Decision Point – Encourage Indian High Net-worth Individuals, family offices, Corporate, Firms, Institutions, Public Sector undertakings with investible surplus to invest in Category 1 AIF by extending fiscal incentives.
Supporting Points – The desired risk capital for India can come from within India. Today, Indian HNI deploy most of the investible surplus in Real Estate followed by debt and gold. It is time to get this surplus diverted to Category 1 AIF Funds. The economic multiplier impact of investment in equity is many-fold compared to investments currently flowing in the real estate or debt instruments.
Indian HNIs are risk averse to invest in Indian start-up or Venture Funds for the following reasons –
Fund that have an investment lock-in of 8-10 years.
No exit option exercisable by the investor.
Returns are expected only on sale of shares of the start-up that ideally talks 4-6 years.
Risk of loosing principal amount or inadequate return in case most of the start-ups in a funds portfolio fail.
No involvement of the investor in deciding or identifying the start-up or businesses to invest-in, as the Fund Manager exercises the choice.
Recommendation – The provisions of Section 54 can be replicated to encourage the HNIs / other entities to invest in the Domestic Early Stage Venture Fund (Category 1 Funds as per SEBI (AIF) Regulation'2012) to seek a deduction upon investment against capital gains made on any asset category.
Additionally, to attract capital a general deduction in respect of investment into such funds could also be granted under Chapter VIA on the lines of section of section 80C, section 80CCB.
To really incentivize capital flow into early stage ventures, it may be provided that any capital gains arising from sale of investment in venture capital undertaking, a securities transaction tax on the lines of transactions in listed companies and equity-oriented mutual funds could be introduced.
Amendments Required (Point 1 & 2 or Point 3 only)
Long term capital gains may be invested in Category 1 AIF one-year prior to the date of capital gain or within 2-years of the date of Capital Gains for exemption from capital gains tax. On investment in the Units of Category 1 AIF, the Long Term Capital Gain will be exempt from the capital gains tax.
A general deduction under Chapter VI A to persons with a limit of say Rs.25 lacs per year for diverting their investment from Gold, Debt, and Real Estate to this highly risk asset class namely Category 1 AIF. As per SEBI an investment commitment by a person has to be minimum Rs.1 crore in an AIF.
Capital Gains arising from the sales of investments in Venture Capital Undertaking are exempted upon including sale of such investments under Securities Transaction Tax (STT).