India is stepping up its efforts to attract global funds. In the Union Budget for FY22 tabled on Monday, Indian Finance Minister Nirmala Sitharaman proposed tax incentives for international funds that relocate to Gujarat International Finance Tec (GIFT)-City, India’s first International Financial Services Centre (IFSC), which was set up as a multi-services Special Economic Zone.
The move is aimed to woo offshore funds and make them park their money in India, which, in turn, is likely to flow into the world’s third-largest startup ecosystem.
According to Siddharth Pai, founding partner and CFO at 3one4 Capital, co-chair at Regulatory Affairs Committee, Indian Private Equity and Venture Capital Association (IVCA), the budget has taken one step forward in bringing the offshore funds to India.
“A noteworthy measure has been to introduce a warehousing mechanism for offshore funds who currently invest into India – a system that allows them to move their fund to GIFT IFSC without the transfer being subject to tax,” he said. “This is a huge boost to the Indian fund ecosystem as part of the ‘Onshore the Offshore’ program that has been in vogue for the past few years. ”
“This will help ensure that the gateway to Indian equities will be in India and the need to have a foreign launchpad in order to invest into Indian equities is mitigated,” he added.
Industry veterans believe it will make GIFT City an attractive destination for VC funds and other investment vehicles.
“Most VC players who operate either out of Singapore or Mauritius will find this particularly attractive from a deal-making perspective,” Ritesh Kumar, partner at Indus Law, told local media Economic Times (ET). “The quality of this exemption will help reduce the complexity of deals substantially,” he added.
Shagoofa Rashid Khan, partner at Cyril Amarchand Mangaldas, believes that it will enable the relocation of existing feeder vehicles to Gift City, thereby extending the tax benefits to fund managers, the ET report said. Feeder funds are sub-funds that put all of their capital into an umbrella fund, known as a master fund, which is handled by a single investment advisor.
As such, India offers a special taxation regime for offshore funds if their fund managers are located in India. The idea is to make sure that fund management activity is done in India without adverse tax implications. Last year in May, the finance ministry amended the income tax rules making it easier for offshore funds to relocate fund management to India.
As of now, the government offers tax incentives for new alternative investment funds (AIFs) to be set up at the GIFT City. The latest move targeted at global offshore funds is a step toward taking the Indian IFSC at par with its global peers.
Renuka Ramnath, founder and chief executive, Multiples Asset Management Ltd and chairperson, IVCA, said the industry is pleased with some of the announcements for IFSC for onshoring the offshore, startups, infrastructure, real-estate, and the healthcare sector.
“There is consensus around doing what it takes to build a vibrant PE, VC sector. We also hope to see concrete policy changes and steps to enable this common vision,” she said. “Today, India needs at least 2.5% of the GDP to come in the form of PE, VC investments for the country to reach its USD 5 trillion target, which would be around USD 125 billion.”
“Only an internationally competitive tax and regulatory environment, as well as a level playing for domestic capital – unlisted shares, will catalyze investors to look towards India,” she added.
Rajat Tandon, President, IVCA said tax exemption to global funds on relocating to IFSC echoes IVCA’s mission of onshoring the offshore pool of funds.
“IVCA is hopeful that the Government of India will continue supporting the domestic and global alternative investment ecosystem, while the PE, VC asset class will continue to boost employment, grow Indian startups, scale-ups to growth companies and advance the economic growth of the country moving ahead of the pandemic,” Tandon said.