On the other hand, the market is also seeing many new entrants, such as Carlyle Group and Nippon Life, which are seeking to leverage the credit demand-supply gap.
Market-linked debentures (MLDs) that were earlier taxed at 10% after a holding period of more than a year are now taxed at marginal tax rates. Even investments in debt mutual funds are now taxed at marginal tax rates without any indexation benefits, irrespective of the duration of the investments.
This has nudged wealthy domestic investors to look at credit, particularly private credit investments, to enhance their debt returns, said fund managers.
“Private credit funds are seeing an increase in traction among investors post-budget amendments, driven primarily by the normalisation of taxation across instruments,” said Rajesh Saluja, CEO of ASK Private Wealth. “Now the post-tax return expectations would be more aligned to the risk-reward ratio in terms of credit and duration unlike earlier, where tax advantages enjoyed by MLDs or debt MFs largely distorted it.”
Neo Asset Management recently launched the Neo Special Credit Opportunities fund catering to the funding requirements of mid-market companies in special situations. It has raised commitments of over ₹1,000 crore in a short span of time. Centrum Alternatives plans to launch its second private credit fund with a corpus of ₹1,250 crore. Carlyle Group is in the early stages of exploring an entry into India’s private credit market, while Nippon Life plans a $244 million India private credit fund, said a Bloomberg report.
“Due to its low correlation with public markets and its ability to cater to the need for growth, predictable, regular income, and safety through collateral covers, private credit funds are gaining popularity amongst the HNIs and ultra HNIs,” said Hemant Daga, CEO, Neo Asset Management. “Today, this is a ₹50,000 crore annual opportunity for investors to channelise their savings into debt and income earning opportunities ranging from 14-22% returns.”Thirteen credit funds had registered with Sebi under AIF Category II with credit/special situation orientation in 2022.
“Going forward, the true comparison will now purely ‘risk’ versus ‘reward’ rather than post-tax returns,” said Dipen Ruparelia, head of products, Vivriti Asset Management. “Performing credit AIFs are well-placed to benefit from this game-changing event in the tax structure of debt investment products.”