The government is preparing to introduce fresh investment regulations aimed at venture capital (VC), private equity (PE), and hedge funds, with a focus on enhancing transparency and establishing a level playing field for both domestic and international market participants.
According to KP Krishnan, Joint Secretary in the Finance Ministry, discussions have already occurred with the market regulator, SEBI, regarding a comprehensive review of existing norms governing VC funds.
In an effort to ensure that venture fund investments are diversely allocated rather than concentrated in specific sectors, the government is striving to develop a robust legal framework. There is a particular concern surrounding substantial fund inflows into the real estate sector, which have, in turn, inhibited investment in other high-tech industries, such as software and biotechnology, leading to escalated real estate prices nationwide.
Furthermore, the government appears inclined to introduce additional tax incentives aimed at encouraging both venture and PE funds to channel their investments into higher-risk sectors.
Venture funds target the equities of rapidly growing companies, aiming for significant returns. Currently, foreign funds enjoy certain advantages over domestic funds under the prevailing tax regulations in the country.
According to Punit Shah, head of financial services at PWC India, foreign VC funds find themselves in a favorable position compared to domestic funds when investing outside the nine high-tech sectors, which include biotechnology, software, and nanotechnology. While the government provides tax benefits, such as no capital gains tax, for domestic investments in these specified areas, real estate does not fall under this beneficial category. Thus, when domestic venture funds invest in unlisted real estate firms, they face capital gains tax upon exiting the investment.
Conversely, foreign funds that are registered in tax-friendly jurisdictions like Mauritius and Cyprus are exempt from capital gains tax on such transactions due to existing double tax avoidance agreements. This strategic change, as Krishnan notes, aims to equalize the tax treatment of both foreign and domestic VC and PE funds, thus fostering a more balanced investment landscape.
In addition, SEBI plans to mandate the registration of VCs and PEs, aiming to gather comprehensive data regarding their sector-specific investments in areas such as real estate, information technology-enabled services (ITeS), and education. TC Nair, Director at SNI, emphasized that currently, SEBI lacks a definitive source of information concerning the precise investment patterns of these funds.