India-Mauritius tax pact: Secondary deals may decline for private equity funds

By: | Published: May 12, 2016 6:29 AM

With the new tax pact with Mauritius that will also apply to Singapore, the number of private market exits could see a sharp fall for private equity funds after March 2017 when it comes into effect.

Indian rupee, US dollarWith the new tax pact with Mauritius that will also apply to Singapore, the number of private market exits could see a sharp fall for private equity funds after March 2017 when it comes into effect.(Reuters)

With the new tax pact with Mauritius that will also apply to Singapore, the number of private market exits could see a sharp fall for private equity funds after March 2017 when it comes into effect. Several PE fund managers told FE that once the changes take effect from April 1, 2017, funds would consider exiting through the IPO route as the most preferred option instead of secondary deals to other funds and strategic buyers.

Currently, private market transactions are taxed at the rate of 30% up to three years for short-term capital gains and at 20% for a longer period. Mauritius-based funds are currently exempt from paying either. According to government data, in FY16 the total inflow of foreign direct investment in the country was $39.3 billion. Of this 34% came via Mauritius and 16% from Singapore.

“For the PE sector, average returns in emerging markets like India tend to be in the range of 15% after taxes but I believe that returns could drop lower than 6% once the changed regulations compounded by currency risks take effect,” the managing director of a large global fund who did not wish to be named told FE.

But opinions differ. “Although there might be some crunch in short-term funding, in the mid to long term the market will adjust. So I cannot imagine a long-term bearing on the cash flow based on this regulation,” said Prakash Kalothia, managing director and CEO at Sun-Area Property Partners.

“We are yet to assess the full impact of the changes but we are convinced that the government has the best interest of foreign investors in mind,” said Jacob Kurian, partner, New Silk Route.

“Since private equity funds typically raise capital from multiple jurisdictions, the investment vehicles are accordingly registered in those geographies and both Mauritius and Singapore feature prominently in this regard,” said Sameer Gupta, partner, tax and regulatory services, EY. “It may have an impact on the new fund raising plans to some extent,” he added.

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