A SEBI committee has come out with proposals for launch of Dedicated Infrastructure Funds (DIFs) by mutual funds. It has proposed additional tax exemption of Rs.1 lakh for investing in DIF but with a 7 year lock in period. Also, capital gains arising on account of the transfer of long-term capital assets may be exempted from tax if the capital gains are invested in DIF units.

DIFs largely invest in unlisted companies in the infrastructure sector, with longer gestation periods. Till now, only venture capital funds invested in such projects leaving out retail investors due to inability to meet minimum investment requirements thus missing out on company’s growth phase prior to it being listed.

It is also recommended that DIFs should operate as closed-ended schemes with a maturity of seven years, with the possible extension of the duration to a further seven years. They shall be allowed to invest up to 100% of its funds into unlisted securities while limiting its exposure to unlisted companies to 10% of NAV.

The committee has also recommended that DIFs should be listed on stock exchanges to provide liquidity to retail investors within 2 years of launch of scheme. The exit options suggested are initial public offerings, strategic sales or buybacks.

Once the recommendations are approved, it is expected that all SEBI registered AMC would launch these funds. Apart from retail investors, companies and FIs can also invest in them.

As regards tax incentives, it is recommended to given only to original investors and not subsequent buyers of the scheme. Though to make DIF a success, it is necessary to provide tax sops as without it no retail investor would be motivated to invest in them.