As per existing regulations, if there are losses in a fund at the end of its life, the same cannot be passed onto its investors
At a time when Finance Minister Arun Jaitley and his team would be getting set for Union Budget 2018-19, the private equity industry is seeking a pass-through of losses at the fund level for Category 1 and Category 2 alternative investment funds (AIFs).
According to the existing regulations, if there are losses in a fund at the end of its life, the same cannot be passed onto its investors. ‘‘This is a big issue with VC or infra funds. Over a fund life of eight-to-nine years, a fund may end up with one or two loss-making firms,” says Gopal Srinivasan, president, Indian Private Equity & Venture Capital Association.
The regulations say that profits can be passed onto investors, but losses have to be kept at the fund level. Interestingly, Sebi’s original venture capital regulations of 1996 allowed this. These were replaced by Sebi’s AIF regulations in 2012. ‘‘If the pass-through is allowed, investors will take more risks. They won’t mind taking losses in one or two companies if they know they will get the full benefit,” says Srinivasan.
Budget 2018: Private investors seek pass-through of losses at fund level
The industry is seeking a similar pass-through of losses at fund level for Category 3 AIFs or hedge funds, which had an investible pool of Rs 226 billion last year. ‘‘Hedge funds is not mentioned in the Income Tax Act. As a result, each assessing officer takes an independent view on them. What we are saying is please bring a formal tax regime for AIF-3 with some kind of pass-through system,” says an investor.
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