The government may soon come out with new investment norms for venture capital (VC), private equity (PE) and hedge funds to make their operations transparent and create a level-playing field for both the domestic and foreign players.
Joint secretary in the finance ministry KP Krishnan said government is likely to revisit norms for VC funds and talks have already been held with the market regulator SEBI towards this end.
Efforts are also on to create a legal framework so that venture fund investments should not land in a few sectors only and equitable distribution takes place. The government is specifically worried about huge fund inflow in sectors like real estate, which has affected investments in other hi-tech sectors like software and biotechnology. At the same time, it has led to appreciation in the prices of real estate in the country.
Government, it is learnt, is considering to give some new tax incentives to venture funds and PE funds to invest in high-risk areas.
Venture funds invest in the equities of high growth companies to earn hefty returns. At present, foreign funds have an advantage over their domestic counterparts under the existing tax system of the country.
Head of financial services at PWC India, Punit Shah said foreign VC funds are at an advantageous position against domestic ones, while investing other than nine hi-tech sectors like biotechnology, software and nano technology. Government gives tax sops (no capital gains tax on profit) to domestic funds if they invest in these nine sectors but not others.
But sectors like real estate is not included in this list. Therefore, when a domestic venture fund invests in an unlisted real estate company, he pays tax on the capital gains earned while exiting the company, Shah added.
But, foreign funds registered in tax heavens like Mauritius and Cyprus do not pay any tax on the capital gains earned such transaction because of the double tax avoidance treaty. The new initiative, according to Krishnan, would ensure that same tax rule apply on both foreign and domestic VC, PE funds to achieve a level-playing field. Besides, the move will also make the investments by these entities transparent. For this purpose, the government would like to redefine VC, PE and hedge funds.
On its part, SEBI will make it mandatory to register VCs and PEs after compiling data about their investments in sectors like real estate, ITeS, education. SNI director TC Nair said that at present the market regulator has no definite source about the exact investments of PEs and VCs.
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Yet another hike in the lending rates by the Reserve Bank of India (RBI) has caused an unprecedented hike in the home loan rates also. Buying a home has just got costlier. Private banks HDFC and ICICI have hike the rates by 75 basis points (100 basis points=1%). This is the third consecutive hike in interest rates this year. On an average, home loans have got costlier by 2% this year as compared to 2007.
The properties in India have been hit by many factors. The global recession had hit the real estate segment hard. The property prices all over the country have stagnated. This is the first such instance in the last five year when property prices have stabalised. Otherwise, the prices for real estate in all segments were rising without any halt. The demand for property had taken off like never before. Besides, property seekers and investors were keenly investing in property segment. Anybody who had little funds to spare found it conducive and profitable to invest in property. At that time, other investment instruments like mutual funds, securities and shares were being neglected by investors.
Home loan rates were affordable and easy payment options like Equated Monthly Installments (EMI) had attracted many home buyers to consider borrowing from banks and financial institutions. The scenario has changed now. Borrowing funds from banks has become a costly preposition. The costs for constructions material is rising. As a result, private property developers have hinted at hiking the prices of property projects. These market conditions are dissuading investors from investing in the property segment. Home seekers too are waiting for the market conditions to improve. As a result, the number of property transactions has dwindled. Property brokers, builders and home seekers are hoping for better times to come.For more view- realtydigest.blogspot.com
The proposed move is a welcome step in light of increased routing of VC money in realty sector. However the regulator should check that the capital formation and encouragement to entrepreneurs is available in the long term. It shouldn’t become a case of ‘penny wise and pound foolish’.
Venture capital (also known as VC or Venture) is a type of private equity capital typically provided to immature, high-potential, growth companies in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company.