Despite a slowdown in quarterly investment and exit activity, improvement in June is encouraging Private equity PE deal activity in the second quarter of 2012 dropped to the lowest level
Trang 1Despite a slowdown in quarterly investment and exit activity, improvement in June is encouraging
Private equity (PE) deal activity in the second quarter of 2012 dropped to the lowest levels seen since Q2 2010 PE investments dipped 15% from US$1.96b in Q1 2012 to US$1.66b Q2 2012
However, much of the slowdown was largely in May This may be accountable to adverse budget proposals announced in March, as June saw a significant increase in monthly activity — following the clarification of many of the budget proposals Interestingly, about half of the investments by value (46%) during Q2 2012 were made in June So while the whole quarter’s topline numbers do not seem encouraging, total investments clearly improved in June, in part driven by greater big-deal activity
Exit activity also slowed down in Q2 2012, with a similar dip in May There were 24 PE exits in Q2, compared with 33 PE exits in Q1 2012 — a 27% decline This was driven by the depreciation of the rupee, a significantly high number of open-market exits in February and concerns around budget proposals But, as with investment activity, there has been an improvement in the level of exit activity in June 2012
A number of tax and regulatory announcements benefiting PE funds were released
in Q2 2012 These include reduction in the capital gains tax, deferral and proposed rationalization of General Anti-avoidance Rules (GAAR) and the notification of Alternative Investment Fund (AIF) regulations
The PE industry in India is facing interesting times Tailwinds are pushing the industry forward in the shape of rupee depreciation (especially beneficial for investments), the Indian Government’s positive attitude toward regulations impacting the PE industry and continuing interest of global investors (with significant dry powder) Adversely, there are headwinds in the form of exit challenges (largely because of rupee depreciation and shallow capital markets/IPO opportunities), a difficult fund-raising environment and, continuing (but abating) valuation challenges with promoters
Overall, the first two quarters of 2012 carried the hangover of the second half of 2011 Deal activity for the rest of 2012 is expected to continue to be moderate, with portfolio exits being a major focus
Private equity roundup is a quarterly
newsletter on trends and perspectives
related to private equity (PE) activity
in India
Q2 2012
In this issue:
Overview 2
Transactions 3
Fund focus 5
PE-backed IPOs 5
PE exits (excluding IPOs) 6
Tax and regulatory update 6
Outlook 9
Methodology 10
Private equity roundup — India
Trang 2Moderate deal activity in Q2 2012
Q2 2012 witnessed PE deals worth US$1.66b, a decline of
approximately 15% compared with US$1.96b of deal value during
the previous quarter This is lowest quarterly PE investment
value since Q1 2011 Similarly, the number of deals declined
in Q2 2012 from Q1 2012 There were a total of 101 deals in Q2 2012, compared with 116 announced deals during Q1 2012 India-focused funds completed the most number of deals, but global funds contributed the most in terms of value of completed investments, with their continued focus on investing in the largest deals (more than US$50m) in India
Figure 3 Top 10 PE deals announced in Q2 2012
Sources: VCCEdge and Ernst & Young research
Figure 1 Trend in PE investments
Figure 2 Type of investors
Sources: VCCEdge, Asian Venture Capital Journal (AVCJ) and Ernst & Young research
Note: deal value considers deals where values have been disclosed, while the deal
volumes consider all the deals announced in respective quarters.
