The Finance Ministry on September 9 formed a six-member committee headed by former SEBI Chairman M Damodaran to examine and suggest appropriate measures to address regulatory and other issues to enable scaling up investments by Venture Capital and Private Equity investment (VC/PE).

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The idea to form the committee germinated when representatives, including Gopal Srinivasan, Managing Director, TVS Capital Funds, from VC/PE industry along with Finance Minister Nirmala Sitharaman met Prime Minister Narendra Modi and apprised him of the entire industry. “We are happy that this government listened to us and acted and formed the committee,” Srinivasan told businessline on the formation of the committee, and the areas that it should look at.

Q

What did the industry tell at the meeting?

The PE/VC industry met Prime Minister along with Finance Minister Nirmala Sitharaman and requested that for the entire industry there are no common rules and framework. Today, nearly ₹5-lakh crore flows into private capital, including private equity, venture capital, growth equity and pre-IPO. We said, like you did for IBC, why don’t you do something similar for the VC/PE industry. They considered the suggestion with the Union Budget mentioning that an expert committee will be formed to take an end-to-end view of the entire VC/PE/AIF segment.

Q

What sort of issues that need to be resolved?

There are many. For instance, SEBI has made fantastic progress but more work needs to be done. The International Financial Services Centre has become an amazing offshore destination. There are still improvements that need to be done. Other is related to domestic capital pools. For nearly ₹50-lakh crore of pension money to be made available for PE, there should be a proper fund of funds. SIDBI has done a fantastic job with 83 investments (VC funds) made so far. For ₹1 investment by SIDBI, the VC fund was able to do ₹ 5. Nearly 50 per cent of foreign capital is VC/PE money as FDI. It is rather odd that FPI have a tag and go to SEBI and apply and become FPI Type 1 or Type 2 but a foreign fund registered in New York, London or Dubai cannot go to SEBI and make Type 3 FPI. Without that it is very difficult for a regulator to function unless they know this money came from where. Foreign pools also require some recognition.

Q

Can you elaborate on the taxation issue?

We need a simple, straightforward and streamlined taxation system. What most countries do is that because long-term capital gains are an essential incentive to invest into the economy for increasing gross capital formation, they have a risk return view. The assets that are lower risk and lower yield, they ask to hold for a longer time. The assets that produce higher yield and have higher risks, they make it shorter. They make it safe by saying two years holding period for all asset led securities and three years for everything else and have one flat rate. Things like this on taxation need to be taken care of. Nowhere in the world is capital gains tax calculated in the PE fund at the base at which you bought the share. It is always what it costs you to make that investment and is taken at the commitment value of the investor and not at the value at which the fund has purchased the share.

Q

What’s your expectation from the committee?

We expect that committee puts everything together and see that it comes up with an end-to-end system. Else, we have to go to various departments for different things. Today, about 85 per cent of the capital is foreign. If you take the exits, 2.5 to 3 times the exits in VC/PE, imagine nearly 85 per cent is exported. This is not because of lack of money in India but because of lack of systems, framework and expertise. 

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