A) FOREIGN INVESTMENT IN AIF (Notification No. FEMA.355/2015-RB)
Non-residents including FPIs and NRIs permitted to invest in units of inter-alia, SEBI registered AIFs under the Automatic Route
Downstream investment by AIF to be regarded as foreign investment if neither Sponsor nor Investment Manager of the said AIF is Indian “owned and controlled” as defined under the FEMA Inbound Regulations:
- Amount of foreign investment in corpus of AIF not relevant for determining whether downstream investment by AIF is foreign investment
In case Sponsor or Investment Manager is organized in a form other than a company (i.e. LLP, etc), SEBI to determine whether the Sponsor or Investment Manager is foreign owned and controlled
- Subsequent Press Note by DIPP specifically defines “control” and “ownership” in relation to LLP (refer Annexure)
- Dichotomy between RBI Notification permitting FDI in AIF and Press Note 12 (2015 series) defining the “control” and “ownership” in relation to LLP.
Downstream by AIF having foreign investment to conform to sectoralcaps and conditionalities.
AIF having foreign investment to make such report and in such format to RBI or SEBI as may be prescribed.
No Government approval required for investment in automatic route sectors by way of swap of shares
B) ACTION PLAN: STARTUP INDIA-STANDUP INDIA
Compliance Regime based on Self- Certification: To reduce the regulatory burden on Startups thereby allowing them to focus on their core business and keep compliance cost low.
Rolling-out of Mobile App and Portal: Governments shall introduce a Mobile App to provide on-the-go accessibility.
Legal Support and Fast – tracking Patent Examinations at Lower Costs.
Faster Exit for Startups: To make it easier for Startups to wind up operations.
Providing Funding Support through a Fund of Funds with a Corpus of INR 10,000crore: The Fund will be in the nature if Fund of Funds, which means that it will not invest directly into Startups, but shall participate in the capital of SEBI registered Venture Funds and Life Insurance Corporation (LIC) shall be a co-investor in the Fund of Funds.
Credit Guarantee Fund for Startups: To catalyse entrepreneurship by providing credit to innovators across all sections of society.
Tax Exemption on Capital Gains: To promote investments into Startups by mobilising the capital gains arising from sale of capital assets.
This exceptional initiative that shall make investors to invest in start-ups rather than capital gains bonds or house property. This exemption must allow capital gains to be invested in SEBI registered AIFs, Fund of Funds, and angel investments in the start-ups validated by Inter-Ministerial Board. A clarification in the notification on its scope is essential.
Tax Exemption for Startups for 3 years: To promote the growth of Startups and address working capital requirements.
This shall give a huge relief on working capital blocked in TDS for the start-ups. In reality our start-up are loss-making in the initial 3-7 years as they are chasing growth, but we hope the notification shall clarify that the clients of start-ups shall be exempted from deduction of TDS on the invoices. A saving of cash flow that today gets blocked in TDS for 12-18 months shall enable them to run faster.
Tax Exemption on Investments above Fair Market Value (Start-up Tax (Section 56(2)(vii b)): To encourage seed-capital investment in Startups.
This is only an incremental step of exempting the incubation enters in addition to venture capital funds. The CBDT needs to exempt all angel investments for the start-ups to raise funds freely from angels.
C) REGULATORY
SEBI had constituted a standing committee ‘Alternative Investment Policy Advisory Committee’ (AIPAC) under the chairmanship of Shri. N. R. Narayan Murthy in March 2015. AIPAC has submitted its first report to SEBI with various recommendations (the same is attached). Public comments on the said report are invited by February 10, 2016.
We have summarized below the key recommendations made under the said report:
Taxation
- Clarity on AIF taxation:
- To either abolish the TDS requirement by AIF on distribution or clarify:
- No TDS on exempt income/ exempt investors/ accredited investors.
- Clarity on TDS by AIFs on net income chargeable to tax in hands of investors as against gross income.
