Private Equity in India

Introduction

Private Equity is playing an important role in today’s Indian Economy. India has seen a boom in private equity activity in recent years with the growth of local funds and the arrival of global players. Beyond their financial contribution private equity firms need to be able to add value, as required, in strategic, operational and human capital matters.

Private Equity fund expects a good return from an investment with capital appreciation in 7 – 10 years. In the Late Nineties, the interest of the Private Equity Players in India was in Information Technology Sector. With the downfall of the Information Technology Sector in 2001-2002, the Private Equity Investors diversified their interest in different sectors of the Indian Economy like Pharma, media, entertainment etc.

The Private Equity plays its role from a Venture Capital – Early Stage or Idea to the huge leverage buy out in which they acquire the entire company. India is closing to China as an equally attractive destination for Private Equity.

Private Equity Investments in India during Jul-Sep 2010: 88 Deals, US$2,046 Million – Source Venture Intelligence

Private Equity – Stages of Business

Zero Level or Seed Stage Business (Just an Idea)

Start-up Stage Business (6 Months – 3 Years)

Expansion Stage Business (After 3 Years)

Classification of Private Equity

1. Venture Capital

2. Buy Out

3. Special Cases

High Priority Sectors for PE Investment

IT/ ITES	27%
BFSI	15%
Energy	10%
Engineering & Construction	9%
Healthcare & Life Science	9%
Manufacturing	7%
Agri-business	5%
Others	18%

Source: Venture Intelligence PE Deal Data base

Key Barriers for Private Equity in India

Competition

Fiscal / Regulatory Issues / Corporate Governance

Management

Ethics

Foreign Direct Investment – Venture Capital

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999.

Under the FDI Scheme, investment (Equity, Compulsorily Convertible Preference Shares, Compulsorily Convertible Debentures, ADR /GDR, etc.) can be made by a non resident in the Indian Company, under the following routes:

Procedure under Automatic Route

FDI in sectors/ activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI.

Procedure under Government Approval

FDI in activities not covered under the automatic route, requires prior Government approval. Such proposals are considered by the Foreign Investment Promotion Board (FIPB).

With the new master circular on FDI being issued by the RBI, SEBI registered FVCI are allowed to invest in domestic venture capital undertakings and domestic venture capital funds through the automatic route subject to the SEBI regulations, RBI Regulations and FDI Policy (sector specific caps). However, in case the entity undertaking venture capital fund activity is a trust registered under the Indian Trust Act, 1882, FDI would be permitted with approval.

Taxation – Venture Capital

Indian VCFs are entitled to tax benefit under Section 10(23FB) of the Income Tax Act. Any income earned by a SEBI registered VCF (established in the form of trust or company) set up to raise funds for investment in a VCU is exempt from tax.

“venture capital undertaking” means such domestic company whose shares are not listed in a recognized stock exchange in India and which is engaged in the—

(i) business of— nanotechnology; information technology relating to hardware and software development; seed research and development; bio-technology; research and development of new chemical entities in the pharmaceutical sector; production of bio-fuels; building and operating composite hotel-cum-convention centre with seating capacity of more than three thousand; or developing or operating and maintaining or developing, operating and maintaining any infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA; or dairy or poultry industry.

Process

Exit Strategy

Most of the Private Equity Firms consider their exit option prior to investing. Exit Route includes: