 "PE & VC industry welcomes Guidelines for application of sec 9A")
"This is a very progressive measure as the government has further liberalised and clarified the new rules it had introduced in the previous Budget of 2015. The Government has responded very positively to the recommendations made by the N R Narayanmurthy led the founder of Infosys report prepared by the Alternative Investment Policy Advisory Committee," said the association in a statement.
Sanjay Nayar, chief executive of KKR and chairman of IVCA in a statement said that foreign investors, PE and VC funds will certainly take note of these reforms. Ultimately such reforms will attract more capital. The private equity and venture capital community is most appreciative of the reform minded approach of the Government.
While welcoming the notification Gopal Srinivasan, chairman, TVS Capital and vice-chairman, IVCA said that the government has addressed several of the concerns addressed by the Narayanmurthy Committee report.
"Besides the new safe harbour rules it has also made several other reforms in the Budget 2016, which will help promote the domestic alternative investment fund industry.These include further improvement of the withholding tax regime by allowing the applicability of rates in force for forage investors coming in through treat nations," he said.
Arvind Mathur, president, IVCA added, the safe harbour reforms are part of a continuum of policy reforms aimed at attracting long-term, stable and value adding savings both from domestic and international sources.
Key highlights of the notification includes, a pre-approval mechanism under which a fund can seek approval at its option from CBDT (Central Board of Direct Taxes) and once approved, benefit of section 9A would not be denied unless approval is withdrawn under limited circumstances.
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The determination of number of members and the participation interest in the fund by looking through the entity where the investment in the fund has been made directly by an institutional entity. Relaxation from investor diversification condition in the period of 18 months or final closing of the fund whichever is earlier, in setting up phase of the fund and in one year period in the winding up phase of the fund, it was stated.
Eligibility of the fund will not be impacted in case of temporary non-fulfilment of investor diversification conditions for period up to 90 days and in case of any delay in furnishing the statement of activity, if delay does not exceed a period of 90 days.
A fund shall be said to be controlling or managing a business carried out by any entity, if the fund directly or indirectly holds twenty six percent of voting right.
The eligibility of the fund will be impacted only if the remuneration paid or payable by the fund to the fund manager has been determined to be not at arm's length price for a period of three previous years in succession; or for any three out of the preceding four previous years. A chance transfer pricing adjustment will not impact the eligibility, said the Association.
"These rules are a sign of the growing sophistication of the regulatory regime for private equity, venture capital and Alternative Investment Funds in India," said IVCA.
However, the association said, while this liberalisation is a strong move in the right direction, some fine tuning may be necessary to further attract more offshore fund managers.
For instance, the 26 per cent control criteria may need to be removed since the role of PE and VC funds is to protect the savings of LPs which are invested in portfolio companies. For example, distressed companies may be helped by PE funds to the fullest extent permitted by FDI rules and this should not conflict with the new CBDT regulations. In other words the new regulations can be fined tuned to meet the needs of the Indian economy. This will both create new jobs as well as protect existing jobs, said IVCA.