Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
Popular Search: TAX RATES - GOODS TAXABLE @ 4% :: empanelment :: Central Excise rule to resale the machines to a new company :: cpt :: ACCOUNTING STANDARDS :: VAT RATES :: ACCOUNTING STANDARD :: form 3cd :: ARTICLES ON INPUT TAX CREDIT IN VAT :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: articles on VAT and GST in India :: TDS :: list of goods taxed at 4% :: VAT Audit :: due date for vat payment
« News Headlines »
 Filing of online return for 4th quarter of 2016-17 — extension of period thereof
 CBDT simplifies ITR filing process from FY18
 Govt extends service tax return filing date to April 30
 No move to tax farm income, clarifies Arun Jaitley
 New board for indirect taxes to become operational from June 1
  9 changes that came into effect from April 1
 First time filing income tax? Here's all you need to know about Form 16 and Form 26AS
 New Opening Financial Controller Chartered Accountant (Manufacturing Plant) A Leading Company
 Income Tax Filing 2017: All you want to know about the single page ITR form SAHAJ
 How to benefit from investments in tax saving mutual funds
 60 per cent of income tax notices on fishy cash deposits returned

Gearing up for private equity
August, 16th 2007

Private equity (PE) is the latest financial innovation to take the world by storm.

Although there are various types of PEs, a typical one raises money from rich investors willing to play with high risk for a fixed period and look for companies or projects to invest in.

Over a timeframe of 4-6 years, the funds work to unlock value in these companies by cutting costs and improving operations.

Though historically Indian entrepreneurs hesitate to sell out their companies lock, stock and barrel, it is only a question of time before the trend reverses.

The theme of this article is not to look at statistics of PE in India but about their accounting and tax implications. The issue of valuation came to the fore in the book Private equity as an asset class (Wiley), by PE industry veteran Guy-Fraser Sampson. In that, the author recalls a transaction wherein he was a partner in an American Fund of Funds manager and three venture funds that had participated in the same venture had valued it in their annual accounts at $960 million, $480 million and 0.

The questions that arose from this situation were: Whether there is no single undisputable method of valuation?

And what value would the investor value this in his own accounts?

Although valuation is a technique that cannot put in a measurable value for a transaction that can be considered final, the problem appears to be in the methods used for the valuation and the assumptions made by the valuers.

There could be a solution in the form of fair value that is being bandied about as the cure for all accounting ills.

The Institute of Chartered Accountants of India (ICAI) has stated that it would make it mandatory for all Indian entities to adopt International Financial Reporting Standards (IFRS) with effect from 2011.

This could call for tweaking a few accounting standards and the issue of new accounting standards on financial instruments, fair value and stock options.

Tax conundrum

One of the biggest PE groups in the US, Blackstone, recently went public. A huge tax conundrum ensued because of the mechanism devised to pay partners whose shares were being diluted.

The partners were given a payment schedule of 15 years at 85 per cent of the tax that the PE fund would save because of amortisation and depreciation costs on the goodwill generated by the dilution.

Some were of the view that the amount of capital gains tax that the partners would pay on their dilution would be far lesser than the amount they would get in payments over the 15-year timeframe.

This opinion was shot back with the argument that a wrong cost of capital percentage was used to calculate future cash flows since a PE manager probably gets the best returns from the market. Thus, several valuation and tax issues could arise once PE comes into India in a big way.

It would be appropriate to think of such issues and their solutions in advance rather than wait for an issue to arise.

It is a fact that AS-23 (Accounting for Investments in Associates in Consolidated Financial Statements), AS-27 (Financial Reporting of Interests in Joint Ventures) combined with AS-13 (Accounting for Investments) and the yet-to-be-issued standard on financial instruments would tackle these niggling issues.

But matching these to international standards would take some time and effort which needs to be invested in now.

Mohan R. Lavi
(The author is a Hyderabad-based chartered accountant.)
Home | About Us | Terms and Conditions | Contact Us
Copyright 2017 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - We Bring IT. Offshore software outsourcing company. We use Global Delivery Model (GDM) and believe in Follow The Sun principle

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions