Samir Arora Vs Rajeev Mantri: Should policy support favour primary-market PE funds or to secondary-market FIIs?

The exchange between Arora and Mantri started with Arora's tweet on why India should try to attract foreign institutional investors (FIIs) money and how easily it can be done.

Should policy support be extended to secondary-market investors such as foreign institutional investors (FIIs) or to primary-market investors such as private-equity funds?

A debate on this unfolded on Twitter between Samir Arora, veteran investor and founder of Helios Capital, and Rajeev Mantri, founder and managing director of the India-focused venture capital firm Navam Capital.

Arora argued for easier capital-gains tax regime for foreign investors, even doing away with it entirely for both foreign and domestic investors, while Mantri called that ask "narrow and self-serving".

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Capital-gains tax is incurred by investor on sale of securities and they are either long-term capital gains (LTCG) tax or short-term capital gains (STCG) tax based on the duration for which the securities were held.

The exchange between Arora and Mantri started with Arora's tweet on why India should try to attract foreign institutional investors (FIIs) money and how easily it can be done.

Arora had said that it was better for India to attract foreign-direct investment (FDI) or foreign institutional investor (FII) money than private-equity (PE) funds. He wrote that FDI only takes out dividends of say 2 percent per annum and reinvests the balance and FII broadly remains invested over time and even redemption are not bunched together, usually. On the other hand, PE funds will expect to double their money over seven years repeatedly till it becomes unsustainable.

Then Arora added that to attract FII money, there is very little effort or policy changes needed, that all that is needed is to relax capital gains laws. He stated that this would help domestic investors, attract risk-taking money, allow the government to raise good money from PSU divestments, collect money from higher securities transaction taxes (STT) and so on.

STT is charged on every transaction whether it is to buy or to sell.

This idea was opposed to by Mantri as "self serving". He wrote: "Pray tell, why should secondary market traders / investors receive a capital gains tax holiday - private equity funds invest in primary share issuance and thus directly provide growth capital to companies."

Mantri added, "What share of investment by FIIs actually goes into the hands of a company? And they should effectively receive a freebie by way of a tax holiday? No."

To this Arora responded by posting that no other country charges capital-gains tax to foreign investors.

He wrote, "U may not know - in fact u do not know-that no country , as in zero countries in the world-charge capital gains taxes to foreign investors. This includes countries like US, UK, Japan etc so India cannot be unique."

He added that securities transaction tax (STT) was introduced to replace LTCG. He wrote that STT is an "excellent substitute" for capital-gains tax.

Instead of charging capital-gains tax to foreigners, India should scrap the taxes for all--foreign and local investors--wrote Arora.

Then, the Indian government can take advantage of the market sentiment to sell public-sector undertakings at even better prices, create wealth for the Indian public and attract foreign institutional investor (FII) money, according to Arora.

In response to a comment under his post, which asked why other countries did not charge capital-gains tax, Arora gave two reasons.

He wrote that, for one, tax is charged in the country of residence; and for another, it becomes difficult for investor to claim tax deductions. He wrote: "IF fund pays taxes in country A how to connect it to each underlying investor (since there is so much churn of underlying investors) so that the individual can claim deduction for taxes paid in Country A and does not have to again pay taxes in his country of residence B."

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A user commented that investors in businesses like PE funds deliver long-term value, while investments in financial assets like FIIs may not. To this Arora countered: "For 25 years they (FIIs) have stayed despite Russian crisis, Asian crisis, global financial crisis etc. In aggregate they will stay--individually investors come and go".