Indian CII Promotes Burgeoning PE Industry

by Mary Swire, Tax-News.com, Hong Kong

12 May 2010

The Confederation of Indian Industry (CII) is bidding to raise the profile of the private equity industry by emphasizing the key role it will play in the country's massive infrastructure development program. It is also pushing for reforms that will result in greater tax clarity.

A CII-KPMG study on the future of private equity entitled ‘Enabling Growth in Promising Indian Companies’ was launched at a Conference on ‘Private Equity and Venture Capital: Carve Outs and Spin Offs’ organized by the CII.

According to the study, by 2013 India will need around USD60-100bn private equity (PE) and venture capital (VC) funds for its infrastructure projects. In order to achieve the annual growth targets of 7-8%, USD1.25 trillion will be needed over the next three years.

The study found that PE-backed companies had performed better and paid higher wages than non-PE and listed firms. Annual sales of PE-backed companies grew at almost 25%, compared to 16% among non PE-backed companies. Profit-After-Tax (PAT) of PE-backed companies grew at almost 35%, compared to 25%. PE/VC investments help those small promising companies which are too young to tap equity and debt markets, according to the study.

Mr K V Kamath, Past President, CII and Non Executive Chairman, ICICI Bank Limited said that the VC/PE industry is at take-off stage in India and the flow of funds would have to be maintained to exploit the opportunities which lie ahead.

Kamath criticized the lack of clarity between the direct tax code and the IT tax on certain issues. The CII would like to use the existing IT Act definition of ‘residents’ for the purposes of the new Direct Tax Code and wants the pass-through status for domestic limited partnerships to be clarified in the code.

The CII also wants the open offer threshold for registered PE/VC firms to be increased to 26% from 15%. It feels that an open offer being triggered at 15% is not conducive to enabling proper due diligence, as it conflicts with insider trading rules; a loosening of insider trading rules is also on the wishlist.

It has also been suggested that the FDI guidelines should be eased for foreign investments in venture capital funds to stimulate investment in India. Alternatively foreign VC investments investing solely in domestic VC funds could be granted registration by the Securities and Exchange Board.

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