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Explained: Role of alternate investment fund in sale of stressed assets

Updated : January 31, 2021 01:43 PM IST

To speed up the sale of distressed assets, veteran banker Uday Kotak has suggested that the time is right for multiple bad banks with an alternate investment fund (AIF) structure. S Srinivasan, MD of Kotak Investment Advisors spoke to CNBC-TV18 to explain this further.

What is an alternate investment fund?

Srinivasan explained, “It is very different from a mutual fund and it essentially raises money under the Sebi regulations meant for large investors. There is a minimum ticket size of Rs 1 crore and most of us who manage large funds typically raise money from global institutional investors like sovereign wealth funds, pension funds, etc. and I think large family offices and HNIs also participate in the AIF structure. So, these are capital providers who have very high risk appetite and they are happy to take the risk of participating in ventures where they may lose capital as well.”

Also Read: Explained: Will Budget 2021 take AIF route to resolve stressed assets issue?

What is AIFs role in purchase of stressed assets?

Srinivasan said, “These funds are managed by like us and other managers – it could global or Indian like KKR, Blackstone for example. We have developed over the period of time skillset to buy a non-performing loan and do whatever is required to either recover the underlying loan or to turnaround the company if the company is likely to have a good business prospect going forward.”

Tax angle on AIF route

He said, “Most of the AIFs are structured as a trust in India. At present the tax regulation allows a pass-through of income which means an investor, let us say a sovereign fund or pension fund which is an investor in an AIF will pay tax according to wherever jurisdiction he is coming from. So the pass through currently is available only for equity i.e. capital gains and interest income. Technically the pass-through is not available to what is called a business income. When we make a gain on a non-performing loan acquisition, the tax authorities could potentially assess it as a business income. What we are simply saying is that that business income should also be given a pass-through. Nobody is saying we will not pay taxes; whoever is the investor, wherever they are, they will pay whatever is the tax due on that income. That is a simple way to address it. Otherwise, another way to address it is to just call it capital gains. It is up to the government to decide what they would like to do.”

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