The government has clarified the so-called ‘safe harbour’ norms for offshore funds in a move that benefits the private equity and venture capital industry.
The Central Board of Direct Taxes (CBDT), in a notification earlier this week, introduced a look-through provision to determine the number of investors in a fund to qualify for the safe harbour and stipulated 18 months’ time for new funds to satisfy the norms.
It said an approval committee that is being formed will determine the eligibility of the managers of offshore funds to avail safe harbour benefits. Those who want to avail such relaxations need to apply to this committee.
The notification makes it clear that the offshore funds that seek to control an Indian business cannot avail safe harbour benefits. For that purpose, it stipulates that funds which have more than 26 per cent voting rights in an Indian company will not be considered for safe harbour provisions.
This means that buyout firms won’t benefit from the government’s move. Also, many large PE deals involve over 26 per cent stake. So this may lead PE firms to make co-investments with limited partners or other PE firms.
While defining the safe harbour norms for an offshore fund, the rule that stipulates a minimum 25 investors has been redefined. A look-through provision has been brought in wherein the rule will be relaxed for funds that have institutional investors with a large number of investors/ limited partners.
"About 85 per cent of the $20 billion of VC/PE investments made in India in 2015 were made by offshore-based asset management companies. For most offshore funds, this move greatly eases doing business from a tax certainty perspective," said Gopal Srinivasan, chairman and managing director at TVS Capital and vice chairman of the Indian Venture Capital Association.
Subramaniam Krishnan, partner, tax and regulatory services, EY, said that while the provisions largely appeal to fund managers of public market-focused foreign institutional investors, PE and VC players will also benefit from these rules.
Industry executives say the government’s move will encourage many Indian fund managers of offshore funds, who were operating out of overseas locations such as Hong Kong and Singapore, to relocate to India.
“Directionally, the issuance of the guidelines by the government is an important step forward in enabling the regime for domestically managing foreign capital, something which countries like Singapore and the UK have done so well,” said Tejas Desai, tax partner for financial services at EY.
“The guidelines provide some important clarifications in relation to the qualifying conditions for the fund like the manner of determining resident Indian ownership and permitting a look-through approach in determining the number of investors in the fund,” he added.
According to Desai, the guidelines provide that the offshore fund can seek a prior confirmation of its eligibility by making an application to the CBDT, something which should give certainty of tax outcome for the fund.
“Over the long run, this means more opportunities for Indian talent within both domestic and global asset management firms to play an expanded role in managing foreign capital,” he said.