Sources: VCCEdge and Ernst & Young research
Overview
4 22
44
73
86 95 96 94 94
123 108
122 116 101
0 20 40 60 80 100 120 140
0
1,000
2,000
3,000
4,000
5,000
Deal value Number of deals
32
1006
57
387
0%
20%
40%
60%
80%
100%
Global Indian Co-investments
June 2012 Continuum Energy Pte Ltd Morgan Stanley Infrastructure Partners 212 Infrastructure
April 2012 Marico Ltd GIC Special Investments and Baring Private Equity Partners 96 Retail and consumer products June 2012 Super Religare Laboratories Ltd Jacob Ballas Capital India and International Financial Corp 66 Health care
April 2012 TVS Logistics Services Ltd Kohlberg Kravis Roberts & Co and Goldman Sachs 51 Logistics
June 2012 Educomp Solutions Ltd Mount Kellett Capital Management, Proparco SA and International Finance Corporation 50 Education
Trang 3Analysis by deal size
Average deal size holds steady
The average deal size in Q2 2012 did not experience any significant
change from the previous quarter However, a year-on-year
comparison indicates a sharp decline (30%) from the same period
last year While the small-size deals (below US$10m in value) have
been consistent over last five quarters, large-size transactions
(greater than US$50m in value) have dipped substantially Even
the number of mid-market deals (US$20m–US$50m) have also
been reduced by more than half from the level seen in Q2 2011,
resulting in the decline in average deal size
Interestingly, the median deal size declined significantly in Q2 2012
(59% decline from US$15m in Q2 2011 and 45% from US$11.2m
in Q1 2012) The decline reflects decreased big-deal activity but
sustained VC activity
Figure 5 Trend of median PE deal size of announced PE deals
Sources: VCCEdge, AVCJ and Ernst & Young research
Note: Only deals with disclosed values have been considered.
Figure 6 Composition of total PE deal volume by PE deal size
Sources: VCCEdge, AVCJ and Ernst & Young research
Figure 4 Trend of average PE deal size of announced PE deals
Sources: VCCEdge, AVCJ and Ernst & Young research
Note: Only deals with disclosed values have been considered.
24.4
17.3
35.4
23.7 28.5 22.2
33.6 32.3
23.2 21.1 22.0 22.5
0
10
20
30
40
50
Q2
2012
Q3
2009 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1
Q2
2012
Q3
2009 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011 Q1 2011 Q2 2011 Q3 2011 Q4 2012 Q1
8.2 7.1 10.0 10.4 11.1 10.0 10.0
15.0
10.0 9.1 11.2
6.2
0 4 8 12 16
27
16
9
16
27
0 20 40 60 80 100 120 140
US$20m–US$50m Less than US$10m
Greater than US$50m
US$10m–US$20m Not disclosed
Trang 4Transactions ( continued)
Analysis based on sector
Infrastructure attracts highest amount of PE funding on the
back of a large transaction in the renewable energy segment
In Q2 2012, the infrastructure sector recorded the highest value of
investments, accounting for 19% of total announced PE deal value
In the largest deal of the quarter, Morgan Stanley Infrastructure
Partners invested US$212m in a wind energy developer, Continuum
Energy Other renewable energy producers and equipment
companies such as Shalivahana Green Energy, ReGen Powertech
and Vana Vidyut also raised PE funding during this quarter
Closely following infrastructure, the health care sector received
US$206m in total PE investment and accounted for 12% of the
total deal value in Q2 2012 The largest share of PE investment into
health care has been for the hospital sector, while other emerging
business sectors such as a chain of diagnostic laboratories and
specialized diagnostic/treatment provider have also attracted PE
investments The hospital segment, which is capital-intensive and
requires sizable investment, accounted for nine PE deals totaling
US$406m in H1 2012 Other notable businesses that attracted PE
investments in 2012 were Super Religare Laboratories, a diagnostic
business (US$66m by Jacob Ballas Capital and IFC); Forus Health,
manufacturer of health care and medical equipments (US$5m
investment by IDG Ventures & Accel Partners); Bright Lifecare,
an online health store (US$5m); NephroLife Care, specialized
