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What The Budget Means For Private Equity's Hottest Themes

28 February, 2011

While Budget 2011-12 failed to deliver on mega reforms moves, it did manage to make some significant headway in a cluster of sectors, which, incidentally are some of the hottest themes investors are chasing. So, what changes has finance minister Pranab Mukherjee unveiled in sectors that are witnessing heavy deal activity both in terms of M&A and private equity fund-raising? What would be the impact of Budget moves on these sectors? Read on to know more:-

Banking & Financial Services

One of the biggest reforms in the financial services sector this Budget was the opening up of the mutual sector to foreign investors. The Budget said, SEBI registered mutual funds will be permitted to accept subscription from foreign investors who meet KYC requirements for equity schemes. “The proposal to permit FDI in Mutual Funds is a big ticket reform and can be the response to the decline in the growth of FDI in the recent past,” said Dinesh Kanabar, Deputy CEO and Chairman Tax, KPMG.

Also, the government has reiterated its commitment to Goods and Services Tax (GST) in the budget. Finance Minister Pranab Mukherjee also said that the Reserve Bank of India (RBI) will issue guidelines for new banking licences by the end of the current fiscal. Many corporate houses and upcoming financial institutions had expressed interest in the banking sector after the idea was first floated last year.

The budget also raised the limit of funds to be invested by foreign investors in corporate bonds issued by companies involved in the infrastructure sector to $25 billion. It also gave a go ahead to infrastructure debt funds.

Microfinance

For the troubled microfinance sector, the government announced “India Microfinance Equity Fund” of Rs 100 crore to be created with Small Industries Development Bank of India (SIDBI). The microfinance fund would look to invest small institutions across the country which would help them maintain growth, achieve scale and efficiency in operations.

The microfinance sector had come under pressure after Andhra Pradesh (the hub of MFI activity in India) introduced an ordinance in the state, now passed into an act, to regulate MFI operations. The share price of SKS Microfinance, India’s largest MFI, reacted positively to the news closing up by 2.12% on the exchanges.

Mukherjee also said that budget includes a “Women’s SHG’s Development Fund” to be created with a corpus of Rs 500 crore. On the financial inclusion front, the government has a target of providing banking facilities to all 73,000 habitations having a population of over 2,000 to be completed during 2011-2012.

Food & Agri

For the food and agriculture sector, the budget raised credit flow for farmers from Rs 3,75,000 crore to Rs 4,75,000 crore in 2011-12. The budget also gave approval to set up 15 more Mega Food Parks during 2011-12.

The budget also included an allocation of Rs 300 crore to bring 60,000 hectares under oil palm plantations and the initiative is expected to yield about 3 lakh Metric tonnes of palm oil annually in five years.

Also with concerns over the misuse of subsidies, Mukherjee added the government will provide a direct cash subsidy on fertilisers to the poor from March next year.

“FM has again made small but so meaningful allocations and tax reliefs for food and agri related activities like encouraging oil palm/pulses acreage, rice cropping systems etc. His focus on nutritional security by setting up a National Protein Development Board is a very welcome move. On the bigger picture, he has allowed fertilizers, post harvest storage and cold chains to be included as infrastructure which will enable them seek foreign loans as well get tax relief under the IT Act. A populist measure like increasing the interest subsidy for farmers was, I guess, inescapable but as along as the Government does not start waiving bad loans, this is still acceptable. The credit flow increase by about Rs 75000 crore is welcome but is still inadequate considering the needs of agriculture,” said Rajesh Srivastava, Chairman of Rabo Equity Advisors which has raised a $120-million India Agri Business Fund.

“I would have liked the FM to announce certain other measures like opening up irrigation to PPP but the Budget is not necessarily the only platform for announcing reforms,” added Srivastava.

Environment/Clean Tech

The budget had several measures for the clean energy and the environment sector. The government said it will start a national mission for hybrid and electric vehicles in collaboration with all stakeholders, said Mukherjee.

To address the issues of environment and climate change, the government has announced an allocation of Rs 200 crore each for Green India Mission and environmental remediation programmes from National Clean Energy Fund. The government will also put Rs 200 crore for clean-up of some more important lakes and rivers other than Ganga.

Besides funding, sops for the sector were also included in the form of various tax cuts. These include full exemption from basic customs duty and a concessional rate of central excise duty extended to batteries imported by manufacturers of electrical vehicles, exemption granted from basic custom duty and special CVD to critical parts/assemblies needed for hybrid vehicles, reduction of excise duty on LEDs reduced to 5% and special CVD being fully exempted.

Education

The government increased the allocation for education by 24% to Rs 52,057 crore. For the year 2011-12, Rs 21,000 crore has been allocated for Sarva Shiksha Abhiyan (SSA), which has been revised to implement the RTE Act., a 40% bump in allocation in the Budget as compared to 2010-11.

The education has been seeing an increasing interest from both private equity and strategic players. The government started private sector reform in the education sector with The Foreign Educational Institution (Regulation of Entry and Operation) Bill, 2010 allowing foreign universities to own up to 51% stake in domestic institutions.

CARE believes that the increased allocation will aid the government in effectively implementing the RTE Act and is indicative of the government’s continued efforts to promote elementary and higher education within the country so as to tap the opportunity presented by our demographic profile, characterized by the presence of a large relatively younger population. CARE also believes that the revised “Vocationalisation of Secondary Education” scheme introduced by the government is a positive step towards increasing the employability of our burgeoning youth population.

The government also announced plans for providing National Knowledge Network Connectivity to all 1,500 institutions of Higher Learning and Research through optical fiber backbone to be provided by March, 2012.

Healthcare

The budget for the healtcare sector was increased by 20% to Rs 26,760 crore with a focus on aspects like research and medical education, which got a major allocation of Rs 2,738 crore to train more medical staff in India. The country faces a shortage of about 600,000 doctors, one million nurses, 200,000 dental surgeons, as per Planning Commission.

But the budget also added a 5% service tax on hospital and diagnostic bills. Centralised air conditioned (AC) hospitals with more than 25 beds and diagnostic chains will have a 10% service tax, but there is also a 50% rebate. Diagnostic chains and day care surgery centers have been high on the radar of private equity investors.


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1 Comment
micks . 5 years ago

Pls explain 50% rebate in healthcare.

What The Budget Means For Private Equity's Hottest Themes

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