During a meeting with finance minister Nirmala Sitharaman, representatives of the Indian Venture and Alternate Capital Association (IVCA) said the Centre should announce some measures during the budget announcement for 2023-24 to bring in parity in taxation and allow blended finance models to operate with multiple funds of funds.
The representatives asked the minister to allow perpetual capital vehicles in order to unlock capital flows from long-term investors such as family offices, corporates and insurance companies.
A perpetual vehicle is structured in a way where the funds do not come with the drawdowns, capital calls, exit deadlines and other traditional features of the PE-VC funds that have a fixed fund cycle or life.
“There are really long-term investors who would rather let compounding effect play on their investments and will continue to support the companies for longer periods with private capital. Such structures will help us unlock those capital flows," Gopal Srinivasan, founder of TVS Capital and senior board member of IVCA, said in its presentation.
IVCA had proposed these changes to an expert committee, headed by former Sebi chairman M Damodaran, formed by the Ministry of Finance. Srinivasan requested Sitharaman to consider these suggestions of the industry, and offer the top priority to parity in taxation.
“There is a need to remove the disincentive present in supporting entrepreneurship in unlisted enterprises. Having parity in the treatment of securities will increase the capital allocated to investments in new asset creation that generate jobs and boost the economy," the committe said during the presentation, Mint has seen a copy of the presentation to the finance minister. Mint has seen a copy of the presentation to the finance minister.
In the last budget, the government had brought in a uniform surcharge of 15% for funds. “…but the time has come to bring in parity in the basic taxation framework for listed as well as unlisted shares and securities for resident investors," it added.
Additionally, the industry also asked the government to look into the tax treatment of specific features of alternative investment funds (AIFs), such as separate legal forms for AIFs and the need to recognize their operations in Indian law with a harmonized uniform framework that would help avoid legal challenges and unintended consequences, which the industry is currently exposed to.
“Two critical aspects of AIF business model that is carried interest and management fee requires right recognition and treatment across laws and regulations," it said.
“Though carried interest is treated as capital gains by the industry, there is a need to bring in certainty to this aspect to avoid friction across agencies and regulators," the note said.
The pass-through character permitted to AIFs should be across incomes, losses and expenses instead of restricting it only to incomes and losses, it said.
It also urged the minister to ease taxation rules for employee stock ownership plans, as many startups use it as an incentive to hire good talent.
Srinivasan said these are all long-standing demands of the industry.
In the note, the experts asked the ministry to operationalize the blended finance model for multiple fund-of-funds (Fofs).
“There is a need to identify the gatekeepers for operationalizing Fofs and by addressing some of the limitations in pooling of funds such as the PFRDA and EPFO etc.," Srinivasan added.
