Pitching for significant changes in norms governing venture capital and private equity funds, a Sebi-constituted panel, headed by N R Narayana Murthy, has recommended steps to promote angel investments and greater tax benefits for all kinds of Alternative Investment Funds.
Besides, the panel has suggested greater mandatory disclosure in private placement of funds flowing into AIFs.
In its second report submitted to Sebi, made public today by the regulator, the panel has suggested extending tax pass-through status to category III AIFs, in addition to category I and II funds.
Sebi has already taken necessary steps on some suggestions made by the panel and these measures include relaxation of some rules for angel funds and lowering of minimum threshold investment, which were approved by the regulator's board earlier this month.
The regulator had constituted the Alternative Investment Policy Advisory Committee (AIPAC) standing committee in March 2015 to prepare a new regulatory framework for start-ups and alternative investments. The committee submitted its first set of recommendations in January this year.
In the second report, it has been suggested that insurers and pension funds should be allowed to invest in category II AIFs.
Also, it has recommended greater mandatory disclosure in private placement memoranda by AIFs which raise capital from retail investors with ticket sizes of less than Rs 10 crore per investor.
"If implemented, these reforms will help accelerate the flow of domestic and offshore long-term capital to AIFs which, in turn, would be invested in Indian start-ups and growth companies in a wide range of sectors vital to the development of the Indian economy," the report noted.
It has been suggested to reduce minimum angel fund investment for venture capital undertakings to Rs 25 lakh from the current Rs 50 lakh. The move will make such funds to spread their risk by investing across geographies.
The panel has also suggested that lock-in requirement should be reduced from three years to one year for angel funds. The upper limit for number of angel investors in a scheme should be increased from 49 to 200.
It wants angel funds to be allowed to invest in startups incorporated within five years, which was earlier three years.
According to the report, extending pass-through taxation to category III AIFs will bring certainty on the tax front and will also ensure the incidence of taxation falls on fund investors, rather than on fund vehicles i.E. AIFs.
Under Sebi guidelines, AIFs can operate broadly in three categories. Sebi rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.
Currently, as many as 268 AIFs are registered with Sebi. Between 2001 and 2015, venture capital and private equity of more than USD 103 billion was invested in Indian companies. These investments were made in over 3,100 companies across 12 major sectors, including those critical to the country's development.
The enhanced disclosures by AIFs include track record of
returns in previous funds, investment strategy and investment objectives, organisation of AIF and its decision making process. It suggested to form an Investor Advisory Committee to address vital matters, including conflicts of interest.
The panel has suggested 12 per cent GST (goods and services tax) rate for AIFs.
"A relaxation should be granted to AIFs to the effect that AIF should be considered as passthrough entities and the investors in AIFs be deemed as service recipients of the services provided by a fund manager/service provider. Similar benefits are available to fund managers in other large financial centres," the report noted.
It also suggested measures to attract offshore fund managers to manage in India.
In May 2012, the regulator had notified the guidelines for this class of market intermediaries.
The category-I AIFs are those funds that get incentives from the government and Sebi. It include social venture, infrastructure, venture capital and SME funds.
The category-III AIFs are those trading with a view to making short-term returns and include hedge funds, among others.
The category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. These AIFs include private equity and debt funds and all others falling outside the ambit of above two other categories.