Budget 2024: What is on the private equity wish list?

Finance Minister Nirmala Sitharaman will present the first budget of Modi 3.0 on July 23.

Global private equity funds have hogged the headlines when it comes to deal street in India since the beginning of 2024.

The year began with the mega Rs 21,000-crore buyout of the Indian unit of American Tower Corp (ATC) by Canada's Brookfield. Later, Warburg Pincus acquired Shriram Housing Finance for Rs 4,630 crore, while its US peer KKR sealed a Rs 7,000-crore agreement to take over medical devices player Healthium Medtech from Apax Partners.

Over and above M&A, private equity funds have also led the way in the ongoing block trade and IPO boom.

According to the latest data from LSEG Deals Intelligence, private equity investments stood at $3.64 billion in the June quarter, 31 percent higher than the $2.8 billion pumped in during the same period last year. However, the number of deals dipped from 353 to 299 during the period.

What PEs wants

In this backdrop, what can Budget 2024 do to create a friendlier environment for private equity funds and what are the segment's key expectations?

According to Gopal Jain, co-founder of Indian mid-market-focussed private equity firm Gaja Capital, which backs the likes of RBL Bank and Xpressbees, "Any country’s private equity industry grows on the back of domestic investors. Take public markets as an example. Banking, mutual funds and insurance are now dominated by Indian companies but private equity remains in the hands of foreign players because of a lack of domestic capital linkages to domestic savings. These pathways have been suggested to the government and can be built through the flick of the pen reforms.”

So, what is the way forward?

"One such initiative announced in Budget 2022, which has to be urgently operationalised, is government seeding a fund-of-funds to help mobilise domestic savings. Permitting domestic pension funds to invest in AIFs (alternate investment funds) is long overdue,” he says.

A Mumbai version of Gift City would be a game changer and has the potential to grow IFSCA (International Financial Services Centre) by 10x, he adds.

‘Make FDI path easier’

Budget 2021 allowed foreign investors to own up to 74 percent in the insurance sector but deals have been sparse.

The following year, Italian insurance behemoth Generali hiked its stake and acquired control in both its joint ventures with the Future Group.

In September 2023, UK's Bupa purchased a stake from its joint venture partner private equity firm True North to become the controlling shareholder in insurer Niva Bupa.

Earlier this year, Zurich Insurance announced plans to pick up a 70 percent stake in Kotak Mahindra General Insurance for Rs 5,500 crore.

Aakash Choubey, partner at law firm Khaitan and Co, says the government can further sweeten the route for fresh bets on the insurance sector.

“While the insurance sector has been substantially liberalised, it has not seen significant PE investment activity in the recent past. It has attracted substantial interest from global funds and a more liberalised regime, including whittling down some of the existing conditions that apply to PE investments, will make the space more attractive," he says.

The defence sector also deserves attention. The interim budget speech earlier this year was silent on FDI caps and overseas listings, Choubey said.

‘Streamline taxes’

When it comes to the existing tax policy, Vivek Soni, EY India Private Equity Leader, says the private equity and venture capital community has three items on its wish list.

For starters, they are hoping for reforms that will significantly streamline the existing capital gains policy.

"Currently, it ( the policy) has different tax implications for different asset classes in listed and unlisted securities because of which investor choices are significantly impacted by tax arbitrage as opposed to the merits of the sector or asset class," he says.

Soni adds that there is also a big push for the removal of the unpopular angel tax (levied at a hefty rate of 30 percent) on startups and other new, high-growth companies. The bone of contention is the subjective valuation of startups, which can lead to disputes with the revenue authorities.

But indications are that the government may retain the angel tax, first introduced in 2012 to prevent money laundering.

"The rationale behind retaining the angel tax is to prevent the potential risk of converting black money into white money in the absence of this provision," a recent The New Indian Express report said.

Soni says there is also a need to clarify or reframe the rules for taxation of indirect transfer of assets based in India to avoid unintended consequences for FIIs and in the case of a multi-layered structure for offshore funds.

The genesis of the rules was the Supreme Court verdict in the case of UK telco Vodafone, which was followed by the controversial retrospective tax amendment.

In a significant boost for sovereign wealth funds and pension funds such as Temasek, Canadian Pension Plan Investment Board (CPPIB) and Ontario Teachers Pension Plan, the government in the interim budget, presented in February, extended tax benefits on infra investments by these entities by a year to March 31, 2025. These benefits were to expire on March 31, 2024.

Some industry executives believe the government's robust fiscal position enables it to focus on rural development and welfare initiatives in the budget, including NREGA, PM Kisan and housing programs, with targeted allocations for specific states.

"I expect continued emphasis on capital expenditure, with incentives to stimulate private sector investment and encourage expenditure recovery. This budget's stance on fiscal consolidation and liquidity management will likely pave the way for interest rate reductions.

“Additionally, I hope to see the introduction of measures promoting import substitution to boost manufacturing in India across sectors such as electronics, home appliances, industrials and medical devices," says Puncham Mukim, Head of Private Equity, India, Everstone Capital Advisors.