Private equity (PE) and venture capital (VC) firms have written to the finance ministry seeking clarity on certain key proposals pertaining to tax pass-through and conditions put forth for waiver of permanent establishment.
Gopal Shrinivasan, chairman and managing director of TVS Capital Funds, says the government has looked into various issues that concerned private equity investments, yet there is a need to focus on execution details in terms of implementation of the norms proposed in Budget 2015.
“There is a need to amplify, clarify and modify tax pass-through that has been restored for all category of alternative investment funds,” Shrinivasan said.
Arvind Mathur, president of the Indian Private Equity and Venture Capital Association (IVCA), says all gains and losses at the fund level must be passed on to investors to ensure growth of domestic PE and venture capital (VC).
“All income of the funds should be treated as deemed capital gains and not business income to ensure clarity and avoid litigation,” Mathur added.
In a bid to encourage offshore funds to set up offices in India, finance minister Arun Jaitley had proposed a waiver of permanent establishment under certain conditions.
“Giving a safe harbour to eligible foreign investors from permanent establishment status has been introduced in a nascent form,” Shrinivasan said.
Yet, in order to qualify as an eligible investment fund for waiver of permanent establishment, the fund is required to have a minimum of 25 members, and a monthly average corpus of over Rs 100 crore. Besides, the threshold of participation interest of a single investor in the fund has been restricted to 10%.
PE and VC firms are of the view that these conditions are impractical.
The PE and VC industry in India has recommended to the finance ministry to lower the number of fund members to 10 from the proposed 25, and increase single investor participation in the fund from 10% to 49%.
“The limit of 10% on a single investor will not be met by most funds because anchor investors usually invest much more. Similarly, unlike mutual funds, private equity funds have a small number of investors. Hence the minimum number of investors of 25 will be impractical in many cases and must be lowered,” Mathur said.
PE and VC firms have requested the government to reconsider the minimum investor rule, such that it excludes investors like pension funds, insurance companies or government bodies or university endowments from its ambit.