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Govt's guidelines gives jolt to VCs and PEs
By siliconindia
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Saturday, 09 August 2008, 00:49 IST
New Delhi: The Indian Government has given jolt for both the Venture Capitalist and the Private Equity (PE) firms with it setting guidelines on investment spheres. The growing interest of the equity firms in the retail sector is to be subdued with the new rules and regulation for the PE funds, while Venture Capitals (VC) will not be allowed to invest in listed firms but only for the startups.
According to the new draft prepared by the government and the Securities and Exchange board of India, the guidelines will also seek to remove the differences in the treatment of foreign and domestic VC funds. The various obligations of a Domestic VC are under scrutiny like the minimum corpus of rupees five crore for the domestic VCs to operate, the tax redemption system according to which domestic VCs can get a tax exemption only if they invest in high-risk areas such as biotechnology or nanotechnology. Since, through the reconsideration, it would bring up norms for both foreign VCs and domestic ones, without any of them having an edge over the other. Currently, foreign venture groups, escape taxes altogether as they normally operate through offices established abroad, moreover, the five crore corpus obligation remains void for them. Apart from it, the risk sectors for the investments are also to be redefined.
Moreover, PE funds will not be allowed to invest in Indian retail companies, which are franchisees of foreign brands. With the franchisee-led or foreign-owned retail companies ranking in its desired list, foreign private equity funds shall have a tough time coping with it. They will not even get to invest in retail companies where foreign investment is allowed. The retail sector has seen a rise of 43 percent in PE investments in the current year on a current market-to-market basis. "At a stage when we were hoping that the government would further liberalise the foreign investment policy by increasing the FDI cap in certain sectors, this move has come as a step backwards," said an industry expert in the PE space, as reported in Economic Times.
