Are PE firms taking cover from tax uncertainty?

By Shrija Agrawal (VCCircle.com)

Such a trend, which may be in the nascent stage in India, is actually more rampant in the West.

Private equity (PE) investors, it appears, are looking at insurance solutions to cover them from risks arising from changing tax rules in India, a recent news report in the Economic Times said. A growing number of overseas investors, especially PE funds, which put money in Indian companies, are buying tax-liability insurance covers, which provide protection from uncertainty in tax laws.

VCCircle spoke to a few leading lawyers, who are deeply engaged in the PE space, and found that such a trend, which may be in the nascent stage in India, is actually more rampant in the West. Comments:-

Vijay Sambamurthi, Founder, Lexygen: Recurring regulatory inconsistency could lead to significant loss of confidence among businesses. It is not good for our economy if overseas investors feel compelled to insure themselves against the risks of regulatory and tax uncertainty.

This reminds me of the years following the Enron controversy, when insurance companies globally made a killing out of selling political risk insurance to businesses looking to invest in India.

But, I do not think it is yet a very established trend that PE investors are buying regulatory/tax uncertainty risk insurance for their India deals. But, that day, when it becomes commonplace, may not be far away if we continue to produce more such rabbits out of the hat like in the Vodafone case.

I have heard of a couple of instances where PE investors have bought insurance cover for their deals. But, these instances are not a major wave yet, and have thus far been limited to deal structures which involve sale of shares of an overseas company, which owns an Indian company’s shares.

There certainly is a very high degree of concern and uneasiness among investors since the Vodafone case, and I very frequently get queried in detail about the “Indian tax uncertainty risk” by concerned PE clients even in cases of straightforward investment.