diagnostic/treatment services (US$25m); and Sandor Medicaids,
medical devices and distribution (US$2m)
The retail and consumer products (RCP) sector attracted the
third-highest level of PE investments in Q2 with 18 PE deals totaling
US$192m Within RCP, the consumer products sector — comprising
fast-moving consumer goods companies and fashion brand
manufacturers — attracted the largest share of PE investments,
with notable investments of US$96m in Marico in Q2 2012 by GIC
Special Investments and Baring Private Equity Partners, as well
as US$134m in Godrej Consumer Products Limited in Q1 2012
by Temasek Holding Advisors There were two fashion brand
manufacturer investments in Q2 2012: Monte Carlo Fashions with
an investment of US$31m and Gokaldas Intimatewear with an
investment of US$9m
Technology saw the highest number of deals (25) in the quarter,
followed by RCP (18) and professional services (9)
In technology, early-stage companies dominated the activity Out
of the total 25 deals announced during Q2 2012, 16 were early/ venture stage deals Further analysis indicates that out of these 16 deals, nearly 50% were for online portals, including Olacabs.com (car rental and cab services), Proptiger.com (property marketing) and savaari.com (car rental services) More established internet businesses also attracted notable investments with a US$59m investment in Just Dial (local search services company) by Sequoia Capital and SAP Ventures, and a US$32m investment in Quikr (online classifieds company) by Warburg Pincus and Norwest Venture Partners, among others
Real estate, hospitality & construction 148 8
Target Segment Value (US$m) Investors
Marico Consumer products
and personal care 96 GIC Special Investments and Baring Private Equity
Partners Monte Carlo Fashions Garments 31 Samara Capital Partners Robemall Apparels
(Zovi.com) Online portal 10 Tiger Global and SAIF Partners Free Culture Apparels Online portal 9 Sequoia Capital India
Advisors and ru-Net Fashionara.com Online portal 8 Helion Advisors and
Lightspeed Venture Partners
Figure 7 Select PE deals in RCP
Figure 8 Snapshot on PE activity across sectors
Sources: VCCEdge and Ernst & Young research
Sources: VCCEdge and Ernst & Young research
Note: “Others” includes media & entertainment, professional services, textiles, industrial products, automotive and agriculture
Trang 5Country/region Fund-raising in Q1 2012
(US$b)
Fund-raising in Q2 2012 (US$b)
ASK Property Investment Advisor Real estate 182
Global Environment Fund Power and utilities 127
Zephyr Peacock India Fund III Sector agnostic 50
Fund focus
Fund-raising slows down from last quarter
Overall, Indian fund-raising activity declined substantially from the
last quarter as well as from the corresponding period last year
There were 11 successful closure announcements worth US$0.8b in
Q2 2012 (50% less in value than in the last quarter) Further, there
has been a decline in the average size of fund raised In Q1 2012
and Q2 2011, the average size for raised funds was above
US$200m In Q2 2012, the average fund size fell to US$76m
Figure 9 Fund-raising in select markets
Figure 11 Funds announced/raised (US$b)
Sources: Factiva, Pregin and Ernst & Young research
Sources: Dow Jones Factiva and Ernst & Young research
Similar to India, fund-raising in other markets including China, Latin
America and the US declined in Q2 2012 from the last quarter
While India fund-raising nearly halved in Q2 2012, Latin America
witnessed a steep decline of 87%
Figure 10 Select India-focused PE funds raised during Q2 2012
Funds announced Funds raised
3.0
5.2
7.6
1.9
0.5
0.8
1.6
0.8
0.0
2.0
4.0
6.0
8.0
10.0
PE-backed IPOs
Weakness in PE-backed IPOs continues
The quarter saw only one PE-backed IPO: SAIF Partners investee Speciality Restaurants Speciality Restaurants is a fine-dining operator with a chain of multi-cuisine restaurants including Mainland China, Oh! Calcutta and Sigree spread across the country This is the second listed company in the restaurant space in India, after Jubilant FoodWorks (Dominos), which was listed in February 2010
