Budget 2011 provides a sweetener for Private Equity Houses in India especially in the infrastructure sector and enhancing limits for foreign investments in the country. While sectors like the power sector have been given special attention, there appears to be some ignorance of the IT sector in terms of non extension of STPI tax holiday period and additional tax for SEZ units. It is certain that these and other proposals will direct the PE houses to rework financial models and valuations of their investments made in India.
In the light of the despondency in the Indian economy due to recent events, it was necessary for the Finance Minister to lift the veil of gloom through Budget 2011. This short article focuses on the implications of the India Budget 2011 on PE Houses and VCs.
The Government has displayed an all round show in the current Budget and has already set the pace for growth by offering some attractive incentives to the Indian entrepreneurs and the investors around the globe.
The infrastructure sector has received an impetus in the form of increased funds and tax related incentives offered to attract investors for tapping the infrastructure opportunities around the country. Introduction of tax free bonds, creation of infrastructure debt funds, formulating a comprehensive policy for developing public private partnership projects are some announcements which will give a fillip to the infrastructure sector which is the backbone of any economy.
SEBI registered mutual funds would now be permitted to accept subscription from foreign investors who meet Know Your Customer (KYC) requirements for equity schemes. This opens the gateway for the Indian mutual funds to foreign investments. Currently, only a Foreign Institutional Investors (FII), FII sub-account registered with Securities and Exchange Board of India (SEBI) and Non Resident Indians can invest in mutual fund schemes. This amendment could be said to be an indirect investment by foreign investors in listed securities.
In addition, the proposal to enhance limits of investments by FII in the infrastructure sector will certainly add fuel for growth.
There has been a passing reference of further liberalizing the Foreign Direct Investment policy to boost the much needed foreign inflow into the country for escalation in growth. One needs to wait and watch as to how the Foreign Direct Investment (FDI) regulators choose to fill the gap to go hand in hand with the Government objective. The next comprehensive FDI policy is due on 31 March 2011.
The balancing act – Portfolio investments and valuation
For portfolio companies, it is a mixed bag. On one hand there is a slight reduction in the effective corporate tax rate whereas on the other hand there has been an increase in the Minimum Alternate Tax (MAT) rate (Surcharge for the domestic companies is proposed to be reduced from 7.5% to 5%. But at the same time, an increase of MAT rate from 18% to 18.5% is proposed). Further there is also withdrawal of exemptions from Dividend Distribution tax (DDT) and MAT for Special Economic Zone (SEZ) players.
In a drive to encourage inflow of money generated by Indian Companies at overseas level, the budget has made a proposal to a lower rate of 15% on dividends received by an Indian company from its foreign subsidiaries. Increase in the tax holiday period for power sector companies is one of the areas which would need reworking of financial models and valuations of these companies.
Transforming the game plan (introduction of laws) – A reassurance
The Direct Taxes Code Bill, 2010 (DTC) seems to be on track with the Government being positive and affirmative about its implementation from 01 April 2012. A final version of the DTC could be expected in a few months from now after inputs from the Standing Committee.
Further, the Government has re-iterated its commitment for transition to the Goods and Services Tax (GST) regime. Areas of divergence with States on proposed have been narrowed. As a step towards the roll out of GST, a Constitution Amendment Bill is proposed to be introduced in this session of Parliament.
Further, the new Companies Bill is also expected to hit the Parliament in its current session.
These new laws will have to be carefully analyzed in the coming months.
Budget 2011 seems to be a no frills show, focusing on substantive measures, by introducing some development related reforms. The budget has offered a few amendments which aim at acting as a catalyst to the infrastructure development and also to the foreign investors who may have a reason to invest in India considering the new avenues which may be unwrapped with the liberalization of FDI lurking over the horizon.
Overall, the growth rate expected is 9% which would enable India to remain an attractive destination for promoting investments in India by Private Equity Houses.
(Anil Talreja is a Partner and Neha Rupani is a Deputy Manager with Deloitte Haskins & Sells. Views expressed are personal.)