By : Niyati Mishra

Abstract

The newly introduced Union Budget of 2025 has introduced numerous measures that will provide significant progressive reforms to the Private Equity (PE) sector in India. From tax exemptions and tax holidays to foster growth in startups and changing limits on Foreign Direct Investment (FDI) to the introduction of new policies, committees and regulatory frameworks, all working to streamline the merger processes and venture capital stimulation in India, these reforms are working together to bolster the perception of India as an investment destination. They go to show that the government is clearly trying to take a proactive stance in improving fundraising and innovation. This article explores and analyses the changes brought by Budget 2025 in comparison to last year’s budget, and their implications on Private Equity in India.

Introduction to Private Equity

Private Equity (PE) refers to share-based investments made in private companies and assets which they tend to hold as a part of their portfolio for several years. These aren’t involved in public trading or listed as a part of the stock exchange. PE Investment involves three main strategies, including Buyouts, Growth Equity and Venture Capital, with approaches varying from considerable control over ownership stakes through a secondary investment in mature companies to somewhat established companies to early stage businesses. Traditionally associated with experienced, institutional investors, PE managers and investors consist of qualified purchasers who are typically used to the terrain of long term investments and are capable of tolerating illiquidity if it may arise. They undergo multiple phases in order to create value for the company through strategic decisions and seamless execution that can then be extracted via several exit strategies. After the exit is complete, investors  recoup their investment on a company-to-company basis, subject to terms and conditions. 

This year’s budget introduces several policies that take a step towards creating more favourable conditions for the fundraising and investment landscape to thrive. By simplifying tax structures, expanding business opportunities and providing reforms to compliance frameworks, this year’s budget takes on a different strategy to incentivise the start-up economy within the country.

Budget ‘24 versus ‘25

The major difference between this year’s budget and its predecessor has to do with the focus that the government has put on making the startup landscape in India more lucrative. Last year’s budget was able to create a relative foundation for this year’s reforms by providing key frameworks on tax exemptions. This year, the Budget ensures that companies continue to benefit from a reduced tax burden. The government has also granted income tax exemptions to sovereign wealth funds (SWFs) and pension funds (PFs), a policy shift expected to channel substantial foreign capital into critical areas of the economy. Another policy update in the new budget is the increase in the Foreign Direct Investment (FDI) cap from 74% to 100% for companies that reinvest in India. On the corporate restructuring front, the budget no longer allows for evergreening of losses in mergers. This shift is likely to influence M&A strategies, necessitating companies to reassess the way they structure deals. Despite these significant measures, one notable omission in this year’s budget is the absence of an extension of the 15% concessional tax rate for new manufacturing units. This had previously served as a crucial incentive for industrial expansion. The decision made to not prolong this benefit is clearly a missed opportunity to accelerate India’s growth and its transformation into a global manufacturing power, especially at a time when global supply chain diversification has presented a window for India to position itself as a leader in manufacturing. 

Tax Regulations and what it means for the Private Equity sector

One of the major developments in this year’s budget has been the introduction of a new Income Tax Bill. This bill seeks to simplify tax regulations and eliminate any ambiguities that may have existed in the previous bills, and seeks to create a more transparent tax environment so that PE firms and investors have to worry less about regulatory compliances and they can shift their focus towards key decision-making required to allocate funds and select which companies to invest in. This means that they would be more likely to not only invest better but also to utilise their time better, ensuring quick and smoother transactions with a lower risk of regulatory non-compliance. Clarity and precision would mean that the sector is able to function more effectively because they are able to follow a more streamlined tax code. Exit strategies would be better off as well because the market would become a lot more predictable. Another major reform is the revamp of the model Bilateral Investment Treaty (BIT), which is supposed to make India more attractive for foreign capital. By establishing adequate safeguards against exploitation, unfair treatment, expropriation, and regulatory uncertainty, BITs provide legal protection to foreign investors, thereby making India an even more attractive hub for foreign capital. This would also enhance investor confidence for cross border investment within these PE and VC firms with  dispute resolution mechanisms in place that offer greater certainty on the investment terms and conditions. Consequently, more international funds will be deployed in domestic sectors with greater growth potential.