Speciality Restaurants’ IPO got oversubscribed by 2.54 times, thereby helping the company to raise around nearly US$31m (INR175 crores) Despite the pessimistic mood prevailing in the capital markets, Speciality Restaurants’ shares got listed at a premium to the issue price and ended its debut day at INR160.65 per share, a premium of 7.1 percent from its issue price
Overall, the IPO market remained subdued During the quarter only three companies came out with IPOs compared with five during the previous quarter Additionally, since the start of 2012, primary markets have seen poor investor response, with more than 22 companies shelving their IPO plans The list includes
Reid & Taylor, Tata AutoComp, Micromax, Embassy Property, Joyalukkas, Lokmat Media, VRL Logistics, Aravali Infrapower and Semantic Space Technologies.1
Figure 12 Trend of PE-backed IPOs
2
1
2
1
0 1 2 3 4
Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012
Sources: Dow Jones Factiva, ISI Emerging Markets, company filings and Ernst & Young research
1 “22 companies have called off their IPOs so far in 2012: SMC Global Securities,” Vijay Gurav,
The Economic Times, 4 July 2012, via Dow Jones Factiva, (c) 2012 The Times of India Group
Trang 6PE exits (excluding IPOs)
Open-market exits dominate PE exit activity
in Q2 2012
There were a total of 23 non-IPO PE exits in Q2 2012, compared
with 30 during Q1 2012 Open-market exits continued to dominate
the exits space The quarter’s most significant PE exit was an
open-market sale where ChrysCapital sold stake in Balkrishna
Industries, originally purchased in 2005 Secondary sale exits
were one-third that of open-market exits
Tax and regulatory update
Both the houses of the Parliament and the President of India approved the Finance Bill 2012, presented in Q1 2012 by the Finance Minister Important changes include deferral of GAAR and
a reduced rate of long-term capital gains tax on the sale of unlisted securities by nonresidents Postponement of GAAR rules has brought temporary relief among investors but with an apprehension about the ultimate shape and form of GAAR Another important development this quarter was the notification of the much-awaited Alternative Investment Funds Regulations by the Securities and Exchange Board of India (SEBI) to regulate the fund industry more comprehensively
Tax Updates
Key amendments to the Finance Bill 2012
• GAAR is being deferred until 1 April 2013
• The concessional tax rate of 10% on long-term capital gains arising from transfer of unlisted securities, currently applicable only to certain nonresident taxpayers like Foreign Institutional Investors (FIIs), will now apply to all nonresident (as against prevailing 20%) In such cases, adjustments on account of inflation index or foreign currency conversions would not be available Whether this amendment applies to shares of a private limited company remains a matter of debate
• Unlisted equity shares would now be subject to Securities Transaction Tax of 0.2% when they are sold under an offer for sale to the public included in an initial public offer, before the listing of such shares on a recognized stock exchange
Draft guidelines for implementation of GAAR The Finance Bill 2012 included a proposal to introduce GAAR from 1 April 2012 In deference to various representations, the application of GAAR provisions has been deferred to 1 April 2013
It is proposed that GAAR provisions will be applied according to guidelines to be drafted for its implementation Toward this end, a GAAR Committee was set up which provided recommendations These recommendations are open for consultation and feedback from stakeholders Some of them are listed below:
• The onus will be on the Department of Revenue to prove that GAAR provisions should be invoked
• GAAR will be applicable to income accruing or arising on or after
1 April 2013
