The Foreign Investment Promotion Board (FIPB) has ruled that foreign investment can flow into private equity funds registered as trusts. The move opens up another window of funds for private equity players and venture capital funds registered as trusts. The department of industrial policy & promotion (Dipp) was opposed to FDI in trusts, but FIPB has overruled the argument. This can lead to a new channel of investment for India Inc, especially start-ups. The FIPB’s view is that FDI can be permitted in trusts which intend to carry out PE investments, provided they register themselves as VC funds.
Following the FIPB ruling, Dipp is now planning to introduce guidelines for allowing FDI in trusts that invest in companies, especially start-ups, with the aim of long term capital gains. Apart from mandatory registration with capital market regulator Sebi, the foreign investor will also have to comply with the know-your-customer (KYC) guidelines, a Dipp source said.
The FIPB’s decision follows detailed arguments over a proposal from IL&FS-Orix trust to bring in funds from Orix Mauritius Trade Winds Investments Company. The trust is registered under the Trust Act of India. The main objective of the trust is to achieve substantial long-term capital appreciation, primarily through privately-negotiated equity and equity-linked investments here, according to FIPB. While most companies set up PE funds as VC funds, IL&FS-Orix combine has chosen the format of a trust.
In terms of tax treatment, VC funds and trusts are on a par. The VC route is preferred by some foreign investors as it provides flexibility in terms of pricing of shares, lock-in and the SEBI takeover guidelines for open offer.
Dipp would now form guidelines and make FDI in trusts subject to FIPB clearance, the sources said. The trust concerned should comply with FDI guidelines, he added. The approval given to IL&FS-Orix would not mean blanket approval for all such cases. Clearances would be provided on a case-to-case basis.
The move comes at a time when the RBI has started clearing pending applications of foreign VC funds. The decision of FIPB is seen to be in line with the larger objective of encouraging FDI inflows to beat the slowdown resulting from the global meltdown.
Source: Economic Times