The Budget has relaxed investment norms for fund managers or general partners (GPs) ploughing their own money into offshore funds to inspire limited partner (LP) confidence.
Typically, PE funds find tax laws abroad more attractive, hence they incorporate as offshore vehicles. But the tax benefits of an offshore fund come with a rider: GPs are allowed to invest only up to 5% of the total fund corpus to avoid an Indian business connection under Section 9 (A) of the Income-Tax Act.
This limit can get breached as LPs typically expect fund managers to invest more and more of their own money so that they have their skin in the game. And the breach can end the fund’s tax-benefit status, attracting Indian laws.
To ease this and ensure continuity of the offshore status, the Budget has said GPs can invest Rs 25 crore over three years from the start of the fund without attracting Indian tax laws.
This becomes crucial especially in the initial years of the fundraising cycle as the fund manager is required to invest more personal money to inspire confidence in LPs.
“The Budget has provided relaxation for fund managers to seed their offshore funds without losing the offshore fund benefit,” said Siddharth Shah, partner at Khaitan & Co.
Under this framework, the minimum fund corpus would have to be Rs 100 crore and the maximum GP limit can be Rs 25 crore, which can be reached over three years.