In a significant move that may bring more prominence to the private equity growth story in India, the Confederation of Indian Industry (CII) is pushing for reforms and regulatory changes that will give a fillip to investments by the alternative asset class.
The CII national committee on private equity and venture capital has held meetings and deliberations, to discuss industry concerns and suggestions, with SEBI chairman C B Bhave, Planning Commission deputy chairman Montek Singh Ahluwalia and member Arun Maira, PM's economic advisory council chairman C. Rangarajan, joint secretary in the finance ministry KP Krishnan, UTI Asset Management chairman U K Sinha and IRDA member R K Nair.
One of the key concerns faced by the PE/VC sector is related to investments in public-listed companies (PIPE). The issue is that an open offer is triggered at 15% and a full due diligence is not possible since it violates insider trading rules. The CII committee has recommended that the open offer threshold for registered PE/VC firms should be increased to 26% from 15%. Also, liberalisation of insider trading rules has also been recommended by the committee.
Another concern is related to the lack of clarity between direct tax code and the IT tax on special issues. The recommendation was made to retain existing definition of ‘residents’ (as per IT act) in the DTC and need for more clarity on pass-through status for domestic LPs in the code.
The committee has also supported relaxed FDI guidelines to allow foreign investments in venture capital funds under the automatic route to encourage creating pools of capital for investments in India. Alternatively, FVCIs, having the sole purpose of investing in domestic VCFs, should be granted registration by SEBI, the committee suggested.
The 1993 SEBI regulations used the term VC to describe the asset class. Back then, PE (private equity) as a nomenclature had not emerged fully. So, the committee has suggested that PE as an asset class should be more consistently recognised from a regulatory perspective.
A CII-KPMG study pegs India's capital requirement at over $1 trillion in the next three years to sustain a GDP growth of 7-9%, translating to a VC/PE investment component of $60-100 billion. The Planning Commission has also included a note on PE’s significance in Indian growth in its mid-term appraisal of the 11th 5-year plan (2007-11) based on the CII committee’s suggestion.
Gopal Srinivasan, chairman, CII National Committee on Private Equity & Venture Capital and chairman and managing director, TVS Capital Funds Limited said, “We have about 8,000 members at CII of which maximum companies are of small and medium sized and can benefit from PE/VC. Moreover, about 86% firms listed on stock markets in India comprise of less than 3% of market capitalization on bourses. Hence, it is essential to liberalise the regulatory frameworks to increase the market capitalisation of these firms.”
Sri Rajan, partner, Bain & Co, told VCCircle, “The authorities have considered our proposals and we expect a favourable decision from them. Anyway, any change in the current regulations will take time. Change in open offer norms would be our first priority as mid-cap firms are still suffering from shortage of enough capital.”
At the CII conference on ‘Private Equity and Venture Capital: Carve outs and Spin offs’ held in Mumbai, KV Kamath, non executive chairman, ICICI Bank, said, the VC/PE industry is at a take-off stage in India and the flow of funds would have to be maintained as great opportunities lie ahead as the Indian growth story is strong.