Tax clarity in budget to help realty, venture funds to pick up
According to experts there could be more investor interest in these funds as the most of tax issues have been sort out by the finance minister’s announcement that these funds will be provided pass through status. It is expected that the industry could see fund moblisation to the tune of $1.5 billion to 2 billion under various categories of funds like real estate funds, social funds and venture capital funds.
However, the funds registered with Sebi under category III which are mainly hedge funds and take speculative strategies were not provided the pass through status.
The government has also allowed foreign investment in Alternative Investment Funds (AIFs), which would allow many players like real estate funds tapping the overseas investor.
“The finance minister providing pass through status to AIF industry is a great relief this allow many players to tap wide range of investor including foreign funds,” says Amit Bhagat, CEO and MD, ASK Property Investment Advisor.
“This will step up the ability of these funds to mobilise higher resources and make higher investments in small and medium enterprises, infrastructure and social projects and provide the much required private equity to new ventures and start-ups,” finance minister said in his Budget speech after providing the tax sops for the fund industry.
AIFs are basically funds established or incorporated in India for the purpose of pooling in capital from Indian investors for investing as per a pre-decided investment strategy. Overseas participation in AIF will also boost capital inflows to AIFs from overseas investors.
Kalpana Jain, senior director, Deloitte India said, “We expect to see a stimulated environment of foreign investment and private equity interest in India given that foreign investment is proposed to be allowed in alternative investment funds. We should see interest in investing in India given that India’s GDP is overtaking any other country in the World”.
Under Sebi guidelines, AIFs can operate broadly in three categories. The Sebi rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others. The regulator in May 2012, notified the guidelines for this new class of market intermediaries. The Category-I AIFs are those funds that get incentives from the government, Sebi or other regulators and include social venture funds, infrastructure funds, venture capital funds and SME funds.
The Category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. These AIFs include private equity funds, debt funds or fund of funds, as also all others falling outside the ambit of two other categories.
The Category-III AIFs are those trading with a view to making short-term returns and it includes hedge funds, among others.
However, category III funds that operate like hedge funds are not given the pass through status.
According to Sebi data, AIF assets more than doubled to Rs 20457 crore as on December 2014 with Category II fund having large chuck of funds with Rs 10302 crore and category I funds having a commitment of Rs 7819 crore.
The hedge fund category has a corpus of Rs 2336 crore. “It is a disappointment that the finance minister has not provided pass through for funds falling under category III and without the tax incentive even the foreign funds would not be looking at investing in these funds,” says Vaibhav Sanghavi, MD, Ambit Investment Advisors.
Ambar Maheshwari, CEO, private equity fund, Indiabulls Asset Management Company said, "Both the developments for AIF are extremely positive for the industry. We've been asking for a pass through for a bit now, we are waiting for the fine print now to assess that there aren't any other issues with this.”
Vishal Kampani, MD and CEO, Institutional Securities Group, JM Financial said, “The tax pass-through for alternate investment funds, tax benefits on REITs and clarity on minimum alternate tax for foreign institutional investors will lead to larger inflow of capital and boost fortunes of the financial services sector.”
- by Ashwin J Punnen for The Financial Chronicle
(With inputs from Ravi Ranjan Prasad)
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