Draft Report of the High Level Group on Services Sector

6.2.3 Asset management

The asset management sector in India has been substantially liberalized and privatized, with full foreign ownership permitted in asset management companies. This has led to robust growth in the sector, with Indian asset management companies competing effectively with foreign players. The key recommendations with respect to the asset management sector are:

1. 
   Improving effectiveness of mutual funds: 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. 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.
   

2. 
   Rationalising regulations for venture capital & private equity (VCPE) funds: The VCPE investor pool in India comprises primarily foreign investors, and Indian investors are largely excluded from the benefits of this asset class. The reasons for this are two-fold. Firstly, unlike internationally where institutional investors constitute the primary investors in VCPE funds in addition to high net worth individuals, in India the ability of institutional investors like banks, insurance companies and pension funds to invest in this segment is constrained or non-existent. This is anomalous given that banks and insurance companies have the necessary financial expertise to undertake a risk-reward assessment of such investment proposals. Secondly, 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. These provisions may be reviewed given the critical role played by VCPE funds in providing longer-term capital for growth and restructuring of enterprises.