India’s PE/VC deals may decline by 45-60 per cent due to pandemic

V Nagarajan

With the COVID-19 global outbreak and stipulation of lockdowns, the Indian Private Equity/Venture Capital (PE/VC) investments in 2020 are expected to be at $19-26 billion, a reduction of about 45 per cent -60 per cent from the 2019 levels, says a survey by EY on the impact of pandemic.

Real estate Private Equity/Venture Capital investments grew by 33 per cent in 2019, largely on the back of large commercial real estate portfolio deals funded by large, global asset managers that were acquiring portfolios of premium yield generating assets across office, retail, warehousing and hospitality real estate segments.

The success of India’s maiden REIT listing in early 2019 and acceptance of this new security class by institutional investors prompted many large investors/owners of quality commercial real estate to draw up REIT listing plans. Post COVID-19, value of PE/VC investments in real estate plunged to a dribble ($8 million).

The country-wide lockdown and social distancing norms have completely disrupted the business operations of tenants. Going forward, owners of commercial real estate portfolios face considerable headwinds on matters related to deteriorating credit rating of tenants, future drop in tenancies and utilisation ratios, rental defaults, potential oversupply and consequential drop in future rentals. Till more clarity emerges on the timing of removal of lockdown, social distancing stipulations, how COVID-19 will impact future customer behaviour, stimulus by the Government for the real estate sector and time period for normalcy to return, EY do not anticipate any significant real estate PE/VC investments in the near-to-medium term.

Infrastructure was the primary growth driver behind the 28 per cent increase in annual PE/VC investments from 2018 to 2019. Its 225 per cent growth in PE/VC investments over 2018 levels was primarily driven by the acceptability of Infrastructure Investment Trusts (InvITs) by large global asset managers, attracted by the promise of their long-term, stable, tax-efficient yields. Prior to COVID-19, the Finance Bill 2020 had anyway given rise to some questions on the post-tax returns available to InvIT and Real Estate Investment Trust (REIT) investors, thereby impacting sentiment. Coupled with the significant depreciation in the Indian Rupee vs. the USD and the prevailing foreign currency volatility seen post COVID-19, the value of PE/VC investments in infrastructure ground to a virtual halt in March 2020 ($3 million).  Going forward, it is expected that PE/VC investors making large infrastructure investment bets to be circumspect and evaluate transactions more stringently and go in ‘wait and watch mode’ for some time. Investors may need time to understand and digest the potential impact of this crisis on the balance sheets of the InvIT sponsors, future cash flow projections from the infrastructure assets, projected future currency depreciation and India’s macroeconomic health.

PE/VC exits are expected to reduce by 50 per cent-67 per cent per cent to below US$5 billion, adds the study. Highlighting how general partners will manage the crisis in 2020, the study states that they will give more attention to the business continuity of their current portfolio companies, seek attractive private investment in public equity (PIPE) transactions and are also likely to favour growth capital investments over buyouts.

I am due to enter into a joint venture agreement with a developer for promotion of my family land for residential development in Ahmedabad. What are the tax implications while seeking such an arrangement with a developer? Manoj Trivedi, Sharjah.

In a major relief to the landowners planning to part their land for joint venture development, from the assessment year 2018-19, the tax liability has been postponed from the year of transfer of land to the year of completion of the project. Additionally, the stamp duty value of your land, on the date of issue of completion certificate, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration in the transaction. In the event of your transferring your share in the project on or before the date of issue of completion certificate, the capital gains shall be deemed to be the income of the previous year in which such transfer takes place.

I own commercial property in Bengaluru and wish to raise short-term funds by mortgaging the unit. What are the procedures involved while mortgaging the unit to a financial institution? Please clarify. Prakash Chandnani, Dubai.

You can mortgage the commercial property without the need to obtain permission from any quarters. NRIs/PIOs can mortgage their assets to an authorised dealer/housing finance institution in India without the need to obtain approval from the Reserve Bank of India. However, if you wish to mortgage the property to a party abroad then prior approval of the apex bank is required.