Page 57 - Banking Finance May 2025

FEATURES

Tax clarity on AIFs, a good start

B udget 2025-26 delivered a long-awaited tax However, with rapid expansion has come greater regulatory
scrutiny.
clarity for Alternative Investment Funds (AIFs) in
Categories I and II, aligning them with Foreign
Portfolio Investors (FPIs). The Finance Minister's
revealed at a CII summit that Rs. 1 lakh crore, or nearly a
announcement that AIFs will now be taxed under capital Ananth Narayan G, wholetime member of SEBI, recently
gains instead of business income is a crucial step in making fifth of all AIF investments, are under scrutiny for potential
India's alternative investment space more predictable and regulatory circumvention.
attractive for investors.
According to SEBI, certain AIF structures have been misused
This move significantly reduces the tax burden on AIFs, with to bypass regulations on nonperforming assets (NPAs), the
rates dropping from over 30 per cent to 12.5 per cent, and Insolvency and Bankruptcy Code (IBC), and the Foreign
brings much needed certainty for institutional investors and Exchange Management Act (FEMA). This exposes a larger
ultrahigh net worth individuals (UHNWIs) investing in private systemic issue - information asymmetry in the AIF industry.
equity, venture capital, and infrastructure projects. By Investors often lack clear disclosures on fund costs,
formally classifying securities held by AIFs as capital assets, performance benchmarks, and distributor commissions,
the government has removed a major compliance hurdle, making it difficult to assess true risks and returns.
ensuring uniform tax treatment and reducing ambiguity in
investment planning. Misaligned Incentives
One of the biggest challenges in AIF regulation is the role of
SEBI's Role distributors and without reforms, AIFs will continue to favour

However, while the Finance Ministry has done its part, the fund managers and intermediaries, eroding trust in what
responsibility now shifts to SEBI. The tax issue may be should be a robust and dynamic investment class wealth
settled, but the broader regulatory challenges facing AIFs managers, who often push these funds based on commission
remain unaddressed. Without deeper structural reforms, structures rather than investor needs. Unlike mutual funds
India's alternative investment space risks becoming a high and portfolio management services (PMS), AIFs still allow
cost, opaque, and distributor driven market that high upfront and trail commissions, creating misaligned
disproportionately benefits fund managers and incentives for financial intermediaries.
intermediaries at the expense of investors. Over the past
decade, AIFs have emerged as a preferred investment Many AIF investors are not fully aware of the total expenses
vehicle for sophisticated investors seeking diversification involved, as funds are not required to disclose Total Expense
beyond traditional asset classes. Ratios (TERs) or provide standardised risk adjusted returns.
SEBI's decision to ban upfront commissions in mutual funds
Their flexibility allows them to invest in start-ups, private and PMS has only driven more distributors toward AIFs,
credit, distressed assets, and infrastructure projects. where fee structures remain opaque and less regulated. This

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