Domestic companies raising private equity funding in the near term are likely to face increased scrutiny from tax sleuths looking for instances of round tripping.

Multiple sources have told The Indian Express that over half-a-dozen domestic companies that have raised private equity funding in the past few months have received queries from the income tax department seeking detailed information on the source of funds as well as questions related to the identity of some limited partners ( LPs) of the investing PE fund.

In the private equity industry LPs are essentially individual and institutional investors who commit capital to a PE fund, which acts as a general partner or GP. A sizable chunk of domestic PE funds currently raise money from multiple tax jurisdictions overseas to invest in unlisted Indian companies. According to Bain & Co, India received a record $22.4 billion in PE investments in 2015 and $2.3 billion between January and March.
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Sources in both the I-T department and the PE industry described the queries as routine but said that the frequency of such queries have risen sharply off late and are understood to be driven by concerns that some promoters could be using the PE route to channel black money as legitimate investments, also known as round tripping.

“Soon after we invested in a company we were called by I-T department to provide details of our investors ,” said a senior partner of a mid-sized domestic PE fund who did not wish to be named.
Another fund manager of a large domestic buyout fund also admitted receiving similar queries from the I-T department and said, “They wanted to know if the promoters of the company we invested had any financial involvement in our fund in any manner”.

Senior income tax officials, however, clarified that the queries are not related to any ongoing investigation similar to the Enforcement Directorate (ED) probe into money laundering allegations against Sequoia Capital and WestBridge Capital with regard to its investment in Vasan Healthcare in the 2009.

“The tax department can seek information from an assessee if required. No investigation has been ordered against any of these companies so far as of now,” the official said.

In July 2015, the SIT had proposed a series of measures to curb money laundering and round tripping. Based on these recommendation the Securities and Exchange Board of India (Sebi), last week stipulated that Indian KYC (know your customer) norms would be applicable to all issuers of offshore derivative instruments including P-Notes that is used by foreign investors to trade in listed securities of Indian firms.

Under scanner
Sources have told The Indian Express that over half a dozen domestic companies that have raised private equity funding in the past few months have received queries from the income tax department seeking detailed information on the source of funds as well as questions related to the identity of some limited partners ( LPs) of the investing PE fund

According to Bain & Co, India received a record $22.4 billion in PE investments in 2015 and $2.3 billion between January and March.

Last week Sebi stipulated that Indian KYC (know your customer) norms would be applicable to all issuers of offshore derivative instruments including P-Notes which are used by foreign investors to trade in listed securities of Indian firms.