Mumbai: Allowing losses at the end of the fund life to be passed on to investors, considering the cost of management effort in calculating profit from the sale of an asset, and creating a taxation regime for hedge funds—are among demands of the private equity and venture capital (PE/VC) industry ahead of the Union budget.
The measures aim to further strengthen the PE/VC industry, which attracted a record inflow of $24 billion in 2017.
“We have made several representations to the government with the two main objectives of making managing funds in India as simple and easy as possible, and to increase capital formation in India," said Gopal Srinivasan, chairman of industry body Indian Private Equity and Venture Capital Association (IVCA), and founder-chairman and managing director of TVS Capital Funds Ltd.
Srinivasan said that while in the last three years nearly 27 changes have happened in terms of the government using PE/VC as a policy instrument for entrepreneurship and job growth, several more measures are needed to meet the above mentioned two objectives.
“Today AIF (alternative investment funds) pools have grown to more than Rs1 lakh crore, which is a big number and total PE/VC investments are expected to reach Rs1.5 lakh crore this fiscal, which is more than entire IPO (initial public offering) and QIP (qualified institutional placement) put together. We believe fundraising by AIFs can grow to Rs3 lakh crore by fiscal 2019-20," said Srinivasan.
“One of the basic ideas of taxation is that you tax profits after setting off the expenses and losses. In a VC/PE fund, losses are generally at the end of a fund life. It should not be the case that the losses at the end of the fund life have to be discarded," said Srinivasan, adding the earlier VCF (venture capital funds) regimes allowed losses at end of fund life to be passed through to investors.
The industry body also recommended that management costs be factored in while calculating the profit from the sale of an asset, as it is the cost of the management effort that creates the value in the asset.
“In the US, the UK and Singapore, if you make a profit on the sale of an asset, you deduct your expenses and then, the investors pay the tax on the remaining profit. But in India, the management fee is not considered to be part of the cost of the asset," said Srinivasan.
A clear taxation regime for category III AIFs, which are long and short hedge funds, is another major demand.
“Nowhere in tax law the hedge fund or AIF III is recognized as a category. Normally, any Sebi-regulated fund structure should come along with a clear tax code. REITs/InvITs, AIF I and II, mutual funds and portfolio management services, all of these have tax certainties. There is clarity on how these are taxed," said Srinivasan.
This asset class has grown significantly in the last year; hence clarity on taxation is important, he added.
To boost capital formation in the country, the industry body has recommended measures such as not taxing the management fee on dollar capital pools being managed in the country, and allowing charitable institutions to invest in private equity and venture capital.
“In the US, charities such as Yale, Princeton, Harvard—these charities created the VC industry. But in India, charitable institutions can’t invest in category I and II AIFs," said Srinivasan.
Srinivasan added that the IVCA is engaging with the government on long-term measures that will further strengthen the PE/VC industry.
“Apart from the short term measures that we are working on, we also have a three-year road map. One of the ideas is listed funds. InvITs and REITs have created listing for infrastructure and real estate. We think it is time to create listed funds for AIF II category, especially the credit funds. So, we are suggesting various retail frameworks on how to have listed funds," said Srinivasan.
Another long-term measure that the industry body is working on is making the International Financial Services Centres AIF-ready, said Srinivasan.