Incentivise AIFs for India’s capital needs
While the narrative so far has been focused on FPIs, AIF industry has grown by leaps and bounds.
As the new government settles down to its task, here is a set of recommendations for attracting long-term capital in to the country.
It is well known that the challenges of NPAs in the banking sector, the stress in the NBFC sector and the requirements of welfare spending and infrastructure would necessitate significant capital requirement. Therefore, it is imperative that we have an environment wherein we iron out glitches and make it easy and attractive for committed global long term investors to invest in India.
While the narrative so far has been focused on FPIs, the Alternative Investment Funds (AIF) industry has grown by leaps and bounds. As per the latest SEBI data this Industry is already managing an AUM of Rs 97,600 crore and growing. SEBI, in sync with the finance ministry and the revenue department, has done a commendable job of encouraging pooling of investment vehicles in India for investing in alternative assets comprising venture capital, infrastructure, private equity etc. Globally AUM of private credit funds increased from $245 billion in 2008 to $667 billion in 2018.
As a consequence, asset managers in India have been able to attract investments from top quality investors like sovereign wealth funds, pensionfunds, university endowment funds etc. into these AIFs registered in India.
These are the “Gangotri” from whom most global fund managers get their capital as well. This capital is really long term, committed and provides significant stability. These funds often invest in illiquid assets or provide much needed capital for rescue and resurrection.
Therefore, it would in the fitness of things to provide the proverbial red carpet under the AIF regulations, thereby achieving the twin objectives of attracting capital and creating an ecosystem for the fund management industry creating quality jobs as well. This requires the harmonisation of views between regulators like SEBI, RBI, revenue department etc. Here is a specific wish list:
1. Tax on interest income: Availability of credit in the domestic market has suffered due to the NPA and NBFC issues. AIFs are able to attract long term investors to provide rupee credit from such investors. At present foreign investors have a withholding tax of 10-15 per cent plus a surcharge on interest Income, depending on the domicile of the investor.
Recommendation: Bring down the withholding tax on interest income for foreign investors to 1 per cent irrespective of their domicile. Since the AIFs are typically 7-10 year funds, its stable capital as well and should be welcomed. As the investor is assuming the currency risk by investing in rupee bonds, such investors’ participation will enable a more vibrant and deeper bond market over time.
In fact, there is a concessional tax of 5 per cent plus surcharge on Masala Bonds. This encourages overseas listing of rupee bonds and consequently export of the market. At the very least parity should be there.
2. Stressed Loan/ NPA: It is a well-known fact that Asset Reconstruction Companies (ARCs) do not have the requisite capital to meet the requirements of the NPA market. With banks increasingly looking to sell loans only for cash, there is a dire need to open the pathway for specialised funds to participate and provide much needed capital.
Recommendation: AIFs should be permitted to “purchase” NPAs, SMA 1 and SMA 2 loans from banks and other lenders. This would provide the much needed cash for banks looking to sell loans.
3. RBI Notification on AIFs: AIFs can also provide much needed equity and debt to ARCs. However, an RBI Gazette notification prohibits an AIF investor in an ARC from purchasing security receipts issued by the same ARC.
Security Receipts are issued by ARCs to raise capital to purchase loans from banks for cash. This notification chokes capital flow to the ARC and thereby for resolution and revival of companies as well as much needed cash when banks are disposing NPAs for cash.
It also discourages foreign investors from setting up AIFs. Some may participate as FPIs and others will simply give it a miss or set up pooling vehicles offshore. This goes against the grain of encouraging a domestic AIF industry.
Recommendation: AIFs must be encouraged to provide capital to ARCs and to participate in security receipts issued by the ARC. This circular should be revisited.
This government has shown its ability to focus on nitty gritties and execution. These measures, and others, which are operational irritants will go a long way in financing the requirements of the economy.
(The author is MD, Kotak Investment Advisors. Views expressed are personal.)