• To address concerns of FIIs, it has been recommended that where an FII chooses not to take any benefit under the tax treaty and subjects itself to tax in accordance with domestic law provisions, GAAR provisions may not apply to the FII or to the FII’s nonresident investors But if the FII chooses to take such benefit, GAAR provisions would apply to the FII but not to the FII’s nonresident investors
Secondary exits
Trimax IT Infrastructure & Services Ltd BanyanTree Growth Capital Technology
Shalivahana Green Energy Ltd Axis PE Infrastructure
Lapis Marketing Services Pvt Ltd Nexus India Capital II Retail & consumer
products Strategic exits
Primex Healthcare and Research
Pvt Ltd. Kalpathi Investments Pvt Ltd. Health care
Chakpak Media Pvt Ltd Accel India Venture Fund,
Canaan Advisors Pvt Ltd. Media & entertainment Atyati Technologies Pvt Ltd Ventureast Proactive Fund Technology
Radiant Hospitality Services Lighthouse fund Professional services
Moser Baer India Ltd Warburg Pincus Technology
Gingersoft Media Pvt Ltd IndoUS Venture Partners I LLC,
Draper Fisher Jurvetson India Media & entertainment Figure 14 List of Strategic & Secondary exits (Q2 2012)
Figure 13 Number of non-IPO exits by type
1
1
3
13 7
10
9
13 7 7
4
3 4
8
4
6 4
0
5
10
15
20
25
30
35
Secondary sale
Buyback
Strategic sale Open market
Sources: VCCEdge and Ernst & Young research
Sources: VCCEdge and Ernst & Young research
Trang 7• Apart from some exceptional cases, where a specific
anti-avoidance rule has been introduced, GAAR will not be invoked
• To explain certain terms relevant to invoke GAAR like “misuse or
abuse,” “bona fide purpose,” “lacks commercial substance,” the
report provides 21 illustrations on applicability of GAAR
(2012-TII-15-ARA-INTL)
While the report provides some clarity on GAAR applicability,
greater clarity is needed on many other fronts With this in mind,
the Prime Minister has set up an Expert Committee that will
receive public comment on the draft GAAR Guidelines by the
end of July 2012, rework the guidelines based on the feedback
and release a second draft by 31 August 2012, to finalize by
30 September 2012
Authorities for Advance Rulings (AAR) treat buyback of
shares as tax avoidance scheme taxable as dividend under
Mauritius Double Taxation Avoidance Agreement (DTAA)
In an increasing trend, Indian tax authorities are applying the
substance-over-form doctrine to transactions One example is
a recent ruling on the issue of taxability of buyback of shares
of an Indian company The brief facts of the case were that the
shareholders of the Indian company were three foreign companies
incorporated in the United States, Mauritius and Singapore
each along with residuary public shareholders The Indian company
made an offer for the buyback of shares, and only Mauritius
company accepted the offer
The AAR observed that the Indian company has not distributed
dividend to any of its shareholders after the introduction of the
dividend distribution tax Further, the US company and Singapore
company did not accept the buyback as it would have been taxable
in India under relevant DTAAs The India Mauritius DTAA provides
that capital gains arising to a Mauritius company would be taxable
only in Mauritius Mauritius does not levy tax on capital gains
Therefore AAR held that the buyback scheme was a colorable
device to avoid tax on distributed profits under the Income Tax Act,
1961 (ITA) and to take the benefit of the India-Mauritius DTAA
Hence, the buyback transaction was disregarded and the dividend
was held to be taxable in the hands of the recipient both under the
ITA as well as the India-Mauritius DTAA
A ruling of the AAR is binding only on the applicant, with respect
to the transaction for which the ruling is sought and on the
tax authorities, with respect to the applicant and the named
transaction However, it does have persuasive value on the courts
in India, the tax authorities and the appellate authorities in deciding
comparable cases
In another recent case before the AAR (2012-TII-16- ARA-INTL), a foreign company had invested in Compulsory Convertible Debentures (CCDs) and equity shares of an Indian company (I Co1).
