'Tax Break could be a huge benefit for stuck PE investors'

By Portfolio Manager PN Vijay

The Private Equity industry is a very large component of the investment sector. It provides risk capital to companies when they are putting up new projects.  In many such cases the promoter has an excellent project but does have the financial resources in full to execute it. 

Private Equity players fulfill this important gap in the equity.  They normally come in at a fairly early stage when risks are high and they exit through a public issue. Black Stone, Carlyle, Sequoia, Intel Capital are some of the big names which operate in this space.

As regards the Indian scenario in the calendar year 2011 while the inflow of FII money into the secondary market was negative, the Private Equity flows were pretty buoyant. This not only was useful for India’s foreign exchange reserves but also showed that such investors take a long term view of the market. Though late entrants to India they are now very active.

I stated earlier Private Equity players normally exit through a public offering and so they pay long term capital gains as applicable to listed shares. In India as long term capital gains tax on listed shares is nil it is a great advantage for them.  However as one is aware the Indian IPO market has been terrible in the last one year and this has resulted in Private Equity players being just unable to exit through IPOs. 

On the other hand investors overseas who have made investment through them often press them for redemption.  In such cases we find that one Private Equity player sells to another. In such cases the lower Long Term Capital Gain is not applicable.  The Private Equity investor has to pay tax at 20% which is the rate for unlisted shares. 

It would appear from reports that the government is considering a move to reduce this tax just for PEs to 10%.  If so that is a very welcome step. It would help Private Equity players to protect their returns and rotate their funds. Their money is stuck  because of the bad IPO market.  It should be made sure in the original contract between the Private Equity players and the company that the preferred exit route was a public issue and then the benefit given in such cases. One hopes that the Govt. will take the step in this Budget.

Also read: Policy shift needed to fuel equities, says Mark Konyn