Draft Report of the High Level Group on Services Sector

Asset Management

While mutual funds in India have grown rapidly, they continue to face two key challenges, namely, short-term investment horizon and secondly, relatively low retail participation with a large part of mutual fund corpuses comprising deployment of corporate surpluses. Therefore, there is a need for a focused ongoing investor education campaign encouraging retail investors to participate in the capital markets through the mutual fund route, as also about the merits of allocation of a portion of their savings to long-term equity investments.

The VCPE investor pool in India comprises primarily foreign investors, and Indian investors are largely excluded from the benefits of this asset class. While foreign investors investing into India need not pay tax on gains from their investments due to the benefit of double taxation treaties, Indian investors in VCPE funds are taxed; through recent amendments to the tax laws, trusts used to pool VCPE monies for investment have been denied tax pass through status unless the investments are made in a few specified sectors. These factors place VCPE funds at a disadvantage to mutual funds, both in terms of access to investors as well as tax treatment. The relevant provisions of tax laws may be reviewed given the critical role played by VCPE funds in providing longer-term capital for growth and restructuring of enterprises.
Pension Reforms

Along with Public sector entities, an appropriate level playing field for Private sector banks and insurance companies is recommended for managing the pension funds. Further, the new pension scheme should be extended expeditiously to unorganized sector employees. Finally, all categories of pension and provident funds should be permitted to diversify their investment portfolios, shifting from the current excessive share of government securities to various categories of corporate debt, securitized paper, and an appropriate proportion of equity investments. Alternate asset classes may also be considered in due course.