Invest in a new economic power for a new India

When we extrapolate the potential of this industry, we expect India to replicate the PE-VC penetration in the top 2-3% of GDP like other developed markets.

We are on track to bring in more than $100 billion investment annually in the country. These investments will find their way into startups, growth capital in Indian enterprises, real estate and infrastructure, and under special circumstances affecting various sectors of the economy.

In recent years, India has witnessed an explosive growth of startups, which have played a vital role in driving the digital revolution.

When the PE-VC segment grows, the startup ecosystem thrives. Startups are revolutionizing the employment prospects by providing wide employment to talents across economic scale and geographical spread.

They are unlocking the potential of women professionals through flexibility and diversity in job opportunities. Startups are leading a digital revolution that is going to provide employment to 500 million, not just 5 million Indians.

A study by a global strategic firm also showed that compared to companies that did not take PE-VC capital, those backed by PE-VC created 1.3 times more jobs for the same capital, And also pays 1.9. manifold higher taxes, and maintaining high standards of corporate governance.

Therefore, there should hardly be any debate on the need and desirability of this source of funds. To unlock further possibilities, the Union Budget should look into three urgent demands of the PE-VC industry.

First, the basic premise of taxation of long-term capital gains (LTCG) for investments in unlisted securities lacks parity in how Indian managers are treated with their global counterparts. LTCG tax on unlisted securities is the highest in India as compared to anywhere else in the world. Even domestic companies operating in the listed securities sector enjoy a better taxation regime. This industry is not struggling for tax benefits, but it is certainly better off than tax losses. As an industry, our most important request to the government is to provide us an equal opportunity.

Second, there is a need to channelize domestic capital to invest in alternative assets. Most of such capital is lying with the Employees’ Provident Fund Organisation, the National Pension System and insurance companies. As of now, the extraordinary returns of our economy and the hard work of our entrepreneurs are being appropriated by foreign investors.

Domestic capital is only around $1 billion-$1.5 billion. Domestic capital should become a participant in the PE-VC economy. If Indian pensioners, policyholders and equity market investors are to benefit from the new economic engine of India’s growth, we must have a stable mechanism to attract and deploy this capital domestically.

To start this journey, we suggest that the government should start with establishing at least one 10,000 crore fund in this budget and manage this fund through institutions like NIIF. These institutions already have the expertise to invest these funds with proven managers. EPFO/NPS and Insurance companies can invest in this Fund of Funds and start the process of raising domestic capital. Over time, the expertise to make direct investments in these institutions can be built up.

Third, there is a set of regulatory regimes that are consistent and clear. (This is a long term—at least 10 years—the real estate class). We suggest that in this budget the government should constitute an expert committee between the Securities and Exchange Board of India, the Reserve Bank of India and the Ministry of Finance to understand the potential of the product to enable a comprehensive single-window legislation. This committee may ensure that various regulations are coordinated to create larger pools of domestic capital and enable domestic institutions to invest in this asset class. It is equally important to create a comprehensive group of domestic managers. We suggest setting up of this Expert Committee with experts from regulators, Ministry of Finance, reputed lawyers and experts from these institutions and experienced investment professionals from the PE-VC industry.

Renuka Ramnath is the Founder, Managing Director and Chief Executive Officer of Multiple Alternate Asset Management and the Chairperson of IVCA.