The foreign company subsequently sold its investments in I Co1
to another Indian company (I Co2), which was also the parent company of I Co1 The AAR observed that the CCDs were in the nature of debt, which did not carry a fixed interest but instead gave
an option for conversion into shares at a future price The AAR observed that I Co1 (issuer of CCDs) was controlled and managed
by I Co2 and, hence, lifted the corporate veil of I Co1 relying on the Vodafone decision
The AAR observed that the payments made by I Co2 to the applicant company were not on account of purchase of the CCDs but were, in effect, payment of interest on the CCDs, taxable, as interest, in the hands of the applicant, under the ITA as well as the India Mauritius DTAA
Apart from the above, there are various other instances where the tax authorities have attempted to look through a transaction at its substance
Central Board of Direct Taxes (CBDT) clarification on applicability of retrospective amendments to completed assessments
The retrospective amendments in the Finance Act, including those to retrospectively tax indirect transfers, have raised concerns in the investor community on the reopening of old cases
On 29 May 2012, the CBDT issued a clarification regarding the reopening of completed assessments The CBDT has now directed all its tax authorities not to reopen tax assessments:
• In cases where tax assessment proceedings were completed prior
to 1 April 2012 and for which no notice of reassessment has already been issued prior to that date
• Where the assessment or any other order that stands validated because the amendments would be enforced (i.e., irrespective
of any court judgment/order; if a notice has been sent to the taxpayer; or tax has been levied, demanded or assessed) in connection with income arising on indirect transfers, such notice
or levy/demand/assessment shall be deemed to be valid
This CBDT clarification accords protection to cases where an assessment order has been finalized before 1 April 2012 However, the CBDT clarification is unlikely to protect cases where finalized assessment orders are pending adjudication before a judicial authority or if reassessment proceedings have already been initiated before 1 April 2012
Trang 8Update on Direct Taxes Code
As part of its tax reform initiatives, the Government of India is
revising, consolidating and simplifying the language and structure
of the direct tax laws into a single legislation: the Direct Taxes Code
The Direct Taxes Code 2010 (DTC) was placed before the Indian
Parliament on 30 August 2010 to substitute the existing ITA
and Wealth Tax Act This was subsequently referred to the
Standing Committee on Finance The Standing Committee, after
holding a broad-based consultation with various stakeholders,
submitted its report to Parliament on 9 March 2012 with various
recommendations on Advance Pricing Agreements, GAAR, Place of
Effective Management (POEM), indirect transfer, Controlled Foreign
Companies and many others This report is expected to be placed
before Parliament in this monsoon session (08 August 2012 to
07 September 2012)
DTAA Updates
• In this quarter, India signed DTAAs with Tanzania and replaced
the DTAA with Malaysia with a new DTAA
• India entered into a Tax Information Exchange Agreements
with Jersey A Tax Information Exchange Agreement (TIEA)
is a bilateral agreement, negotiated and signed between two
countries to establish an official system for the exchange of
information relating to taxes TIEAs allow for free exchange of
financial tax information between the two signatory countries and
are increasingly being seen as an important tool to tackle money
laundering
Regulatory updates
Alternative Investment Funds Regulations, 2012
The Securities and Exchange Board of India (SEBI) released the SEBI
(Alternative Investment Funds) Regulations, 2011 (AIF Regulations)
on 21 May 2012 AIFs means a fund which invests private capital
pooled by investors in accordance with a defined policy to benefit
its investors This would include private pools of capital such as
PE funds, hedge funds and venture capital funds (VCFs) The AIF
Regulations will affect only AIFs set up in India, not offshore funds
investing in India through foreign direct investment (FDI) The AIF
Regulations have segregated Funds under the following three broad
categories:
Category I AIF — funds that invest in either start-up, early-stage
ventures, social ventures, SMEs, infrastructure or other sectors that
the government or regulators consider as socially or economically
desirable This category includes VCFs, SME funds, social venture
funds (SVFs), infrastructure funds and such other AIFs as may be
specified.
Category II AIF — funds that do not fall in Category I and III AIF and
that do not undertake leverage or borrowing other than to meet the
permitted day-to-day operational requirements and would include
PE funds and debt funds.
Category III AIF — funds that employ diverse or complex trading strategies and may employ leverage including through investment
in listed or unlisted derivatives and would include hedge funds.
The SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations), have been repealed and are subsumed in the AIF Regulations The VCF Regulations shall continue to regulate existing VCFs until the existing fund or scheme managed by the fund is wound up Such VCFs may seek reregistration under AIF regulations subject to approval of 66.67% of their investors by value
One of the key highlights of the AIF Regulations is allowing registration of more categories of funds/sub-funds such as SVFs, debt funds, hedge funds etc The implementation of AIF Regulations
is a step in the right direction and should go a long way in steering the growth of the industry while balancing the need to manage risks for investors and the stability of the financial system The move
by SEBI to broad-base the types of funds that can be launched for participation by investors is also a welcome move and will enable fund managers to design a broader suite of fund offerings that can cater to various risk appetites and investment objectives
However, there are some concerns and need for more clarity in the AIF Regulations on:
• Restriction of tax pass-through status to only Category I AIFs disappoints the hope of the PE industry for simplification and certainty in tax regime as the uncertainties of trust taxation continues
• Exemptions from certain provisions under of SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2009 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011 are restricted to Category I AIFs only and are not extended
to PE funds and hedge funds
• Investments by foreign venture capital investors (FVCIs) are restricted into Category I AIF Thus, modalities enabling the raising of foreign funds by Category II and Category III AIFs need to be laid down under the foreign investment policy of the Government of India
FDI Policy — Circular 1 of 2012 Following its usual practice of releasing biannual FDI circulars, the Government of India released the FDI Circular 1 of 2012 early
in this quarter One of the key features of the FDI Circular issued
in April relaxes FDI norms for commodity exchanges There was
a composite (FDI — 26% and FII — 23%) cap of 49% in commodity exchange under the approval route The FII limit of 23% has been liberalized and brought under the automatic route
Tax and regulatory update ( continued)
Trang 9Considering that FDI policy has been substantially rationalized
and liberalized, the Government of India has decided that there
is no need for the usual biannual amendments to the circular as
any changes made in the FDI policy are updated through Press
Notes during the year Therefore, a new circular consolidating
all further amendments to the FDI policy shall be issued only on
29 March 2013
FII investment in “to be listed” debt securities
According to existing Foreign Exchange Management (Transfer or
issue of Security by a Person Resident outside India) Regulations,
2000, FIIs registered with India’s capital markets regulator, SEBI,
are allowed to invest only in listed nonconvertible debentures
(NCDs) bonds issued by an Indian company SEBI has allowed
FIIs to invest in “to be listed” debt securities Accordingly, the
Reserve Bank of India (RBI) has decided that SEBI-registered FIIs/
sub-accounts of FIIs can now invest in primary issues of NCDs/bonds
only if listing of such bonds/NCDs is committed to be done within
15 days of such investment If not done within 15 days then the FII/
sub-account of FII shall immediately dispose of these bonds/NCDs
either by way of sale to a third party or to the issuer and the terms
of offer to FIIs/sub-accounts should contain a clause that the issuer
of such debt securities shall immediately redeem/buy back the said
securities from the FIIs/sub-accounts of FIIs in such an eventuality
As a result of this amendment, the arranger mechanism, hitherto
used, may not be required In an arranger mechanism, the issuer
company with a resident, typically an nonbanking financial company
(NBFC), wherein the NBFC would buy the unlisted debt securities
and onward sell them to the FIIs after the listing
Investment in Indian Venture Capital Undertakings (IVCU)
and/or domestic VCFs by SEBI-registered FVCIs
According to Foreign Exchange Management (Transfer or issue
of Security by a Person Resident outside India) Regulations 2000,
a SEBI FVCI may invest in equity, equity-linked instruments, debt,
debt instruments, debentures of an IVCU or of a VCF through an
initial public offer or private placement or in units of schemes/funds
set up by a VCF, subject to such terms and conditions mentioned
therein
The RBI has decided to also allow FVCIs to invest by way of private
arrangement/purchase from a third party in the eligible securities
(equity, equity-linked instruments, debt, debt instruments,
debentures of an IVCU or VCF, units of schemes/funds set up by a
VCF), subject to prescribed terms and conditions It is also being
clarified that SEBI-registered FVCIs will also be allowed to invest in
securities on a recognized stock exchange subject to the provisions
of the SEBI (FVCI) Regulations, 2000 This move by the RBI gives
FVCIs greater flexibility in making investments in the country
At best, near-term annual growth estimates for India hover around 5.5% to 6% To an Indian entrepreneur, this kind of growth may seem quite disappointing, but
in the broader global context this growth profile is still very attractive when compared with negative growth fears in Europe, US and Japan India therefore remains
an attractive destination for global investors, especially those in the Western hemisphere.
