On Private Equity Fund Restructuring & Taxation

You can buy mutual fund,buy public equity like shares of Reliance

But if a person requires 5million USD in the span of 4-5 weeks. And a person having that
amount and is ready to invest that money for the period of 2-3 years, he is also looking for a
triple digit return ( 200%) in that span.
In this case, a person invests his money in Private Equity Funds.

Private Equity (PE): There are few people who have funds, but they don’t have the adequate
knowledge, where to channelise the funds.

There are two people involved in PE :

1. Limited Partners : These are the ones who invest the capital.
2. General Partners : They are ones who manage the funds, Fund Managers. (Having a
track record of returning the money in past few years)

Investors choose the sector, geographical locations as per their vision.

There is an agreement between the General Partner and Investors, wherein it is stated a certain
percentage of return.
General Partners draws the money as required and the Limited Partners has to invest the
money when required.
So, exit of an investment can be made only methodically ( like IPO, further investment )

These fund managers firms do not want to be regulated. Like Black stones, etc .
All the foreign companies come to India to invest, via Foreign Direct Investment, thus dodging
the traditional regulations.

There are certain unwritten rules :

The General Partner ensures the investor the complete pay back of the capital with a certain
percentage of ( 10%, let’s say) return.
First year, 10% profit goes to Investors, then after the Hurdle rate, consequent year profit is
distributed in 80:20 ratio b/w General partners and investors( getting the 80). So, typically 20%
is what a General Partner gets, for his job ( Generally speaking).

Example
Money has been invested by all the investors ( 10 crores), for say 5 years. No other funding
machinery was ready to invest in the company. Now, post this funding, the valuation of the
company shoots up.

These investors are the people who don’t want to pay the taxes, thus creating a tussle. They are
generally set in the Cayman Islands. ( Earlier Mauritius, Singapore) .
Indirect taxation : Broadly, GST will not be applicable on the investors because of no exchange
of goods or service. But Fund Managers do attract indirect tax.

So, US investors have got a typical tax structure, due to its legislation. Therefore, a third country
comes into the picture.

Leverage buyout : When an investment