The mushrooming of startups and concomitant interest in funding new and untested companies has monied Indians swallowing their risk aversion and considering unconventional forms of investing.
As recognition of this, the Securities Exchange Board of India (SEBI), the national capital markets regulator, devised rules in 2012 to govern alternative investment funds (AIFs).
What are AIFs?
SEBI defines an AIF as “any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.”
This definition excludes mutual funds and family trusts. Essentially, AIFs deploy investor money into businesses of varying maturity and size.
AIFs can register with SEBI in three different categories. There is one for venture capital funds and angel funds, infrastructure funds and social venture funds - those that have a positive impact on development or the economy. Hedge funds, private equity funds and real estate funds - with more complex use cases - fall into separate categories.
Although “sophisticated investors” can be banks or financial firms, it’s also code for ultra-high net worth individuals who have both the capital and experience to stomach potential losses. India is estimated to have around 146,000 ultra-high net worth individuals with a combined net worth of Rs 135 lakh crore.
SEBI data show AIFs have raised a total of more than Rs 33,300 crore since August 2012, with almost half coming in the 2016 calendar year.
What are the rules around investing in AIFs?
A SEBI committee, formed in 2015 and headed by former Infosys chairman NR Narayana Murthy, has submitted several sets of recommendations aimed at lowering the investment threshold for AIFs. Such changes would lower the barriers to entry and possibly boost growth initiatives such as Make in India.
In the latest legal news, India may reduce the threshold to Rs 25 lakh for accredited investors. Currently the minimum investment is Rs 1 crore. This would encourage more people to contribute and raise capital.
Another possible recommendation by the SEBI committee, media say, is anonymous disclosure norms that don’t reveal details of exits or sales to potential investors.
For years, there have been calls for the government to give AIFs some of the incentives received by other investment vehicles to stimulate interest, especially around taxation.
Some of the committee’s most relevant recommendations are waiving service tax to be paid on management fee by funds (venture capital and private equity funds usually charge a 2% management fee from investors), introduction of securities transaction tax and application of capital gains tax for sale of investments in unlisted companies by venture capital and private equity funds.
In January of this year, the Central Board of Direct Taxes said income from the transfer of unlisted shares will not be taxed in the case of certain AIFs, such as venture capital, angel and impact investing funds.
The risk of income from the transfer of unlisted shares being considered as capital gains had been a sore point for some investors.
Last year the cabinet approved a proposal to establish a Rs 10,000 crore so-called fund of funds, which would contribute to AIFs.
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