BANGALORE: A dismayed venture capital industry plans to complain to the finance minister that he has given them a raw deal in the Budget and request him to withdraw the measures they feel will harm risk capital investing in India.
The Indian Venture Capital Association, which will seek a meeting with Pranab Mukherjee to make its case, fears that many deals that are already in the pipeline may dry up if the modified tax regime proposed in the Budget is implemented.
"This will have an impact at the macro, sentiment level. Investors have long-term view and if you add regulatory uncertainty, there will be an impact," said Mahendra Swarup, the association's president. Topmost on the list of concerns for the industry is the General Anti Avoidance Rules, or GAAR, which allows authorities to tax offshore funds when they sell a stake in an Indian company.
Tax authorities have the power to declare any arrangement to obtain a tax benefit as impermissible if they have a doubt that such an arrangement is for the purpose of avoidance of tax and not just prudent tax planning.
"There is a need for clarity on what will be considered avoidance and what will be considered as tax planning. The assessing tax officer should not be the one to decide this," Swarup said Tax officers with little knowledge of private equity and of international treaties will choose the easier route and simply tax the funds, fear industry executives.
"This has had a tsunamilike effect on the private equity industry," said Dhanpal Jhaveri, chief executive officer and partner of Everstone Capital Advisors, an India-focused investment firm with a corpus of $1.6 billion (Rs 8,000 crore). Equally contentious are proposals to make retrospective amendments in the Income Tax Act.
Poor exits have been the bane of the Indian private equity industry for a while now. Assuming a minimum holding period of three years, private equity funds have recorded only 347 exits between 2009 and 2011 compared with 1,085 investments between 2006 and 2008. At a time when fund managers are grappling with a lack of exit options due to volatile public markets, the only viable option is mergers and acquisitions.
However, the introduction of a retrospective tax will force strategic investors who buy stakes in private equity-funded companies to weigh their options more closely. "How do we know the government will not make another amendment at a later date? We should know what the regulations are at the time of investment, not when we are exiting," said Alok Mittal, managing director of Canaan India.
Private equity funds will now have to factor additional capital gains tax costs while closing investments and planning exits, thereby increasing the cost of transactions. "The devil is in the details; there is a lot of fear and uncertainty," said Raja Kumar, founder of Ascent Capital, an investment firm that invests across sectors such as power, ports and e-commerce.
One of the most contentious issues in the budget proposals relates to levying tax on excess of fair value of a share paid by an Indian resident to an unlisted company. Industry analysts see this as a direct threat to the nascent network of angel investors.
Over the last year, this segment of high-risk, very early stage investment has been on an uptick in India. Leading angel networks such as Mumbai Angels and the Indian Angel Network have closed dozens of deals creating a pipeline of start-ups for venture capital funds.
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