On the Budget wishlist of PEs and VCs is a request to allow perpetual funds to operate. These capital vehicles can unlock flows from long-term investors such as family offices, corporates and insurers. Shobhana Subramanian explains the advantages of such funds and the other asks from the government
What is permanent capital?
A permanent capital vehicle (PCV) sustains investments with an unlimited time horizon. Its structure is such that the funds don’t come with the drawdowns, capital calls, exit deadlines and other features of PE-VC funds with fixed fund cycle or life.
Also Read: Explainer: Behind Jet Airways’ rebirth pangs
There are some very long-term investors who want to let the compounding effect play out on their investments; they will continue to support firms for longer periods with private capital. There is no drawing down of the principal at any point in time; thus, there is little focus on the short-term performance of a financial product. PCVs are known as evergreen structures, with evergreen defined as “always reliable”. Endowments, for instance, typically have unlimited time horizons.
What are its advantages?
These vehicles can unlock capital flows from long-term investors such as family offices, pension funds and insurers. They allow funds to work across cycles. They can mop up capital during good times and ride out troughs. As the size of the corpus grows, they allow for redemptions to facilitate exits. PEs and VCs want flexibility on perpetual-fund; this is available to other alternative investment funds (AIFs). For instance, other AIFs can invest in both listed and unlisted securities.
Also Read: Explainer: Making sense of employment data
The LTCG tax for listed shares is 10%, after a holding period of 12 months. For unlisted ones, it is 20% after 24 months. While PEs/VCs do not mind the longer holding period for unlisted shares, they want parity on taxation. They say their capital is at greater risk as the firm may not survive/succeed. Parity would inspire investment in unlisted stocks and boost entrepreneurship.
Why do PEs and VCs want to be treated as a separate class of investors?
Permanent capital vehicles can unlock capital flows from long-term investors such as family offices, corporate, pension funds and insurers. While PEs and VCs are governed by the Securities and Exchange Board of India (Sebi) rules, new provisions have been brought in over the years, such as the angel tax and rules requiring the transfer of investments at market value. While these are anti-evasion or anti-abuse measures, it hurts investments, and PEs and VCs want a self-contained code. This, they say, could facilitate transactions relating to investments — in companies under the Corporate Insolvency Resolution Process (CIRP), for instance.
Currently, investment in distressed firms is often impeded by the taxman making claims and going beyond the terms of the CIRP, though the apex court has upheld ‘clean slate’ principles for CIRP.
Have the blended finance schemes taken off?
In the Budget for 2022-23, the government has said it wants to promote thematic funds for blended finance, with its share capped at 20% and managed by private sector fund managers. Among the targeted sunrise sectors are climate action, agri-tech and deep-tech. However, not much progress has been made on this front.
These funds were to be modelled on the Fund of Funds (FoF) set up by the National Infrastructure Investment Fund and Small Industries Development Bank of India (Sidbi), with each of the FoFs funding between 150 and 200 startups.
How has the Sidbi Fund of Funds fared?
To encourage entrepreneurship in the country, Sidbi is using the Fund of Funds model. The idea is to fund emerging startups indirectly by providing funds to VCs in the Indian startup ecosystem. The Sidbi FoF has a corpus of Rs 10,000 crore for capital contributions to various AIFs registered with Sebi. The AIFs, in turn, will invest at least twice the contribution in designated startups. At the end of March 2022, Rs 9,408 crore had been invested by AIFs in startups. The government has allowed AIFs accelerated drawdowns.