Published Editorial

Getting PE funds

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The Financial Express

by

Ajit Krishnan

Tax Partner & Leader–Infrastructure practice
Ernst & Young

The infrastructure sector, comprising transportation, power and telecom, has not seen strong growth over the past few years. The growth of this sector hinges largely on stable tax & regulatory policies and availability of viable long-term funding. Many infrastructure players indicate their biggest priority now is to get viable, long-term funding and private equity (PE) investments.

The debt-laden infrastructure sector is finding debt servicing difficult. Banks and other lenders to the sector are wary of further lending. The RBI, in its May 2013 report on Macroeconomic & Monetary Developments, says that with rising corporate leverage, it is necessary to resolve the vexed structural issues the infrastructure sector faces. Also, companies in the infrastructure segment (except power) are not allowed to refinance their high-cost domestic debt with low-cost external commercial borrowings.

PE and other investment deals in the sector are deterred by tax and regulatory constraints. While the infrastructure sector is incentivized with 100% income-tax deduction for ten years, the levy of a minimum alternate tax at 20%, coupled with several uncertainties and the long time-lines involved in dispute resolutions, have affected valuations and cash flows. Taxation of offshore supply and services, which form a significant portion of the cost of a power project, is mired in controversy.

The government has granted service tax exemption on construction, repair and maintenance of infrastructure projects such as roads, airports and ports. Similar exemption could be granted to other sectors such as power and renewable energy to reduce the cost of these projects.

Similarly, certain sectors that are exempted from service tax on output services are not exempted on input services received by them. The system has to ensure that exemption is available across the entire length of the supply chain.

According to a recent Ernst & Young report titled, ‘Private equity: breaking borders’, pooling vehicles of PE funds for India (including infrastructure-specific funds) have been using off-shore jurisdictions such as Mauritius and Singapore for tax and regulatory benefits. The government would do well to introduce a regime which would enable such pooling to happen in India. While Sebi recently introduced the Alternate Investment Fund Guidelines, there are certain wants of the industry to be considered like:

  • Allowing foreign investment in pooling vehicles under the automatic route, subject to FDI cap;
  • Granting tax pass through status for such pooling vehicles;
  • Allowing pooling vehicles to invest directly at the asset level instead of investing in shares/ securities of entities which hold the asset;
  • Giving exemption from tax on services received by pooling vehicles from service providers such as managers, legal advisors and valuation experts;
  • Creating an environment that allows listing of such pooling vehicles.

A barrier in public fund raising is the absence of a secondary market that offers a financial product involving long-term yield play to investors. Developed markets like the US, Japan, Australia and Singapore allow listing of collective investment vehicles in the form of trusts, which hold assets and pay out stable long-term dividends. These are regulated but tax efficient pass-through vehicles that enable fund raising. The introduction of a similar product or modification of the existing Collective Investment Scheme Regulations of the Sebi to enable such a product would create a robust secondary market for the sector, which would encourage PE players to invest, as an easy exit would be possible through such a product.

Views are personal.