Private Equity investment and its taxation

Private equity:

Private equity is an alternative investment class in which investors directly invest in private companies that are not listed on a public exchange. VC/PE industry has emerged as a potential source of capital for the corporate sector and Most PE-VC (Private Equity-Venture Capital) firms operate under a unique legal framework known as the Limited Liability Partnership (LLP) framework. private equity (PE) funds may consider purchasing stakes in public companies with the intention of de-listing from public stock exchanges to take them private.

Private Equity investment and its taxation

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PE/VC firms are very similar to mutual funds where capital is pooled and is later invested in various instruments but unlike mutual funds usually, in publicly traded companies, PE/VC firms invest in private companies and are only open to institutional investors, HNIs, UHNIs & Investment Banks because they are the only ones who can afford to invest large sums of money for longer time horizon (8 -10 yrs) since these companies generally take a long time to be mature and even be cash flow positive, they are not liquid, they also have a high ticket size (10 Cr) and even though they have huge potential, they are also extremely risky since statistically around 9 out of 10 ventures fail.

Structure of a PE fund:

There are mainly 2 participants in a fund:

  • General partners (GPs): GPs have the right to manage the private equity fund and to pick which investments they will include in their portfolios. GPs are also responsible for attaining capital commitments from LPs. GPs are liable to debts or obligations of the fund if turns negative.
  • Limited partners (LPs): They do not influence investment decisions and they are usually pension funds, endowments, insurance companies, HNIs, and UHNIs. LPs are liable for up to the full amount of money they invest in the fund.

Functions of PE funds:

PE funds perform various functions based on the type of investment:

  • Venture capital (VC): They provide funding opportunities for an early-stage start-up with huge potential for a high rate of return. These are inherently more risky since they little more than ideas at the time of a pitch and haven’t yet proven their ability to turn a profit.
  • Growth Equity (GE): They provide funding opportunities for usually smaller growing companies in exchange for company equity, typically a minority share. They are less risker than VC because they have a proven track record.
  • Buyouts: They acquire public companies and de-list them from public stock exchanges to take them private. There are 2 types of buyouts – i) Management buyouts and ii) Leveraged buyouts.

Also read : Investors guide to corporate credit rating

Indian private equity space:

Prior to 1997, the Indian private equity market was very small and mostly based on official funding from the Government and multilateral agencies such as World Bank, IFC, CDC, and DFID but this has changed in recent years and since 2003, private-equity firms have invested more than $100 billion in India and this amount excludes funds invested in real estate assets and venture capital. The private equity segment has also played a crucial role in the growth and development of many small and medium-sized enterprises and many companies have been able to take advantage of this vital funding source. The Private Equity-Venture Capital (PE-VC) backed companies are helping in building India into an economic superpower by bringing in new business models, creating new jobs, backing entrepreneurs, and helping fund financial inclusion, better infrastructure, increasing renewable energy, and promoting capital efficiency in the Indian economy.

In recent times attractiveness of India in the private equity space has increased and In this past decade, the value of Indian PE/VC investments grew from $8.4 billion in 2010 to $47.5 billion in 2020, a CAGR of 19%, and A major portion of these investments came in the last four years, accounting for 68% of all the PE/VC investments made during the decade, growing at a CAGR of 31%. The PE-VC ecosystem in India has become resilient after withstanding the challenges of the pandemic and this can be observed as the number of deals as well as the investment values have increased and the Private Equity-Venture Capital (PE-VC) firms invested a record $49 billion (across 840 deals) in Indian companies during the first 9 months of 2021 and this figure has already surpassed the full-year investment total of $39.5 billion (across 892 deals) in 2020. PE/VC investments in 2021 have recorded an all-time high both in terms of value and volume. The dollar value of PE/VC investments in 2021 recorded US$77 billion, 62% higher than $47.6 billion recorded in 2020.

The table below represents the PE/VC investment trend in India:

PE investment taxation on investors:

In the case of private equity investment, LTCG (Long term capital gains) tax rules are applicable if the holding period is 24 months or more and is computed as 20% of gains with the benefit of indexation, also there would be a surcharge applicable, which is 10% if income is above Rs. 50 lakh, 15% if the income was between Rs. 1 crore to Rs. 2 crores, and 25% if the income was above Rs. 2 crores and up to Rs. 5 crores. In case the income was above Rs. 5 crores the surcharge was 37% but in the 2022 budget, the surcharge has been capped at 15%.

STCG (Short term capital gains) tax rules apply to investments that have a holding period shorter than 24 months and will be based on the Income Tax slab rate of the investor for the Financial Year.

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The global macro has impacted India’s investment opportunity in a much more favourable way and most PE/VC investors are inclined towards investing increased amounts in larger deals and growing on the strong foundation laid in the previous decade, the Indian PE/VC industry is expected to emerge as a focal point of global investment flows having risen to be amongst the top three most preferred destinations for global LPs. Large corporates acquiring start-ups to augment their e-commerce and technology capabilities are expected to be one of the major drivers of PE/VC exits in the coming decade.

Even though the prospect of PE/VC fund seems to be in an upward trajectory in India with many unicorns popping up (In 2021, India witnessed the birth of 44 unicorns with a total valuation of $ 94.37B), there are some barriers to entry as such type of AIF (Alternative Investment Fund) are only available for sophisticated investors, who can part ways with large sums (minimum of 1Cr) of money was a long period of time and comfortable with high risk. There are also limitations specified under the AIF regulations for the number of investors as such every scheme of an AIF (other than an angel fund) should have below 1000 investors and in the case of an angel fund, the scheme can have not more than 49 angel investors. So HNI investors who fulfill the requirements and would want to get exposure to PE/VC can invest in one of the many PE/VC fund available after assessing the risks.

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This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit

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