Indian Financial Markets

Private Equity and the IPO Market 51

In 2006, there were 80 domestic PE and 39 foreign PE funds in India. Most of

the foreign PE funds (all but one) were based out of Mauritius.

2

Since Mauritius

has a tax treaty with India, routing the funding of the PE means a lower tax

burden on the investors in the PE fund.

In fact, the high rate of capital gains tax imposes a transaction cost on the

PE firms operating in India. Further, the recent environment has become more

expensive in terms of the taxation of PE firms. For example, for PE firms regis-

tered with SEBI, the income earned from investments in portfolio compa-

nies would normally not have been liable to tax. Instead, investors of the PE

firm would have been liable for taxes on amounts distributed by