Budget 2021: What’s in store for PEs, VCs and others after a period of resilience?

Budget 2021: What’s in store for PEs, VCs and others after a period of resilience?

Private equity and venture capital flows have become the largest component of FDI investment into India. Various independent studies have confirmed that PE and VC-funded companies create significantly more employment and pay more taxes than comparable non-funded firms. 

In this unprecedented year of resilience, the role of PE and VC funds has enhanced as businesses look to survive, grow and revive. PE and VC funds are pivotal as they provide much-needed capital and guidance for businesses to overcome challenges and grow despite odds. 

As referred to in the Economic Survey, the pandemic engendered a once-in-a-century global crisis in 2020, wherein 90% of the countries are expected to experience a contraction in GDP per capita. 


This has left our Indian economy with a fiscal deficit pegged at 9.5% of the GDP and the goal is to bring the fiscal deficit to 4.5% of the GDP by 2025-2026. 

Despite the challenging scenario, deal values in 2020 retained momentum with record investments worth $38.2 billion. 

The intent of the government is to invite more such investments and make India an attractive FDI destination. The budget does make some significant changes which may be an area of interest for PE/VC funds and relevant from a dealmaking perspective.  


Key policy and regulatory framework changes  

  • Increase in FDI limit in insurance from 49% to 74% with safeguards
  • ARC/AMC to solve stressed assets problem of banking industry
  • Rationalised single securities Market Code by 2022
  • World-class fintech hub at GIFT IFSC 

Sovereign and pension funds 

To promote foreign investment in the infrastructure sector, the government had provided 100% exemption on all income streams i.e. dividend, interest and capital gains, subject to certain conditions applicable for sovereign funds. Some conditions were very stringent and hence certain relaxations. The key relaxations are:

  • Permitting AIF I and AIF II to invest less than 50% in the non-infrastructure sector and in infrastructure investment trust (InvIT).  
  • Permitting investment via Indian holding company, set up on or after 01 April 2021, having more than 75% investment in one or more infrastructure companies. 
  • Permitting investment in non-banking finance company-infrastructure debt fund/infrastructure finance company having over 90% lending to infrastructure companies.
  • Exemption to be available on a proportionate basis.

There are certain other relaxations also provided relating to borrowings, monitoring investee entities (in the context of commercial activity), liable to tax in the  home country, etc.

The above relaxation would go a long way in attracting much-needed long-term patient capital for the infrastructure sector. 



Post abolishment of Dividend Distribution Tax (DDT), dividend income is taxable in the hands of the shareholder and the companies paying dividend were required to withhold TDS at 10%. 

It is proposed now that withholding tax provisions shall not apply to dividends paid to a business trust (REIT/InVIT) by a special purpose vehicle. This amendment is clarificatory in nature, hence proposed to be made retrospectively from FY20.

This solves the cash liquidity issue and also the need to approach the tax officer to seek lower/NIL withholding order as the income was not taxable for business trust.   


Issuance of zero-coupon bond by infra debt fund

It is proposed to amend the definition of Zero Coupon Bond (ZCB) to enable notified Infrastructure Debt Funds to issue ZCB. This will allow long-term capital for the infrastructure sector without ongoing tax leakage. 


The finance minister has provided the platform for offshore funds to consider the IFSC route and it is evident from the recurring and continuous reforms that the government is determined to provide requisite support for funds to set up in IFSC. 

Currently the exemption under Section 9A for eligible investment funds is subject to certain onerous conditions. The Budget seeks to provide relaxations on applicability of eligibility conditions for an eligible investment fund or its eligible fund manager, provided the fund manager is located in an IFSC and has commenced operations by 31 March 2024.  

Relocation of a foreign fund into an IFSC jurisdiction has been incentivised by providing capital gains exemption to both the fund as well as the members/investors in the fund.  

Affordable housing

With the impetus on affordable housing as part of infrastructure development, the Budget provides for extension in exemptions i.e. 100% deduction in profits and gains derived from such business subject to fulfilment of certain exemptions provided the project is approved on or before 31 March 2021. 

In addition, the government has further opened up the arena of affordable rental projects with similar income exemptions, provided the project approvals are in place by 31 March 2022. These may drive some interest from funds looking to invest in the affordable real estate space.

To summarise, the Budget attempts to provide impetus on FDI investment, iron out certain teething issues from a tax standpoint and retains consistency around tax policies and rates, which is something PE/VC funds would typically prefer when they look at India as an investment destination, as compared with other emerging markets. 

Anil Talreja is a partner, Vishal Hakani is a partner and Dinesh Rajesth is a senior manager with Deloitte Haskins and Sells LLP. 

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