When Jayant Sinha was shifted from the finance ministry to aviation in the recent cabinet reshuffle, the mood turned sombre in the alternative investment funds (AIFs) industry.

AIFs are investment vehicles that pool funds for investing in real estate, private equity (PE), venture capital and hedge funds. These private pools of capital have emerged as a robust and well-regulated platform for providing growth capital to small- and mid-sized companies in India that otherwise may have found it difficult to access investment from traditional funding agencies.

Sinha, by virtue of working in that sector before joining politics, had understood well the challenges faced by AIFs. In the past two years of the National Democratic Alliance (NDA) regime, Sinha had not only been instrumental in removing several bottlenecks facing AIFs, but he also helped bring about a boom in the industry.

Sinha became someone whom the AIFs could call one of their own.

Prior to Sinha assuming the mantle of minister of state in the finance ministry, the industry got stepmotherly treatment from the government; there was no one who understood the sector well.

Sinha, who was earlier heading Omidyar Network’s investment operations in India, was the quintessential insider who understood the business inside out.

“Sinha’s leadership helped in repositioning the PE industry as a strategically relevant and an important part of the Indian economic growth cycle," a PE fund manager told this writer on condition of anonymity. “He understood the industry very well, being an investor himself. But now, there is so much catch-up that will have to be done by the new leadership," he said.

During Sinha’s tenure, there had been extensive engagement between the PE industry and the government, and the biggest advantage was that the policymakers listened to what the industry had to say.

This engagement bore fruit.

For one, in the 2015-16 Union budget, the government accorded tax pass-through status to all AIF categories; it also modified permanent establishment norms to help offshore fund managers to shift to India. Also, to attract more foreign capital into the country, the government in the same budget unveiled a proposal to allow overseas entities to invest in AIFs.

Though the AIF regime has been in operation since August 2012, funds had to take prior approval from the Foreign Investment Promotion Board (FIPB) to raise capital from overseas investors.

In line with the government’s announcement, the Reserve Bank of India, in November 2015, issued a notification stating that foreign investors could invest in vehicles such as AIFs, infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) under the automatic approval route, thereby avoiding the procedural delays of going through the FIPB route.

The industry has grown at a rapid pace in the past year. The total investment commitments of AIFs rose almost fivefold to touch ₹ 17,452 crore as of June 2016 from September’s ₹ 3,800 crore, according to Securities and Exchange Board of India (Sebi) data.

The home-grown PE industry obviously gained significantly from Sinha’s grassroots level understanding of the issues plaguing the industry such as lack of tax pass-through and the need for creating a framework to bring asset management onshore, and so on.

Sinha had also been extremely helpful to the start-up community. Angel tax, a tax on start-ups which raised capital from angel investors or funds in excess of the fair value of shares, which was one of the retrograde steps taken by Pranab Mukherjee when he was finance minister, was reversed last month. This would not have been possible if the government didn’t have someone who understood how the start-up and funding industry works.

Most of the steps taken by the government had been to boost the domestic funds industry; and so, Sinha’s exit from the finance ministry is unlikely to have an impact on international investors or dollar investors. For dollar investors, there are global issues such as currency depreciation and Mauritius/Singapore tax issues to worry about.

About $100 billion has come to India in the last decade, with $22 billion coming last year alone, which is not a small number by any stretch of imagination, and any change in leadership regulating the AIFs industry is likely to draw commentary. However, if the finance ministry remains benevolent, the industry will stop missing Sinha’s presence.

Shrija Agrawal is Mint’s deals editor. Due Diligence will run every week and cover issues in India’s venture capital, private equity and deals space.

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