India's Tax Structure: Exporting Rupee Credit Market to Foreign Investors

Srini Sriniwasan, managing director of Kotak Alternate Assets Managers, discusses the evolving landscape of the alternative investment fund (AIF) industry in India, highlighting the need for taxation reforms to encourage domestic investment in the credit market.

IndiaTax ReformAifReal EstateCredit MarketReal Estate MumbaiOct 02, 2025

India's Tax Structure: Exporting Rupee Credit Market to Foreign Investors

Real Estate Mumbai:Taxation reforms are necessary to encourage more domestic investment in the credit markets and to address disparity in rates between domestic and foreign investors, says Srini Sriniwasan, managing director, Kotak Alternate Assets Managers. In an interview with Khushboo Tiwari in Mumbai, Sriniwasan discusses the evolving landscape in the alternative investment fund (AIF) industry. Edited excerpts:

Which sectors are attracting the maximum interest from AIFs?

Real estate continues to be an attractive sector for investment. However, the fastest growth in AUM over the past couple of years has been in credit strategies, which are poised to become a significant segment within Indian AIFs. Within real estate, credit strategies are also gaining traction. For example, we are raising our third corporate credit fund after successfully closing our first two at $1 billion and $1.5 billion respectively, targeting $2 billion this time. Out of our nearly $10 billion AUM, about $8.5 billion is focused on credit strategies. We also run high-yield schemes aimed at international investors who understand and are prepared to bear the associated risks.

How do you see competition from specialised investment funds (SIF)?

They are expected to be formidable competitors to Category III AIFs. Unlike India, international markets do not classify alternative funds into I, II, or III categories; these distinctions stem from historical tax regimes. Alternative funds typically focus on unlisted assets, and in essence, there is little difference between Category III AIFs and Portfolio Management Services.

How do you see Sebi’s push towards accredited investors in AIFs?

Until now, the definition of a sophisticated investor has primarily been based on a financial threshold—holding assets of ₹1 crore or more. However, many individuals meet this criterion without fully understanding the risks involved. With increasingly complex and riskier products emerging, the approach to accreditation needs to evolve. Globally, accredited investor status is often based on self-declaration, whereas in India, regulators rely on third-party verification. This process, if cumbersome and costly without tangible benefits, discourages investors from obtaining accreditation. The industry is actively working to simplify this through seamless digital solutions, exploring options involving depositories or the Income Tax Department. Meanwhile, a phased approach has been introduced with specific funds to cater exclusively to accredited investors.

Are there any regulatory relaxations you see as necessary from Sebi?

Sebi has made significant progress over the last year. Discussions around tiering investors into categories such as preferred and junior unit holders initially faced resistance due to potential risks of misuse. However, with a robust code of conduct and industry maturity, these concerns are being addressed. This tiering is crucial as the bond market is heavily skewed towards AAA and AA ratings. AIFs have the potential to channel funds to MSMEs and invest in lower-rated bonds, which sophisticated investors can handle given their risk appetite.

Is there any relief the AIF industry is seeking on taxation?

Currently, foreign and domestic investors pay the same capital gains tax on equity, the highest risk asset class. The mutual fund industry has become a counterbalancing force for the foreign investment capital. It begs the question: why not encourage large investors to increase allocation towards credit strategies? Presently, high-net-worth individuals pay nearly 40 per cent tax on interest income while foreign investors pay just 15 per cent. This tax structure inadvertently exports India’s rupee credit market to foreign investors. Reforming this is essential to retain and grow domestic investment in credit.

How do you view the recent RBI circular relaxing earlier curbs on AIF investments?

The main concern Sebi raised with RBI was that some NBFCs used AIF structures to perpetuate loan ever-greening, particularly in collusion with certain foreign investors who had no genuine interest in the AIF sector’s growth. This issue was concentrated among a small group and unfairly tarnished the broader AIF industry, leading to halted investments by RBI. However, corrective steps have been taken, and the new RBI circular is very welcome. Going forward, we can expect more lenient and constructive regulation.

How do you see the GIFT City ecosystem evolving?

For any market to thrive, home market investors must have participation rights. Previously, foreign institutional investors dominated the public equity markets, but liquidity surged once domestic investors grew. Currently, the GIFT City exchange permits only foreign investors to trade, limiting liquidity. To unlock its full potential, the rupee has to be fully convertible and domestic investors should be allowed to participate freely.

You submitted a bid for Jaiprakash Associates. What is your view on fund houses owning majority stakes? Will you pursue similar opportunities?

Without commenting on specifics, our stake is not a controlling one. Globally, buyout funds commonly acquire control stakes, so it’s not inappropriate for domestic managers to follow the same practice. We already have controlling interests in certain investments via special funds. If we see value in managing a company and driving returns, we will engage in such opportunities. If 20 foreign investors can do it in India, domestic managers should have the same capability. In the case of Jaiprakash, the returns appear attractive at the current valuation, so we are bidding accordingly. We will not hesitate to take substantial positions where the business fundamentals are solid and we believe we can add value.

Frequently Asked Questions

What are the key sectors attracting investment from AIFs in India?

Real estate and credit strategies are the key sectors attracting significant interest from AIFs in India. Credit strategies, in particular, have seen rapid growth in AUM over the past couple of years.

Why is there a need for taxation reforms in India's credit market?

There is a need for taxation reforms to address the disparity in tax rates between domestic and foreign investors. Currently, high-net-worth individuals pay nearly 40% tax on interest income, while foreign investors pay just 15%. This tax structure inadvertently exports India’s rupee credit market to foreign investors.

What is the role of accredited investors in the AIF industry?

Accredited investors play a crucial role in the AIF industry by providing the necessary capital for complex and riskier products. However, the process of obtaining accreditation in India is often cumbersome and costly, which can discourage investors.

How does the RBI circular impact AIF investments?

The recent RBI circular is very welcome as it relaxes earlier curbs on AIF investments. This is expected to lead to more lenient and constructive regulation, addressing concerns about loan ever-greening and unfair practices.

What is the potential of the GIFT City ecosystem for AIFs?

The GIFT City ecosystem has significant potential for AIFs, but it is currently limited by the restriction on domestic investors. To unlock its full potential, the rupee needs to be fully convertible, and domestic investors should be allowed to participate freely.