- Income of AIF to be characterized as investment income and not business income.
- Losses of AIF to be available for set off by investors.
- Non-resident investors to be subject to tax as per rates in force; If subject to Section 195 of the Income-tax Act, 1961 (‘Act’), should be exempt from Section 194LBB of the Act.
- Non-resident investors to have the option to obtain a NIL/ lower TDS certificate under Section 197 of the Act.
- To either abolish the TDS requirement by AIF on distribution or clarify:
- Exemption to AIF and portfolio companies from applicability of Sections 56(2)(viia) and 56(2)(viib) of the Act
- Exemption from indirect transfer provisions on gains from transfer of shares or interest of the holding companies/entities above eligible investment funds (EIFs) investing in India
- Liberalisation of Safe Harbour norms
- Introduction of Securities Transaction Tax (‘STT’) on all gross distributions of AIFs and elimination of tax withholding/ other taxes in hands of investors.
- STT to be levied on investment/ purchase and sale of AIF units.
- Other recommendations:
- Investors in angel funds/ social venture funds to get incentive in the form of deduction of upto 50% of investment amount
- Allow management fees to be capitalized as ‘cost of improvement’ or allow standard deduction of 3% of cost of acquisition
- Taxation upon ‘sale’ and reduced taxation rates for unlisted shares acquired via ESOPs/employee incentive schemes
- Clarify tax rate of 10% on LTCG on transfer of private company shares
- To align the treatment of capital gains for listed and unlisted companies, both on holding period and tax breaks
- CCPS conversion to be non-taxable event and period of holding to be from date of investment and not date of conversion
- AIFs to be permissible investments for charitable and religious trusts
- Service tax abatement on services fees in respect of funds raised by an AIF from overseas investors
2. FDI in AIF regulation:
- Investment by NRIs from NRO accounts to be permissible
- Permission to LLPs to act as sponsor/and or managers, etc.
- To exclude AIFs with 100% domestic investments with foreign owned or controlled Sponsor and /Manager from foreign investment conditions
3. Reforms to unlock domestic capital pool
- Pension Funds and Charitable Trusts to be permitted to invest in AIFs
- For Insurance cos:
- Investment limits in AIFs to be increased
- to simplify approval process
- For Banks – increase investment limits and lower risk weightage attached to investments in AIFs
- Accredited investors satisfying prescribed conditions to be eligible for investment in AIFs
- Registrar of Companies to permit LLP to carry on investing activities, i.e. register as AIF
- Single Family Offices to be allowed to register specified investment vehicles as QIBs; Family Offices and dedicated state funded vehicles be eligible for registration as AIFs
- FVCI – sectoral restrictions to be liberalized; single stage approval process at designated depository participant level – akin to FPI
- IPO – Allow all AIFs to get an allocation in an IPO; AIFs like Mutual Funds to be allowed to anchor an IPO, even if the lead manager is a group company
- Amendments to AIF regulations for Angel Funds providing relaxation of minimum investment period, minimum investment amount, maximum no. of investors, permission to invest in overseas VCUs.
4. Reforming AIF Regulatory Regime: To regulate the Fund manager instead of the Fund
- To repeal PMS, AIF and IA regulations and introduce a new “SEBI (Alternative Investment Fund Managers) Regulations” (‘AIFM Regulations’)
- to have specific capitalization requirements, which could provide for sub-categories based on the nature of the AIFM’s business (i.e. discretionary, non-discretionary, customized or collective investments)
- Angel Funds/ network and social venture funds to be a separate category of AIF
- Amendments in AIF Regulation
- The definition of VCF and Category I AIF to be expanded to growth stage investee companies
- Amendments in AIF Regulation
Overseas investment by AIFs: Limits to be extended to (a) 25% of the corpus of an AIF (currently provided by SEBI) or (b) 50% of the offshore component of the corpus of AIF, whichever is higher; SEBI’s requirement of ‘Indian connection’ to be liberalized.