The Centre should review the competition regulator's definition of control over companies by private equity (PE) funds, Srini Sriniwasan, managing director of Kotak Alternate Asset Managers Ltd told Mint in an interview.
As the current view goes, a PE firm holds "control" over companies due to minority stakes and board seats, and information and veto rights could lead to misconceptions about collusion, said Sriniwasan, who is also the vice-chairperson of the Indian Venture and Alternate Capital Association (IVCA), an industry body for alternative assets.
The IVCA held pre-budget consultations with Union finance minister Nirmala Sitharaman on 20 June.
“When PE funds invest in companies, they have some rights to protect themselves that can be viewed as a control position. So, the question was if there can be an exemption for PE funds," said Sriniwasan.
The industry body emphasized that these rights are negative and defensive, intended to protect minority interests, and do not provide control to PE firms.
The finance minister is expected to present the budget by July end.
Besides this, the industry body discussed measures to boost domestic capital in alternative investment funds (AIFs) to finance infrastructure, credit, startups and growth companies.
Chrys Capital’s Ashley Menezes and Rajat Tandon, the president of the industry body, were also part of the discussions.
Meanwhile, Sriniwasan batted for more clarity on the definition of what constitutes a PE investor. “This money, which is coming from foreign direct investments (FDIs), is not seen as an organized pool of capital as AIFs, which is currently the only recognized PE pool under the law,” he said.
When foreign investors invest through the FDI route, it becomes very hard to distinguish whether it is a PE fund or a strategic investor as the recipient of that money is either a company or the government, he said adding that's why a clearer definition, which considers the broad-based nature of PE firms that include both direct and indirect investors, will be imperative.
Established in 2005, Kotak's alternative asset arm has handled about $8.8 billion in total capital commitments with presence across six business verticals including PE, real estate and infrastructure funds.
The IVCA has sought more clarity on taxation of investments in securities that are more readily available to foreign portfolio investors. “What we are asking for is to have the same parity as them, make it as clear and put out additional circular clarifications as the case may be,” Sriniwasan said.
There also needs to be more clarity about the taxation on current interest. “At the IVCA, our primary concern is that people who are domiciling their business in India are collecting money, not just from domestic investors but also from foreign investors. This subjects them to the regulatory oversight in India and contributes to it,” he said, adding that the policies adopted are going to be the critical aspect of how growth is driven to AIFs in the country.
He also alluded to the missed opportunity for domestic investors as over 80% of exits have gone to investors outside the country. He emphasized that these domestic institutional pools of money have been reluctant participants in the industry due to a host of reasons, which include poor past experiences, lesser understanding or the lack of ability to underwrite the managers or strategies.
“As an industry, we want to ensure that the AIF industry can also be a hedge for us as a nation to counter the volatility of global capital like how the mutual funds industry must counterbalance foreign portfolios,” he said.
The industry executives also appealed for more regulatory and legal clarity on AIFs as an asset. The lack of proper recognition has led to a grey area where they end up being taxed at the highest level, which becomes a cause of concern for foreign as well as domestic investors. So, more provisions are needed to level the playing field, Sriniwasan said.
