ICICI Venture Mulls Creative Holding Structure
ICICI Venture Funds is reportedly looking at ways to escape the recent tax clause on Indian venture funds. The Mumbai-based private equity firm is looking at structuring the investment in such a way that the shares of the investeee companies will be directly held by the limited partners of the fund. It will be somewhat like a mutual fund where the investors are allotted units for investment.
I am not sure how this can be done. Legal pundits and CA firms can advise on this. Also, what needs to be considered is whether the regulations would allow such a tinkering with the VC fund holding structure.
The Union Budget 2007-08 had restricted the tax benefits (pass-through benefits) enjoyed by the VC funds registered with Securities Exchange Board of India (SEBI). Now they are available only for certain specified sectors such as IT, nanotechnology, biotechnology, drug discovery etc. This will affect those funds like ICICI Venture who have invested in areas like retail and publishing, and infrastructure sector.
There are also other issues. It’s not yet clear whether the income of VC/PE funds are treated as “business income” or “capital gains”. In the case of former, the tax rate is 30 per cent plus surcharges, while in the latter it’s 10 per cent.
Funds like IDFC Private Equity and UTI Bank are looking at setting up offshore funds in places like Mauritius with which India has a “double taxation avoidance treaty”.
There is no need for tax exemptions on income accruing from investments in listed companies or in companies at pre-IPO stage. That is not really providing risk capital, and it is just quick buck investing. But those funds who are providing early stage capital can be definitely be spared.
Finance Minister P Chidambaram’s idea of taxing VC/PE funds have come a way too early, though.
Related:
Budget Restricts “Pass-Through Benefits” For VCs In Certain Sectors
Restricting Pass Through Benefits: Greater Impact On Domestic VC Funds
Economist Ajay Shah Rubbishes Plans To Tax Venture Capital Funds
How Budget Would Impact VC Funds: Tax Man’s Perspective
Will Domestic Funds Now Go To Mauritius To Set Up Offshore Funds?
Pass-Through Effect: UTI Bank Plans $500 Million Fund, But Registered Offshore
