Budget 2024 expectations: What is the wish list of private equity and VC funds

Private equity head honchos are hoping Finance Minister Nirmala Sitharaman walks the path of fiscal consolidation and bats for a friendlier regulatory atmosphere

The calendar year of 2023 was by no means a spectacular year for the private equity and venture capital segment in India.

PE/VC investments recorded a second consecutive year of decline with their dollar value falling by 11 percent year-on-year (YoY) to $49.8 billion. This was primarily due to a 33 percent decline in overall deal volume caused by the startup segment, which saw a sharp fall of 42 per cent YoY in the number of deals (472 deals in 2023 vs 815 deals in 2022), with deal values falling from $18.5 billion in 2022 to $8.8 billion in 2023, according to data from EY.

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So what does 2024 have in store for the world of funds? Though no blockbuster announcements are expected, the Interim Budget 2024 may send key signals and set the investment tone in an election year.

Private equity head honchos are hoping Finance Minister Nirmala Sitharaman walks the path of fiscal consolidation and bats for a friendlier regulatory atmosphere.

Gopal Jain, Managing Partner and Co-founder of homegrown PE firm Gaja Capital, which backs RBL Bank, NBFC Kinara and Xpressbees told Moneycontrol, "I expect the budget to project the economy down the path of fiscal consolidation thus setting the fiscal stage for interest rate reduction which the economy requires to incentivise capex investments."

He added, "The PE industry is hoping the finance ministry will help address the recent RBI guidelines which have widely affected the start-up ecosystem. Also, it hopes the government will operationalise the fund of funds scheme presented in the 2022 budget."

Jain was referring to a recent RBI circular, which bars regulated entities (REs) from investing in units of Alternative Investment Funds (AIFs) having downstream investments either directly or indirectly in a 'debtor company' of the REs.

According to the circular, REs that already invested in such AIFs are required to liquidate their investment within 30 days from the date of downstream investment by the AIF/date of circular (in the case of existing investments). In case liquidation is not possible, the regulator wants REs to make 100 per cent provision on such investments.

Though the move is intended to crack down on structures which could be used by REs like NBFCs for evergreening (giving new loans to help a stressed borrowed pay old loans) of loans, a section of the industry feels it will lead to many practical hurdles in terms of meeting timelines and finding willing buyers.

In Budget 2022, the government allocated Rs 1,000 crore for the Fund of Funds for Startups.

Former KKR India CEO and Chairman Sanjay Nayar, who now runs technology-focused venture capital fund Sorin Investments, expects the interim budget to offer a glimpse into the government's strategy to further speed up structural reforms and unlock growth drivers.

"Two things I would expect to see are: financial market deregulation to crowd in local savings and unlocking operating assets to attract foreign capital would be very welcome. We need to reduce the strain on the fiscal and yet expand growth drivers, especially in infrastructure, besides just the government balance sheet," says the veteran dealmaker.

Interestingly, PE/VC investments in infrastructure and real estate asset classes in India recorded a YoY growth of 23 per cent in 2023 (US$19.6 billion across 112 deals in 2023). Also, PE-backed IPOs too recorded the second-best year with 30 IPOs according to data by EY.

Tejesh Chitlangi, Senior Partner at law firm IC Universal Legal feels the PE-VC ecosystem needs more support.

"To promote domestic institutional investor participation in AIFs, more support is needed from regulators like RBI and IRDAI, as their existing regulatory policies have not been adequately supportive vis-a-vis the growth of the domestic PE-VC industry, something which public markets otherwise have enjoyed to a tremendous extent due to significant institutional participation from SEBI regulated mutual funds," he says.

Alluding to a longstanding tax demand of the industry, Chitlangi adds, " As the start-up and unlisted ecosystem is key to nation building as well as a precursor to strong public markets, hence bringing the otherwise high taxation on unlisted equity at par with listed equity tax rates is the need of the hour."