Structuring a Venture

Capital Fund - Tax and

Regulatory Aspects
July 2012

Contents for discussion

Domestic Pooling Aspects to be Considered
Typical Fund Structure
AIF Regulations Key Aspects
Foreign Investment in Domestic Pooling Vehicle
Unified vs. Co-invest

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

Domestic pooling Aspects to be considered

Category of
investors

Taxation issues

Number of
investors

Aspects to be
considered

Period of
investments

Target
sectors

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

Typical Fund Structure

Typical Fund Structure

Investors

Management fee + carry

Pooling

AMC

vehicle
Management
agreement

Target

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

Alternative Domestic Pooling Structures

NBFC

VCF

PMS

AIF

LLP

Unregistered
trust

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

Typical Fund Structure - Key issues

Need for flexibility in making investments
Overseas presence for management activities
Costs involved in set-up and time lines for set-up (including approvals etc.)
Characterization of income on sale of investments
Deductibility of carried interest / management fee against exit gains

Taxation of AMC
o

LLP structure

Carry taxation
-

Capital gains v. Business income

Service tax issue

Tax compliance
o Tax payments, credit distribution, etc

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

AIF Regulations Key

Aspects

AIF Regulations Categories of AIF

SEBI released AIF Regulations on May 21, 2012 to regulate all funds established in
India, raising funds from Indian or foreign investors

CATEGORY I

CATEGORY II

CATEGORY III

AIFs with positive spillover effects

on the economy

No incentives given by SEBI, GOI,

or other regulators in India

AIFs which trade for making short

term returns

Incentives given by SEBI, GOI, or

other regulators in India

VCF,
SME Funds,
Social Venture funds,
Infrastructure funds

Employs diverse or complex

trading strategies

Private equity funds,

Debt funds,
Other funds not classified under
Category I or III

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

Hedge funds

AIF Regulations Key conditions applicable to all AIFs

Registration

Any fund established or incorporated in India (excludes offshore funds)

Form of AIF

Trust or a Company or a LLP or a body corporate

Family trusts,
ESOP trusts,
Employee welfare trusts,
Exclusions from
AIF Regulations

Gratuity trusts,
Holding companies,
SPVs not managed by fund managers and regulated by other regulators,
Securitization / reconstruction companies registered with RBI,
Funds regulated by SEBI /any other regulator in India

Minimum corpus
Maximum
investors

INR 20 crores

1,000 investors

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

10

AIF Regulations Key conditions applicable to all AIFs

Minimum
contribution per
investor

INR 1 crore from investor (INR 25 lakhs from employees or directors)

Sponsor
contribution

Continuing minimum Sponsor contribution - at least 2.5% of the corpus or

INR 5 crore, whichever is lower

Listing

Possible for closed ended AIFs with minimum tradable lot of INR 1 crore,
however funds are not to be raised through the stock exchange mechanism

Foreign
Investments

May invest in securities of companies incorporated outside India (subject to

conditions of RBI / SEBI)

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

11

Foreign Investment in
Domestic Pooling Vehicle

Foreign Investment in Domestic Pooling Vehicle

Set up as a
Company

FIPB approval not required for investment in a company registered with

SEBI as an VCC. Only Category I AIFs can be VCC.
FIPB approval required for AIFs under categories II and III.

Prior FIPB approval required for making foreign investment in Trust.

Set up as a Trust
On repatriation RBI approval would be required.

Prior FIPB approval required for making foreign investment in LLP.

Set up as a LLP
FVCI not allowed to make any investment into LLP.

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

13

Unified Vs. Co-invest

Unified vs. Co-investment structure

Unified

Co-investment

Investors

Investors
Co-investment
arrangement

FDI / FVCI

Offshore
AMC

Fund
management
agreement

FDI / FVCI

Offshore

India

Domestic
AMC

Offshore

Domestic
investors

Management
agreement

Domestic
investors

Investment
advisory
agreement

DVCF/
AIF

Investee
companies

2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Domestic
AMC

India

Investment Management
Agreement

DVCF/
AIF
Investee
companies

15

Glossary of Terms
VCF

Venture Capital Fund

DVCF

Domestic Venture Capital Fund

SEBI

Securities and Exchange Board of India

AIF

Alternative Investment Funds

AIF Regulations

SEBI (Alternative Investment Funds) Regulations, 2012

SEBI VCF Regulations

SEBI (Venture Capital Funds) Regulations, 1996

FVCI

Foreign Venture Capital Investor

GOI

Government of India

SME

Small and Medium Enterprise

LLP

Limited Liability Partnership

SPV

Special Purpose Vehicle

VCC

Venture Capital Company

FIPB

Foreign Investment Promotion Board

FDI

Foreign Direct Investment

2012 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.

16

Thank You

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation.

Annexure 1

Alternate Domestic Fund Structures

Structure
NBFC

Key Benefits

Key Concerns

Regulated Entity
No restrictions on Advisory fee
Carried interest, if any, could be in the form of
fees

Tax inefficient
RBI Prudential norms to be adhered to
RBI registration

Can invest across listed and unlisted securities

Regulated by SEBI
Pass through treatment for tax purpose

Investment to be held directly in the name of investors

and not through pooled account
Liquidity

- Listing of PMS scheme not possible

- PMS scheme to mandatorily provide for an exit
option to investors

PMS

Fees to be linked to drawdown and not commitment

Applicability of AIF regulations in case of pooling of
funds?
Pass-through treatment for tax purposes
- Tax is applicable at the LLP level and distributions
are not taxed ensuring one-level taxation

LLP

Unregistered Trust

Limited liability of partners

No restrictions on management fee

Pass-through treatment for tax purposes

No restrictions on Advisory fee
No restrictions on investment in group companies

2012 KPMG, an Indian Partnership and a member firm of the KOMG network of independent member firm affiliated with KPMG
International Cooperative (KPMG International), a Swiss entity. All rights reserved.

Low on investor comfort

Liquidity to investors - No mechanism for listing of
LLP
Characterization of income (Business Income v/s
Capital gains)
RBI approval
Applicability of AIF regulations
Registration under AIF regulations
Post AIF regulations should be on same footing as
DVCF
18