PEs & VCs eye exit via offer for sale after STT ruling

Funds approach SME exchanges to explore listing of investee companies

Private equity (PE) and venture capital (VC) players are exploring options to exit their investments through the offer for sale (OFS) route, following the recent changes in tax rules governing such sales.

The amendments to the Finance Bill made last week, brought offer for sale transactions under the Securities Transaction Tax (STT) net. The seller in these offers is liable to pay STT of 0.2 per cent, beginning July 1. This means such transactions would be exempt from the capital gains tax of 10 per cent, which these funds were otherwise liable to pay. Senior officials said several players are looking at this as a viable option and have even approached the newly-formed Small and Medium Enterprises (SME) exchanges to understand the finer details.

“The move to exempt OFS from capital gains is a positive development for SME exchanges. This makes the listing route a much better exit option. Some PE funds have already evinced interest and are keen to know the modalities of listing,” said a senior official with an SME Exchange.

The move will benefit VC funds operating out of India and registered with the Securities and Exchange Board of India, whereas funds investing via vehicles domiciled in tax havens will get benefits under the local laws.

“The offer for sale will be tax-free if conditions laid out in the Finance Bill are complied with. It gives one more exit point for PE players. It is possible that many would be looking to use this route,” said C A Gupta, tax partner, Deloitte. Gupta added that funds facing uncertainty under the Mauritius route over the treaty, will now get the benefit of tax exemption under the local law itself.

From the domestic funds’ perspective, an offer for sale on the bourses is more tax efficient than a secondary sale executed in an off-market transaction pre-listing. “This will have an impact on the pre-listing deals space, funds may prefer offer for sale to an off-market sale,” said Saurabh Agarwal, director, Kennis group. “It is definitely positive,” said Jagannadham Thunuguntla of SMC Capitals. However, he added SME exchanges, as a concept, needed more time to be understood and embraced by investors and sellers. “When even IPOs in the main board are finding it difficult to sail through, the SME exchanges will find it harder. Only high-quality SMEs can be successful.”

SME exchanges have not made big inroads as a popular risk capital avenue among the 20 million small enterprises in India, despite the National Stock Exchange and Bombay Stock Exchange having launched the SME trading platforms.