Venture Cap Body Seeks Regulation
The Indian Venture Capital Association (Ivca) has moved the Centre for creating a `proper regulatory framework' for structuring venture capital funds (VCFs). The association has also called for `removing restrictions' on investment instruments which pose constraints of financial structuring to venture capitalists.
In a memorandum to Jaswant Singh, deputy chairman, Planning Commission, and chairman, Task Force Committee for Information Technology, Ivca has called for forming a policy framework to enable pension funds, insurance companies and mutual funds to invest in the VCFs.
The association has sought tax incentives and the permission for pension funds and insurance companies to contribute at least five to ten per cent of the corpus to VCFs.
The memorandum has further called for `modifications' in Section 10 (23) F by removing the `anomalies' between VCFs and mutual funds regarding taxes.
VCFs are sore over mutual funds being given preferential treatment by the government by way of giving the funds total tax-exemption, while VCFs are required to pay maximum marginal tax. "Mutual funds participate in the secondary capital market, while VCFs provide promoters equity and nurture companies in their formative stage and hence take more risks," said Vishnu Varshney, chairman, Ivca.
While pressing for a regulatory framework, Ivca has demanded removing the `anomaly in taxation' between domestic VCFs and offshore funds. According to Varshney, while offshore funds (catering to existing large companies) pay no taxes, domestic funds which provide equity assistance to small and medium enterprises have to pay maximum marginal tax.
"Even among domestic funds, those settled by the Unit Trust of India are totally exempt from taxes," he added. The association has also pointed out the `difficulty' being faced by VCFs regarding raising of funds. According to them, in the absence of any incentive, it is difficult for domestic venture funds to collect money. Ivca has also asked for changing the Central Board for Direct Taxes guidelines to include instruments like preference shares, other convertibles, conditional loans, etc. This would make `exit' from small companies easier for VCFs, the association held. "The entire domestic venture capital industry is in danger of becoming extinct because of the `indifference' of the government," the memorandum said.