Investing in new economic shakti for a new India

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

We are on the path to bringing in over $100 billion per annum of investments into the country. These investments will find their way into startups, growth capital into Indian enterprises, real estate and infrastructure, and special situations impacting various sectors of the economy.

In recent years, India has seen an explosive growth of startups, which have played a pivotal role in ushering in the digital revolution.

When the PE-VC segment grows, the startup ecosystem flourishes. Startups are revolutionizing employment prospects by broad-basing employment to talent across economic strata and geographical spread.

They are unlocking the potential of women professionals through flexibility and variety in job opportunities. Startups are leading a digital revolution that’s going to employ 500 million, and not just 5 million Indians.

A study conducted by a global strategic firm has also revealed that as compared with companies that did not take PE-VC capital, those that were backed by PE-VCs create 1.3 times more jobs for the same amount of capital deployed, and also pay 1.9 times higher taxes, and uphold high standards of corporate governance.

Hence, there should hardly be a debate on the need and the desirability of this source of funds. To unlock further potential, the Union budget should look into three immediate demands of the PE-VC industry.

First, there is a lack of parity in how Indian managers are treated vis-a-vis their global counterparts in the basic premise of taxation of long-term capital gains (LTCG) for investments in unlisted securities.The LTCG tax on unlisted securities is the highest in India compared with anywhere else in the world. Even the domestic players operating in the listed securities space enjoy a better taxation regime. This industry is not clamouring for a tax advantage, but it certainly deserves better than a tax disadvantage. As an industry, our most critical ask from the government is to provide us a level playing field.

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 Organization, National Pension System and insurance companies. As of now, the extraordinary returns of our economy and hard work of our entrepreneurs are being appropriated by foreign investors.

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

To begin this journey, we suggest that the government should begin with setting up at least a ₹10,000 crore fund of funds in this budget and manage this fund through institutions such as NIIF. These institutions already have the expertise to further invest these funds with proven managers. EPFO/NPS and insurance companies can invest in this fund of funds and kick start the process of pooling domestic capital. Over time, the expertise to make direct investments can be built in these institutions.

Third, have a set of regulatory regimes that are consistent and unambiguous. (This is a long-term—at least 10 years—illiquid asset class). We suggest that the government in this budget should set up an expert committee to understand the potential of the product to enable comprehensive single-window legislation among the Securities and Exchange Board of India, Reserve Bank of India, and the ministry of finance. This committee can ensure that the various regulations are in sync to create large pools of domestic capital and enable domestic institutions to invest in this asset class. It is equally important to create an even wider set of domestic managers. We suggest the setting up of this expert committee with experts from the regulators, ministry of finance, eminent lawyers, and experienced investment professionals from these institutions and the PE-VC industry.

Renuka Ramnath is founder, managing director and chief executive officer of Multiples Alternate Asset Management, and chairperson of IVCA.