PE firms face FIPB hurdle

Strict regulations on identity of investors stopping those wishing to bring in foreign money; experts call for change

Private equity (PE) companies looking at raising money from abroad for their funds are facing hurdles at the Foreign Investment Promotion Board (FIPB), the agency to clear foreign direct investment (FDI) into the country.

Applications of some funds have been rejected or kept on hold. Many others have shelved their plans, being unable to disclose details of the prospective foreign investors or ‘beneficial owners’ to the government agency, said tax consultants and lawyers.  At the time of application, FIPB asks for the identities of all investors in the funds.

FIPB is seeking particulars about the source of funds to scrutinise the quality of flows. The government is worried about Indian money being re-routed through tax havens, known as round tripping. The funds say they’re unable to disclose foreign investors’ names in the applications because of contractual agreements and competition.  

PE firms seek a FIPB nod for foreign investments into funds which are registered as trusts under the Alternative Investment Funds (AIF) guidelines, introduced by the Securities and Exchange Board of India (Sebi) a year earlier. Indian asset managers, which sponsor PE funds, set up offshore vehicles which get registered as a foreign venture capital investor with Sebi. The capital markets regulator usually clears such applications within a month and sends it to the Reserve Bank of India (RBI), which gives approval in three to six months. Most PE firms intending to bring in foreign money simultaneously apply with FIPB for FDI clearance to save time.

India might be losing out on foreign money, especially for infrastructure funds, due to this requirement. “It is a procedural issue that is costing India long-term investments from large institutional investors, especially when the country needs it the most,” said Anish Sanghvi, associate director, tax and regulatory services, PWC.

In the past year or so, FIPB has rejected the application of Next Orbit Ventures Fund, which had sought approval to get foreign investment in its venture capital fund. It had deferred the clearance of ICICI Venture Funds Management, which wanted to bring money from a ‘foreign limited liability company’. Subsequently, ICICI Venture withdrew its application. The agency also kept on hold the application of Indostar Capital Finance, a non-deposit taking company, wanting to sponsor a debt fund.

FIPB also kept Franklin Templeton Asset Management’s application in abeyance. Franklin intended to be the investment manager of various AIFs and contribute ‘mandatory amounts’.

It is not clear whether these applications have been rejected or deferred or kept in abeyance specifically because of issues surrounding FIPB’s demand for beneficial owners’ identities.

“Presently, every foreign investor in an AIF needs to obtain specific FIPB approval for each such investment. There is a need for the government to set out and simplify the regulations for foreign investors to invest in AIFs," said Jay Gandhi , partner, J Sagar Associates.

Tax consultants feel the government can make it easier for PE funds to get foreign investors located in Financial Action Task Force-compliant countries. FATF is an inter-governmental body to prevent money laundering. “This ensures such funds would have strong anti-money laundering and KYC (know-your-customer) regulations,” said Sanghvi.

“This ensures that such funds would have strong anti-money laundering and KYC regulations,” said Sanghvi.