Private equity players cheer tax relief prospect

This story first appeared in DNA Money edition on Wednesday, October 10, 2012.

Private equity (PE) players have said the recommendations of Parthasarathi Shome committee, set up to look into the retrospective tax issue, would remove uncertainty over intra-group restructuring and PE transactions and bring more clarity over post-tax returns.

Subbu Subramaniam N, founding partner, MCap Fund Advisors, said, “In the broader perspective, I think, the government is conveying the message that it cares for international capital by making this reversal of stance.”

As per the draft report on retrospective amendments relating to indirect transfer, PE investors would be outside of the coverage of taxation of indirect transfer where:

(i) the investment by a non-resident investor in a PE fund is in the form of units which do not results in participation in control and management of the fund;

(ii) the investor along with its associates does not have more than 26% share in total capital or voting power of the company,

(iii) the investee company or entity does not have more than 50% assets in India as compared to its global assets;

(iv) the investee company is a listed company on a recognised overseas exchange and its shares are frequently traded,

(v) the transfer of share or interest in a foreign company or entity results due to reorganisation within a group.

“Since there is some predictability about what I will be able to deliver to my investors post-tax, I can now build into my calculations while making investments,” said Subramaniam.

“Whether 5% or 10% tax, no tax, short-term, long-term tax and so on... anything that is prospective will help me to take care of the decisions thereafter, that’s the whole advantage now.”

Industry players said through the earlier amendments the government had sent a message that it did not care for foreign capital, which had compounded the problems of lacklustre returns faced by PE firms.

Amit Maheshwari, partner, Ashok Maheshwary & Associates, Chartered Accountants, said, “By exempting business reorganisations, listed investee companies, or companies having substantial non-Indian assets or investors of PE funds (which invest in units), the Shome committee recommendations will provide much needed respite to the PE industry reeling under low growth, lack of exits and clarity due to the draconian retrospective tax amendments.”

Experts said with the norms bringing in clarity, the overall fund raising is also likely to see a revival.

“If capital is seeking to come to India, it will come directly or indirectly through the funds so that actually will be a derivative benefit,” said a top official of PE fund.