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PE flow down 50% on pass through curbs

The government’s decision to restrict the number of sectors for which domestic private equity funds can claim pass through status for tax purposes has begun to impact PE deal flow. In April, the first month in which the new norms became applicable, the number of deals struck by domestic PE and VC funds shrunk by almost 50%.

According to the data compiled by advisory firm Grant Thornton, April saw just five deals from domestic funds against an average of about 10 deals per month in the past. March 2007 itself saw 12 deals led by domestic funds. The March-April period last year had witnessed 21 deals led by domestic funds out.

Says C Srividya, partner, corporate advisory services at Grant Thornton, “There is clear drop in the deal flow of Sebi registered VC funds. However, in terms of value of the investment it may not affect so much as a significant part of the money is coming into India from funds not registered with Sebi.”

Those who are involved in the intermediation of PE transactions feel that there is a direct correlation between the deal flow and the new norms. Says Akil Hirani, managing partner of law firm Majumdar & Co, who tracks corporate mergers & acquisitions and PE activity, “It is definitely linked to the change in the pass through status of PE investments. While some domestic funds are moving offshore, it takes time as their charter has to be amended and there are procedures involved. This would have delayed their investments in the short term.”

However, some domestic funds feel otherwise. Says Bangalore-based UTI Venture Funds director (PE) & CFO Ajay Mittal, “If the funds have already been raised then it would not be a rational strategy to sit on it as we cannot legally transfer the fund which has not been disbursed yet to an offshore entity. It would only add to the problems if a domestic PE fund slows down its investments.”

But lawyers point out that even those with unutilised funds can potentially transfer it to an offshore arm by amending their charter document after taking an approval from the investors. While this may not be true for pure domestic funds such as Sidbi who have raised funds locally, a majority of domestic PE and VC funds have raised funds overseas and they can transfer their existing fund to an offshore arm to avoid tax.

It should be, however, kept in mind that the PE and VC investments are still at a nascent stage in India. A clear trend of a slowdown or a temporary blip of investments from domestic PE funds would emerge only over the next two months.

Source : Economic Times

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