'Unshackle AIFs to boost high-growth imperative'

The economic fallout from the pandemic has been unrelentingly global. The Centre has laudably committed to passing massive reforms in the midst of managing this macro event. The deregulation of large-scale sectors such as coal and mineral mining, defence manufacturing, power distribution, civil aviation, space, solar and battery manufacturing, and amendments to the Essential Commodities Act has expanded value potential rapidly. The start-up ecosystem must also be considered vital in its prioritisation within this growth-oriented reform. 

The start-up ecosystem has undeniably stepped up to support India’s citizens and the economy through this time. Grocery and essentials delivery start-ups have fulfilled an exponential increase in orders through the lockdown to ensure the uninterrupted flow of food supplies to cities of all sizes. Those in logistics and supply chains have helped organise emergency fleet and capacity requirements through the discontinuities to help produce and distribute personal protective equipment, face masks, and other essentials.

Companies in telemedicine, health products design and distribution, insurance distribution,ed-tech, pharmacy delivery, payments,e-commerce,neo-banking, and other areas have helped maintain access and availability through this challenging time. An indirect impact of these start-ups has been in helping retain hundreds of thousands of employees directly, and millions indirectly, to maintain income generation and demand flows through this time.

While these ideas may have seemed as frontier investments only a few years back, their essential nature has been proven through the lockdown. Indian alternate investment funds (AIFs) have had an outsized role in the development of this ecosystem which is now third in size globally — behind the United States and China.

Between January 2015 and June 2020, over 500 registered AIFs raised Rs 25,066.7 crore in commitments to focus on start-ups and unlisted investments in the venture capital and private equity space. In the same time period, Indian start-ups have raised over Rs 400,000 crore ($58 billion) in capital. Clearly, Indian capital is not yet a majority participant in the start-up ecosystem today. This is an immense reform opportunity for us to capture. If we can incentivise the flow of rupee capital to support the creation and growth of more of these young companies via AIFs, the first- and second-order benefits from their local scale-ups will contribute tangibly to our high-growth imperative.

For starters, the Centre can rationalise taxation norms for Indian unlisted investors with those for foreign investors. Indian investors need to pay 27 per cent tax on capital gains for unlisted investments today. A normalisation of the definition of “capital assets” for Indian AIFs will ensure that they can compete fairly with global capital on home soil. Regulation can be amended for insurance companies, pension funds and banks to direct more organised long-term allocations to the AIF sector. These large pools of domestic capital must lead the transformational wave of technology-driven change, as they have in the US and other large economies.

There has also been a flight of wealth via the liberalised remittance scheme. With additional incentives for India’s capital class to invest in the development of the local risk-capital ecosystem via AIFs, these flows can be significantly retained within the country.

The pandemic has demonstrated that technology will only become more critical in our lives. The reiterated call for indigenous tech development will require AIFs to participate at scale. Opening up this sector and establishing parity on taxation and incentives with global investors will help AIFs widen their scope of influence in this transformation. With a reform approach, we can intentionally nurture the development of indigenous high-value businesses that develop frontier ideas into long-term growth flywheels for the economy.

The writer is Managing Partner, 3one4 Capital