Panel proposes reforms to boost domestic capital in India PE

The recommendations by the Alternative Investment Policy Advisory Committee (AIPAC) are ultimately intended to help create a more supportive environment for start-ups in the country by easing restrictions on those who invest in them. The committee was formed last year and is chaired by Infosys founder N.R. Narayana Murthy.

The measures suggested in the panel's report focus on creating a more favorable tax environment and unlocking domestic capital pools. Tax measures include the introduction of a securities transaction tax in order to simplify requirements faced by alternative investment funds (AIF).

The report also recommends reforming the tax pass-through system by making it applicable to more investors, including foreign funds; reducing the withholding tax levied on participants in the pass-through system; and improving the safe harbor provisions of the tax code in order to encourage offshore funds to locate in India.

In a move intended to encourage greater domestic participation in the industry, the panel recommends expanding the base of investors who are allowed to commit to AIFs by dropping requirements that investors register with SEBI and commit at least INR10 million ($147,000) to a fund. In addition, it recommends raising the limits on investments by banks in AIFs, and allowing greater participation from groups such as pension funds, insurance companies and religious and charitable trusts.

AIPAC noted that only 10-15% of equity capital invested in Indian AIFs originates from domestic sources, with the rest coming from foreign investors. In the US and China, by contrast, domestic sources make up 90% and 50%, respectively, of investors.

Other recommendations by the panel include allowing AIFs to participate in IPOs and family offices to register as institutional investors or as AIFs. SEBI will be seeking public comments on the report until February 10.

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