15 Jun 2016

Forming Long-term Capital

Most investors seem to want their money back within half a decade. This starves projects that are good in the long-term. How might we fix this myopism?

One solution is billionaires funding projects they think are good in the long-term, like flying cars or private space companies. But it would perhaps be good to have more long-term investments than a few rich people can make.

Perhaps the government can exempt long-term investments from taxes — income tax (section 80C [1]), capital gains tax, dividend distribution tax, and securities transaction tax.

Which brings up the question: what is a long-term investment? Perhaps bonds with a maturity of at least ten years.

Buyers of such bonds can sell them on the stock market if they want to exit early. That doesn’t hurt the project which was funded by selling the bonds. In other words, if a port was funded by selling ten-year bonds, some of which later change owners, that doesn’t hurt the completion of the port. It will only if investors demand their money back prematurely, which isn’t allowed for a bond, anyway.

People who buy bonds on the market won’t be eligible for any tax benefits, since their money didn’t directly fund the project.

Even better than a 10-year bond is a perpetual bond, which comes due whenever the issuing company wants it to. That will let even longer projects be funded, and increases flexibility and decreases risk for the issuer: if a project is delayed, and the principal couldn’t be repaid on the agreed-upon date, it can simply be repaid at a later date, rather than being considered a default, with all the attendant unpleasant consequences.

Equity should also be eligible for long-term investment status, but again, only when a company issues new shares to raise money, and not resale of those shares. It’s similar to a perpetual bond in that the company is taking money from you without promising it back by a set date.

Tax benefits should be passed through if you invest via a fund, so you won’t have the hassle of making multiple investments for diversification.

It will be interesting to see what will happen if we are able to generate tens of billions of dollars of long-term capital. What new and exciting and beneficial projects can be done that can’t be done now?

[1] Perhaps remove short-term investments from section 80C. In other words, if you want to avail of a tax benefit, invest for a decade.

Don’t have a limit on how much one can invest long-term per year. Let more long-term capital be generated, which will help the economy and the country.

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