Fortunately for cricket-loving businessmen, investors and professionals in India, they didn’t really have to make a choice between business and pleasure, as the Hon’ble Finance Minister’s Union Budget speech ended well in time for them to be able to catch most of the match between India and the UAE today.
More importantly, the Budget contained some proposals which, while not revolutionary or dramatically reformist, would still have gladdened the business community as a whole on account of there being a fair degree of focus on operational detail and execution while at the same time making sure that the atmosphere of positivity created in recent months continues to flourish.
As an aside, it is interesting to note that even the Railway Budget presented a couple of days ago by the Hon’ble Railways Minister had a similar feel, with the key focus being on enhancing operational efficiencies rather than on blockbuster announcements.
As a transactional lawyer, my focus here is on how the Union Budget 2015-16 will impact the deal environment for PE/VC funds. I think this Budget is certainly a pretty good one from point of view of the PE/VC industry, as it contains certain measures which will address some of the challenges the industry has faced. I will address below some of the key announcements in this Budget which should give the PE/VC industry good reason to increase their exposure to India. I will also, alongside these positives, highlight what I believe to be a couple of missed opportunities.
FDI Laws
The most noteworthy change from an FDI perspective is that it has been clearly and expressly clarified by the Hon’ble Finance Minister that FDI will now be freely allowed into all categories of Alternative Investment Funds (“AIFâ€s). This has always been a bit of a sticky and uncertain issue with respect to setting up PE/VC or hedge funds that propose to raise funding from both Indian and non-Indian investors, and the regulatory uncertainty surrounding this issue has made several LPs reluctant to invest in “feed-in†structure funds set up to invest in India.
I am also gladdened to note that in permitting FDI into AIFs, the Finance Minister has not made a distinction between the various categories of AIFs. I have always been an opponent of iscriminating one category of AIFs against the others with respect to matters like FDI, FEMA and tax treatment, and this announcement by the Finance Minister to make FDI open to all AIFs is a very laudable move indeed. In my view, this will give a huge fillip not just to the Indian Private Equity industry but also to the very nascent Indian hedge funds industry (which is at serious risk of turning out to be a stillborn industry) by allowing Indian sponsors of these AIFs to raise funds from foreign investors.
Apart from the above, there has been virtually no other announcement with respect to FDI reform, which is a bit disappointing. As I had highlighted in my post-Budget piece on www.vccircle.com last year, there is significant scope for this Government to reform our FDI laws further in sectors like insurance and defence by permitting FDI of at least 51% in order to attract the big-ticket global manufacturers to “make in Indiaâ€.
Taxation
- The biggest reform on the tax side is the announcement that all Category I and Category II AIFs will now be eligible for the tax pass-through status hitherto accorded only to VC funds. This is a long-standing demanding of the Indian PE Industry and is indeed a welcome development that will boost fundraises by Indian sponsors, which in turn increases funding options for entrepreneurs.
Infrastructure Projects
Some of the other announcements made in the Budget pertaining to infrastructure are interesting too from a PE/VC standpoint. The key ones that caught my eye were:
- The allocation of Rs. 70,000 crores for infrastructure is a very encouraging sign. Several of these could be allocations for greenfield and brownfield PPP projects as well, which present great opportunities for PE funds and Indian business groups to team up.
Conclusions (Hopes?)
While many of these proposals are good measures focused on removing irrationalities in the regulatory and legal framework, as I have highlighted above, there are also some clearly missed opportunities which one hopes that this Government will address soon. I think taking a more holistic view of the various factors affecting an industry (including the funds industry), and then legislating suitably, would be far more beneficial and would deliver better results.
Also, as is often the case in our country, there can be many a slip between intent and text of legislation. One hopes the good intent expressed in the Budget speech does not get diluted or obfuscated by the time the said proposals make it to the statute books. If the proposed changes are not drafted into law in very unambiguous and non-dilutive terms, the objectives sought to be achieved by the Budget to facilitate a dramatic growth in deal-making would not happen.
The Finance Minister also made it clear in his speech that this Government is committed to not applying taxes retrospectively, which is of course, an important message to be sent loud and clear to the global market. However, there continues to be lack of clarity on what would happen to the cases already initiated in the past. This point would have been an important one for the Finance Minister to reassure the global business community on, which has not been done.
All in all, may be this is not a blockbuster Budget, but it certainly is a pretty good Budget that focuses on some of the important nuts and bolts. Will this “nuts-and-bolts tweak†rev up the engine of the Indian economy? Let’s certainly hope so!
(Vijay Sambamurthi is the founder and managing partner of Lexygen)
To become a guest contributor with VCCircle, write to shrija@vccircle.com.
