Finance minister P Chidambaram's announcement that venture capital (VC) funds for infrastructure would be allowed pass-through status comes as a relief to the sector.

With this, large amounts of funds could flow into infrastructure financing, which is expected to require over $360 billion in the next few years, of which $90 billion would be in form of equity.
 
India Infrastructure Finance Company Ltd (IIFCL) chairman SS Kohli said the move would provide a boost to the sector in the long run. There would be huge requirements of funds in the next few years. The move would particularly help in infrastructure funding, especially the equity component, Kohli said.

At present, the infrastructure sector receives very little VC funding, analysts said.

Of the total 42 VC funds in the country, around five are involved in infrastructure funding.

At present, VC funds enjoy complete pass-through status under Section 10 (23FB) of the Income Tax Act, irrespective of the nature of income. However, Budget 2007-08 sought to restrict the pass-through status for VC funds and VC companies to only income from investments in domestic unlisted company in certain specified sectors, including information technology and biotech. Infrastructure sector was not included in the list.

This was also discouraging VC funds from making long-term investments in sectors like infrastructure and real estate.

Investments by VC funds in India have doubled to more than $1000 million in 2007 from $320 million in 1999. VC funds mostly invest in sectors with high growth but with inherent uncertainties. India has been one of the most active markets among other Asian economies for VC funds.