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Investments in PFC's VC fund may qualify for I-T exemption
December, 29th 2006

The power ministry has proposed fiscal breaks for contributions to the India Power Fund, a venture capital fund to be floated by Power Finance Corporation for investments in the power sector.

The government is considering an income-tax exemption up to 20% of the total contribution to the India Power Fund in an bid to facilitate investments to this sector,. The proposal which is a part of the budgetary wish list put forth by the power ministry is expected to go a long way in meeting the goal of Power for All by 2012. The sector will require investments to the tune of $200 billion to set up the additional capacities in the electricity sector.

The India Power Fund is a venture capital fund to be set up by the Power Finance Corporation of India. PFC is looking at formally establishing the fund in the first quarter of 2007.

Not only will the tax break help mop up funds for the sector, it will help kick start the India Power Fund, which has been in the making since February 2004.

It is hoped that the income tax break of 20% per year of the contribution to the fund for five years, will help garner funds, which the Power Finance Corporation can then invest in power sector projects. The proposal comes at a time when the Reserve Bank of India has raised the risk weightage requirement, forcing possible investors in the fund to back off.

PFC has been in talks with LIC and other banks for contributions to the fund. However the RBI guidelines seem to have paid put to any such partnerships. Earlier PFC had considered starting the fund on its own in case LIC and banks decline to contribute to the fund. This the Corporation would do by converting the fund into a mutual fund with contributions from retail investors.

In such a situation an income tax break will be welcome and help getting the fund of the shelf. The India Power Fund in February 2004 by Anant Geete power minister in the NDA government to meet the shortfall in equity needs for the power sector. The fund was shave an initial corpus of Rs 200 crore contributed by the Power Finance Corporation, and was expected to increase to Rs 7,000 crore. The funds was however never formally registered.

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