Budget 2018: Private investors seek pass-through of losses at fund level

At a time while Finance Minister Arun Jaitley and his team could be getting set for Union Budget 2018-19, the private equity enterprise is looking for a pass-via of losses on the fund stage for category 1 and category 2 alternative funding finances (AIFs).

according to the existing rules, if there are losses in a fund on the cease of its existence, the same can't be passed onto its investors. ‘‘this is a big trouble with VC or infra funds. Over a fund lifestyles of 8-to-9 years, a fund might also emerge as with one or loss-making corporations,” says Gopal Srinivasan, president, Indian non-public equity & task Capital affiliation.

The policies say that earnings can be surpassed onto traders, but losses have to be kept at the fund degree. interestingly, Sebi’s unique challenge capital rules of 1996 allowed this. those were replaced by using Sebi’s AIF guidelines in 2012. ‘‘If the pass-via is authorized, investors will take greater risks. They won’t mind taking losses in one or organizations in the event that they recognize they'll get the whole benefit,” says Srinivasan.

The industry is seeking a similar pass-through of losses at fund level for Category 3 AIFs or hedge funds, which had an investible pool of Rs 226 billion last year. ‘‘Hedge funds is not mentioned in the Income Tax Act. As a result, each assessing officer takes an independent view on them. What we are saying is please bring a formal tax regime for AIF-3 with some kind of pass-through system,” says an investor.

AIFs, which grew 55 per cent in FY17, contributed 19 per cent of VC/PE inflows in FY17. The changes could increase the flow of domestic capital into AIFs, which is only 16 per cent in India compared to 60 per cent in China. IVCA has also suggested that larger charitable and religious trusts, be allowed to invest in AIFs. The industry is also seeking lower long-term capital gains tax (LTCG).

Public market investments are exempted from LTCG if they are held for one year while PE/VC investments in unlisted shares are taxed at 20 per cent LTCG if held for more than two years. Vishal Tulsiyan, managing director & CEO of Motilal Oswal Private Equity says that PE invests with a long-term horizon and are putting money in illiquid stocks. ‘‘To make it attractive, they should make LTCG PE/VCs pay at par with listed stocks,” he says.