Tax sop, demand from rich drives over $1b into alternative investment funds in 2015

by Jonathan Adams

A tax benefit through a provision announced in the last budget along with demand from high net-worth individuals (HNIs) for various investment options has led to a surge in the amount of money managed by alternative investment funds or AIFs.

In calendar year 2015, AIFs registered with capital markets regulator Securities and Exchange Board of India (Sebi) raised Rs.7,325.9 crore, more than the total funds raised by AIFs in the previous two and half years.

According to data from Sebi, in the period from August 2012 to December 2014, AIFs raised Rs.5,539.1 crore. The fund raising numbers are only for category I and II AIFs.

In 2012, Sebi came out with AIFs regulations, which put these funds under three categories. Funds that have a positive spillover on the economy and receive some concessions from the government (such as infrastructure funds and social venture funds) are categorized as category I AIFs, and funds where no incentives or concessions are given are classified as category II AIFs (such as private equity, venture capital and debt funds), while category III AIFs include hedge funds.

According to industry experts, certain positive announcements in last year’s budget helped improving the fund-raising environment for AIFs.

With a view to streamline the taxation regime of Alternative Investment Funds, finance minister Arun Jaitley, in last year’s budget, announced that tax pass-through status will be provided to all the sub-categories of category I and to category-II AIFs governed by Sebi regulations.

“Last year’s change in the budget definitely helped the cause. It was no doubt that it was a step in the right direction,” said Sanjeev Krishnan, partner and leader (private equity and transaction services), PwC India.

“AIFs are continuing to gain credence and more and more people are talking about launching an AIF,” he added.

“At a time when over $20 billion has been invested by PE/VC funds, something like an AIF will definitely gain currency,” Krishnan said.

Budget announcements, however, are not the only reason why AIFs are becoming popular among investors.

According to Shefali Goradia, partner at BMR Advisors, “Changes announced to the AIF regime in the previous budget are not the biggest factor for growth in fund-raising by AIFs. Fund-raising has seen growth because of increased traction for AIFs. There are a lot of start-ups and especially in the e-commerce space, there is a lot of opportunity. There was an interest in investing in domestic companies, and the AIF regime made it more conducive,” she said.

While announcement on the certainty of tax pass-through, which was a long-standing demand in the previous budget, has helped, experts said that more clarity is required on the taxation front.

“It is not completely hurdle free. When the funds distribute income there is a withholding tax of 10%. There is very strong representation and an expectation that there will be a relaxation on that front,” Goradia said.

“This is a big impediment, especially in cases where there are offshore funds investing alongside a domestic AIF, they are not able to invest through the AIF because of the 10% withholding tax… If these relaxations come through then the use of on-shore AIFs will become easier,” she added.

This article is for information purposes only.
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