For a PE investor, the main challenges with India have been: (i) the uncertain regulatory environment and (ii) lackluster exit performance With the Government recognizing the PE industry’s importance to India, hopefully the first of these concerns is being resolved
In fact, the Government has taken a few positive steps in the last few weeks Exits remain a greater issue for the Indian PE industry There have been more than 2,000 PE investments in the last six years in India, and a significant portion of that (more than two-thirds) is now due for exit
or further investment High original entry valuations have constrained follow-on investments in and exits of these companies The lack of exits has also hindered fund-raising plans of a number of India-focused funds A churn is expected with fund managers, some of has already been seen
Though PE firms are busy screening and evaluating both investment and exit opportunities, completing deals has been difficult because of such reasons as regulatory issues, rupee volatility and shallow IPO markets We expect this phase to continue over the foreseeable future
as the industry consolidates However, from a long-term perspective, we remain bullish on India PE and expect the industry to come out much stronger from the current situation.
Outlook
Trang 10About Ernst & Young
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• Our services are broadly classified as four service lines:
Assurance, Tax, Transactions and Advisory Each service line
is further streamlined into niche competencies and focused
groups, which enable us to strengthen our outreach and offer a
compelling portfolio of broad and well-defined services
• Each team is built as a multidimensional group of professionals
from diverse backgrounds, with a range of perspectives They
understand and address our clients’ concerns from a variety of
standpoints, while using highly evolved tools and approaches to
offer inputs in a structured and compelling manner
• Values and ethics unite us, ensuring cohesive work toward the
shared goal of making a difference A special energy that we
bring to each assignment defines the way we work and is our key
characteristic
Today, we are recognized as leaders in the professional services industry, and the accolades we receive encourage us to continue striving for excellence
• “Most Attractive Employer” award in the consulting sector by
Randstad
• India’s tier-one tax firm for the eighth consecutive year —
Euromoney ITR, World Tax Guide 2010
• Ranked No 1 Financial Advisor in India for 10 consecutive years
(2002–2011) for most number of deals — Bloomberg
• The most reputed Tax Firm in India — TNS Global Tax Survey
Monitor, 2009
• Asia Pacific M&A Investment Bank of the Year and Asia Pacific
M&A Deal of the Year — 2009 Asia M&A Atlas Award
• Most Active Transaction Advisor Award, PE and M&A for three
consecutive years (2009–2011) — Venture Intelligence
• Financial Advisor of the Year Award, 2011 — Asian Venture
Capital Journal, India Awards
• Financial Advisor of the Year M&A Award — India, 2011, 2009
and 2008 — Financial Times and Mergermarket
• Overall winner — consultancy rankings, in survey of risk and
compliance professionals — OpRisk & Compliance magazine
• Risk and business advisory relationship with 160 of the BSE300 companies
• “Excellence in Training” award in the Employer Branding Awards for three years (2007–08, 2009–10, 2010–11)
• ”Continuous innovation in HR strategy at work” award in the Employer Branding Awards 2010
* The numbers include personnel from other member firms of Ernst & Young Global based in India.
• Private Equity roundup — India is based on Ernst & Young’s
analysis of announced PE deals and other PE-related
news and information reported in secondary sources,
AVCJ and VCCEdge
• PE deal values used in this document are based on those
provided in press releases pertaining to deal announcements
The conversion rate (INR to US$) is based on the exchange
rates prevalent on the dates of the deal announcements
• ►Fund-raising for China and Latin America, includes global funds focused on pan-Asia-Pacific and emerging markets and global funds focused on Latin America and emerging markets, respectively
• The deals have been reclassified, wherever required, based on Ernst & Young’s sector-classification policy
• The figures have been rounded off to the nearest whole number
Methodology