However, with the new budget, PE firms will have to re-evaluate their strategies in depth because of the possible implications that could arise on tax liabilities after the merger/acquisition is complete. This would particularly have an impact on distressed asset deals because they could potentially alter the company’s valuations and plans for restructuring in the near future. Earlier, acquisitions were simply easier to carry forward and more financially viable because the uncertainty surrounding tax liabilities and the unpredictable effect on valuation was not directly affected by these imposed tax regulations. It had to do with their position within the market. These tax reforms have incentivised both sellers and PE firms to utilise these benefits better because a healthier investor landscape is fostered since the system in itself is more structured. However, M&A deals still may be volatile because of the increased risk component, because of which PE firms will have to regulate and tweak their model accordingly. 

Changes in Fundraising for Private Equity Firms

Private Equity firms require a stable, functional and predictable environment in order to function and mitigate risks effectively for their investments. To facilitate this, the 2025 budget proposes ways to enhance availability of capital so that it’s easier for PE firms to allocate funding accordingly, so they can provide adequate support to their investments. One such measure is the introduction of a Fund of Funds that provides an additional allocation of INR 100 Billion to invest in these companies and also Alternative Investment Funds (AIF’s). This would mean the existence of much needed capital for startups and mid-size companies, encouraging greater participation in entrepreneurial ventures, improved liquidity in the market, and an increased number of business opportunities. Furthermore, the government has announced the creation of a Deep Tech Fund of Funds, a project designed to support small to medium sized companies willing to dive into the tech centre, whether in Artificial Intelligence (AI), robotics, semiconductor or chip manufacturing. The government’s incentive to increase funding here has to do with its motive to help build India into a global powerhouse of technology. PE firms thus get the opportunity to invest in this new generation of deep tech ventures. Although capital intensive, the industry has immense growth potential in innovation, attracts private investments that are normally portrayed as high-risk, and increases the commercialisation of R&D to facilitate privatisation in Deep Tech amenable to PE firms. The budget has also introduced greater flexibility and fluidity within foreign investments to reduce barriers to entry for foreign firms and to attract a greater pool of foreign investors and MNCs. Region specific regulatory barriers and compliance requirements have been reduced so that the investment process is simplified and investor PE firms as well as investee companies are able to scale their operations worldwide, given that private equity is a growing venture globally that has been generating greater buzz in recent years, with privatisation of industries seen increasingly as a positive way of acquiring funding. Historically, government allocated funding has been preferred but with the evolution of reforms in the budget, private funding has been highly incentivised. 

Key Additions in 2025’s Budget

The launch of a Special Window for Affordable and Mid-Income Housing (SWAMIH) Fund 2, a blended finance facility, provides for INR 150 Billion that will be directly involved with the completion of real estate and housing projects to make the current volatile real estate market more affordable for approximately 1 lakh homebuyers and homeowners. The fund will not be concentrated only within private funding, but will also include financial assistance from the government and some commercial banking entities. The focus on the real estate market poses a new opportunity for PE firms, given their ability to dabble in a tumbling market with reduced prices and gain a larger market share rather easily. This blended funding model also leverages  private-public relationships and fills in gaps that solely private or government funding cannot fill. With  regulatory authorities working together with the private sector, the execution of  projects is expected to become more efficient and productive, and would provide a quicker solution for currently persisting housing issues. The government has also proposed the establishment of a committee to review non-financial sector related regulations so that for the layman, the process of carrying out deals and financial transactions in general is simplified and  ease of investment is increased, with a reduced focus on fulfilling regulatory burdens and more on carrying out business practices efficiently. PE firms are thereby given a more transparent framework under which they can operate with greater autonomy, improve long term investment strategies, and provide a sustainable capital inflow as opposed to inflows that peak circumstantially, usually at the start of the business or when there exists a consumer trend. 

Conclusion 

The 2025 Budget, therefore, marks a step forward in India’s Private Equity landscape by fostering a more holistic environment through new tax decisions, regulatory compliances, simplifications and developments within fundraising. By improving the ease of doing business in a business climate that is currently competitive, and by addressing key concerns surrounding taxation and foreign investment, the government aims to make India a global focal point of business. Private Equity firms of all shapes and forms, both domestic and international, established and relatively new, are set to gain from these reforms as they navigate an evolving financial ecosystem in India shaped by emerging opportunities.

About the Author:

Niyati Mishra is a first-year law student at Jindal Global Law School and a member of the Economics and Finance cluster at Nickeled and Dimed. She is interested in Mergers and Acquisitions, Private Equity and Corporate Restructuring, and is keen to explore the intersections between law and finance and navigate corporate legal frameworks.

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