimed at small and medium enterprises (SMEs), category II includes mostly private equity and debt funds. Category III comprises hedge funds or those entities that intend to do leveraged trades.
The investments of category II funds also registered a rise of nearly 22% from ₹ 4,013.37 crore in the December quarter to ₹ 4,867.87 crore in the March quarter. According to Sebi data, a total of 135 entities have registered as AIFs till 31 March with an additional 31 in the pipeline.
While there has been no sudden spike in the number of AIFs, the tax pass-through status has certainly given investors more confidence in terms of investing in such entities, said Malav Shah, partner, Minesh Shah and Co., a consulting firm that advises many AIFs. “Investors have become more comfortable on the tax front, when it comes to investing in AIFs after the budget announcement and this has augmented fund-raising for category I and II AIFs. The AIF regulations were introduced in 2012 and there were already many players with the structure in place; hence, in our view, not many new AIFs have been formed following the tax clarity in the budget," said Shah.
He, however, said the announcement had a reverse effect on category III AIFs where investors are sceptical to invest since tax treatment has not yet been clarified.
According to the Sebi (Alternate Investment Fund) Regulations, 2012, which replaced the erstwhile Sebi (Venture Capital Fund) Regulations, 1996, only venture capital funds, part of the category I AIF, were allowed tax pass-through prior to the budget announcement. This left out other sub-categories of category I such as SME funds, social venture funds and infrastructure funds as well as category II funds that include private equity (PE) funds and debt funds.
Arpit Agrawal, director and fund manager, Tamohara Investment Managers, a Sebi-registered AIF, said the space will now grow exponentially after the budget announcement.
“Money comes faster with clarity on regulations. The tax pass-through status will have a multi-fold impact on AIF with more high-networth individuals (HNIs) coming on board as investors. The regulators would also be happy as they would prefer HNIs investing through AIFs while retail investors can choose the mutual fund route. For the time being, private equity players would be the biggest beneficiary," said Agrawal.
The total investment commitment by AIFs as on 31 March stood at ₹ 22,612.36 crore, up from ₹ 13,110.33 crore a year earlier, according to Sebi data. Within category I, infrastructure funds have received maximum commitment.
According to Shah, HNIs are major investors in this segment, though a few registered AIFs have taken approval from Foreign Investment Promotion Board to raise money from overseas investors.
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