There is a need to eliminate tax and regulatory hurdles so as to lure foreign investors to India based funds, as private equity (PE) firms witnessed nearly 22 per cent fall in terms of value in 2012, a report has said.

According to a report by Ernst & Young titled "Private Equity: Breaking Borders", if India needs to compete with global financial hubs, it is imperative for the government to formulate a conducive foreign investment policy that gives foreign investors a sense of comfort while choosing India as a location for pooling such funds.

"The current regulatory and tax framework for PE funds needs suitable amendments to facilitate the smooth inflow and repatriation of capital from the country," Ernst & Young National Tax Leader Sudhir Kapadia said.

Kapadia further said the Government needs to put in place a simple and robust framework that does not cast unnecessary compliance burden on foreign investors. Moreover, the government needs to work on eliminating multiple levels of taxation, simplifying tax payment and ensuring certainty in tax laws to attract foreign investors to India.

A significant portion of PE funds that are dedicated for investments in India are currently pooled in offshore countries, such as Mauritius and Singapore, due to attractive tax and regulatory frameworks prevalent in those countries.

This scenario could change for the better if the Indian government undertakes some regulatory and tax easing measures.

Key regulatory recommendations, that could boost PE investments include foreign investment in SEBI registered Alternative Investment Funds (AIFs), that should be allowed under the automatic approval route.

The key tax recommendations that could boost PE investments include the pass-through system of taxation for India-domiciled AIFs and the income derived by foreign investors in SEBI-registered AIFs should be exempt from tax, the report said.

PE investments in India outplayed all sources of capital as only USD 1.3 billion was raised through IPOs (excluding IPOs by public sector undertakings) in 2012, compared with USD 7.6 billion through PE investments.

With India poised to become the second largest economy in the world by 2050, PE investments need to be encouraged to bridge the gap between the needs of the Indian economy and the ability for public funds to meet the same, the report said.

PE firms have invested about USD 7,537 million in India over 415 deals in 2012, compared to USD 9,641 million they invested across 446 deals during the previous year, a fall of 21.8 per cent in terms of value, E&Y said.