Insights into Editorial: Investing in new Economic Shakti for New India   – INSIGHTSIAS

Context:

The Private Equity-Venture Capital (PE-VC) industry recorded a phenomenal growth of $63 billion in investments during 2021, a 57% rise over the $39.9 billion in the previous year.

This represents about 60% of the foreign direct investment (FDI) into the country. The PE-VC sector, thus, will be the key driver to making India a $5 trillion economy.

About Private Equity-Venture Capital (PE-VC) industry:

1. Private equity is sometimes confused with venture capital because both refer to firms that invest in companies and exit by selling their investments in equity financing, for example, by holding initial public offerings (IPOs).
2. However, there are significant differences in the way firms involved in the two types of funding conduct business.
3. Private equity and venture capital (VC) invest in different types and sizes of companies, commit different amounts of money, and claim different percentages of equity in the companies in which they invest.
4. PE and VC firms both raise pools of capital from accredited investors known as limited partners (LPs), and they both do so in order to invest in privately-owned companies.
5. PE and VC firms goals are the same: To increase the value of the businesses they invest in and then sell them—or their equity stake (aka ownership) in them—for a profit.
6. When we extrapolate the prospects of this industry, we expect India to mimic the PE-VC penetration to top 2-3% of GDP, as in other developed markets.
7. We are on the path to bringing in over $100 billion per annum of investments into the country.
8. These investments will find their way into startups, growth capital into Indian enterprises, real estate and infrastructure, and special situations impacting various sectors of the economy.

Start-up Industry growth depends on the Private Equity-Venture Capital (PE-VC) industry:

1. In recent years, India has seen an explosive growth of startups, which have played a pivotal role in ushering in the digital revolution.
2. When the PE-VC segment grows, the startup ecosystem flourishes. Startups are revolutionizing employment prospects by broad-basing employment to talent across economic strata and geographical spread.
3. They are unlocking the potential of women professionals through flexibility and variety in job opportunities.
4. Startups are leading a digital revolution that’s going to employ 500 million, and not just 5 million Indians.
5. A study conducted by a global strategic firm has also revealed that as compared with companies that did not take PE-VC capital, those that were backed by PE-VCs create 1.3 times more jobs for the same amount of capital deployed, and also pay 1.9 times higher taxes, and uphold high standards of corporate governance.

Hence, there should hardly be a debate on the need and the desirability of this source of funds.

Three immediate demands of the PE-VC industry:

To unlock further potential, the Union budget should look into three immediate demands of the PE-VC industry.

First, there is a lack of parity in how Indian managers are treated vis-a-vis their global counterparts in the basic premise of taxation of long-term capital gains (LTCG) for investments in unlisted securities.

1. The LTCG tax on unlisted securities is the highest in India compared with anywhere else in the world.
2. Even the domestic players operating in the listed securities space enjoy a better taxation regime.
3. This industry is not clamouring for a tax advantage, but it certainly deserves better than a tax disadvantage.
4. As an industry, our most critical ask from the government is to provide us a level playing field.

Second, there is a need to channelize domestic capital to invest in alternative assets.

1. Most of such capital is lying with the Employees’ Provident Fund Organization, National Pension System and insurance companies.
2. As of now, the extraordinary returns of our economy and hard work of our entrepreneurs are being appropriated by foreign investors.
3. The domestic capital is meagre at just around $1 billion-$1.5 billion. Domestic capital must become partners in the PE-VC economy.
4. If Indian pensioners, policyholders, and equity market investors are to benefit from India’s new economic engine of growth, we must have a steady mechanism to attract and deploy this capital domestically.
5. To begin this journey, we suggest that the government should begin with setting up at least a ₹10,000 crore fund of funds in this budget and manage this fund through institutions such as NIIF.
6. These institutions already have the expertise to further invest these funds with proven managers.
7. EPFO/NPS and insurance companies can invest in this fund of funds and kick start the process of pooling domestic capital.
8. Over time, the expertise to make direct investments can be built in these institutions.

Third, have a set of regulatory regimes that are consistent and unambiguous.

1. Experts suggest that the government in this budget should set up an expert committee to understand the potential of the product to enable comprehensive single-window legislation among the Securities and Exchange Board of India, Reserve Bank of India, and the ministry of finance.
2. This committee can ensure that the various regulations are in sync to create large pools of domestic capital and enable domestic institutions to invest in this asset class. It is equally important to create an even wider set of domestic managers.
3. We suggest the setting up of this expert committee with experts from the regulators, ministry of finance, eminent lawyers, and experienced investment professionals from these institutions and the PE-VC industry.

Conclusion:

The Gati Shakti National Master Plan is another important step for India to upgrade national infrastructure and multimodal connectivity.

According to the Economic Survey 2019-20, India will have to invest approximately $1.5 trillion on infrastructure to become a $5-trillion economy by 2024-25.

However, while the Rs 100 lakh crore plan will have an important economic multiplier effect at home, it must also be leveraged to have an external impact by aligning it with India’s regional and global connectivity efforts.