1. Unlocking Domestic Capital Pools: A very small portion of start-up investments is funded from domestic sources. Regulators such as RBI and IRDA should encourage institutions regulated by them, to invest in VC/PE asset classes. Pensions & provident funds should be encouraged and investment limits for banks & insurance companies in VC/PE Funds must be increased from 10% to 25%. Lastly, we should permit large sum of charitable or religious funds lying in bank deposits to be diverted to VC /PE funds. Also individual investors should be given tax rebates for investing in VC/PE Funds.
2. Taxation - We need to create a favorable tax regime for domestic and overseas investors which will help attract capital inflows into the Alternative Investment Funds (AIFs), which includes venture capital, private equity, debt funds and infrastructure funds. So we propose a Full Tax-Pass-Through for AIFs, like in the case of mutual funds and REITs (real estate investment trusts). Investment gains of AIFs should be treated as ‘capital gains’ in nature and taxed at STT (Securities Transactions Tax) rates.
3. Promoting Onshore Fund Management – Currently around 95% of VC/PE fund is contributed by offshore investors, and their managers prefer to domicile their funds overseas (in countries with favorable tax and regulatory regimes specific to VC/PE Funds in contrast to the ambiguous rules in India). We need to create parity between Indian and offshore regulations and amend the safe-harbour norms for ease of doing business.
4. Institutional Trading Platform (ITP) – ITP platform facilitates start-ups and other SMEs to list without the mandatory IPO process which is time-consuming and capital intensive that small companies can hardly afford. However, restrictive SEBI listing norms such as, no person can hold 25% or more of the post-issue share capital, is discouraging companies from accessing the platform. The platform provides easier entry and exit options for informed investors like angel investors, venture capitalists and private equity players, apart from offering better visibility and wider investor base and tax benefits to long-term investors. However, we need to create easier regulations in order to encourage companies to tap the Institutional Trading Platform.
By Ajay Jalan, Founder & Managing Partner, Next Orbit Ventures
