Private equity roundup — India pdf

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 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 signicant increase in monthly activity — following the clarication 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 signicantly 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 beneting 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 notication 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 benecial for investments), the Indian Government’s positive attitude toward regulations impacting the PE industry and continuing interest of global investors (with signicant dry powder). Adversely, there are headwinds in the form of exit challenges (largely because of rupee depreciation and shallow capital markets/IPO opportunities), a difcult fund-raising environment and, continuing (but abating) valuation challenges with promoters. Overall, the rst 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 2 Private equity roundup — India Moderate 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$50m) in India. Figure 3. Top 10 PE deals announced in Q2 2012 Sources: VCCEdge and Ernst & Young research Figure 1. Trend in PE investments Figure 2. Type of investors Sources: VCCEdge, Asian Venture Capital Journal (AVCJ) and Ernst & Young research Note: deal value considers deals where values have been disclosed, while the deal volumes consider all the deals announced in respective quarters. Sources: VCCEdge and Ernst & Young research Overview 928 1,070 2,617 1,946 2,221 1,646 2,517 3,458 1,924 1,771 1,957 1,664 44 73 86 95 96 94 94 123 108 122 116 101 0 20 40 60 80 100 120 140 0 1,000 2,000 3,000 4,000 5,000 Number of deals Deal value (US$m) Deal value Number of deals Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 32 1006 57 387 12 271 0% 20% 40% 60% 80% 100% Number of deals Value (US$m) Global Indian Co-investments Month Target Investor(s) Value (US$m) Sector June 2012 Continuum Energy Pte. Ltd. Morgan Stanley Infrastructure Partners 212 Infrastructure May 2012 Thomas Cook (India) Ltd. Fairbridge Capital 150 Travel and nancial services June 2012 Future Capital Holdings Ltd. Warburg Pincus India 120 Financial services April 2012 Quality Care India Ltd. Advent International Corp. 110 Health care 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 June 2012 Just Dial Sequoia Capital India and SAP Ventures 59 Technology April 2012 Intas Pharmaceuticals ChrysCapital V LLC 56 Pharmaceuticals 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 3 Q2 2012 Transactions Analysis by deal size Average deal size holds steady The average deal size in Q2 2012 did not experience any signicant 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 ve 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 signicantly in Q2 2012 (59% decline from US$15m in Q2 2011 and 45% from US$11.2m in Q1 2012). The decline reects decreased big-deal activity but sustained VC activity. Figure 5. Trend of median PE deal size of announced PE deals Sources: VCCEdge, AVCJ and Ernst & Young research Note: Only deals with disclosed values have been considered. Figure 6. Composition of total PE deal volume by PE deal size Sources: VCCEdge, AVCJ and Ernst & Young research Figure 4. Trend of average PE deal size of announced PE deals Sources: VCCEdge, AVCJ and Ernst & Young research Note: Only deals with disclosed values have been considered. 24.4 17.3 35.4 23.7 28.5 22.2 33.6 32.3 23.2 21.1 22.0 22.5 0 10 20 30 40 50 Average deal size (US$m) Q2 2012 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 20 12 Q3 2009 Q4 2009 Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 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 Median deal size (US$m) 43 43 45 43 45 21 13 15 15 7 27 18 15 21 13 16 9 9 10 9 16 25 38 27 27 0 20 40 60 80 100 120 140 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Number of deals US$20m–US$50 m Less than US$10m Greater than US$50m US$10m–US$20m Not disclosed Transactions ( 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$32m investment in Quikr (online classieds company) by Warburg Pincus and Norwest Venture Partners, among others. Sector Value (US$m) Number of deals Infrastructure 324 7 Health care 206 6 Retail and consumer products 192 18 Financial services 179 8 Technology 150 25 Travel 150 1 Real estate, hospitality & construction 148 8 Logistics 131 3 Education 64 7 Pharmaceuticals 58 2 Others 61 16 Tota l 1664 101 4 Private equity roundup — India Target Segment Value (US$m) Investors Marico Consumer products and personal care 96 GIC Special Investments and Baring Private Equity Partners Monte Carlo Fashions Garments 31 Samara Capital Partners Robemall Apparels (Zovi.com) Online portal 10 Tiger Global and SAIF Partners Free Culture Apparels Online portal 9 Sequoia Capital India Advisors and ru-Net Fashionara.com Online portal 8 Helion Advisors and Lightspeed Venture Partners Adiga's Restaurant NA New Silk Route Advisors Figure 7. Select PE deals in RCP Figure 8. Snapshot on PE activity across sectors Sources: VCCEdge and Ernst & Young research Sources: VCCEdge and Ernst & Young research Note: “Others” includes media & entertainment, professional services, textiles, industrial products, automotive and agriculture Country/region Fund-raising in Q1 2012 (US$b) Fund-raising in Q2 2012 (US$b) China 8.3 5.5 India 1.6 0.8 Latin America 3.1 0.4 US 29.3 22.9 Name Focus Sector Fund size (US$m) ASK Property Investment Advisor Real estate 182 SIDBI VC SME-focused 134 Global Environment Fund Power and utilities 127 Motilal Oswal PE fund Sector agnostic 86 Ambit Pragma Fund II Sector agnostic 77 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 3.7 3.6 1.9 0.5 0.8 1.6 0.8 0.0 2.0 4.0 6.0 8.0 10.0 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Funds announced/raised (US$b) 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 ne-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 ve 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 5 Q2 2012 Figure 12. Trend of PE-backed IPOs 2 3 3 1 2 1 0 1 2 3 4 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 PE-backed IPOs Sources: Dow Jones Factiva, ISI Emerging Markets, company lings 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 PE 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 signicant 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 notication 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 ination 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 benet 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 benet, GAAR provisions would apply to the FII but not to the FII’s nonresident investors. Target Company Seller Sector Secondary exits Trimax IT Infrastructure & Services Ltd. BanyanTree Growth Capital Technology Care Hospitals Ashmore Health care 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 6 Private equity roundup — India Figure 14. List of Strategic & Secondary exits (Q2 2012) Figure 13. Number of non-IPO exits by type 4 5 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 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Secondary sale Buyback Strategic sale Open market Sources: VCCEdge and Ernst & Young research Sources: VCCEdge and Ernst & Young research • Apart from some exceptional cases, where a specic anti- avoidance rule has been introduced, GAAR will not be invoked. • To explain certain terms relevant to invoke GAAR like “misuse or abuse,” “bona de 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 nalize 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 prots under the Income Tax Act, 1961 (ITA) and to take the benet 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 xed 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) clarication 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 clarication 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 clarication accords protection to cases where an assessment order has been nalized before 1 April 2012. However, the CBDT clarication is unlikely to protect cases where nalized assessment orders are pending adjudication before a judicial authority or if reassessment proceedings have already been initiated before 1 April 2012. 7 Q2 2012 Update 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 ofcial system for the exchange of information relating to taxes. TIEAs allow for free exchange of nancial 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 dened policy to benet 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 specied. 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 nancial 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 simplication 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) 8 Private equity roundup — India Considering 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 nancial 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 claried 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 exibility in making investments in the country. 9 Q2 2012 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 prole 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 rst 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 signicant 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 rms are busy screening and evaluating both investment and exit opportunities, completing deals has been difcult 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 10 Private equity roundup — India About Ernst & Young Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 152,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. In India Ernst & Young India has ofces in Ahmedabad, Bangalore, Chennai, Gurgaon, Hyderabad, Kolkata, Kochi, Mumbai, New Delhi, NOIDA and Pune. Its workforce of more than 9,900* people work toward the organization’s vision of being a trusted business advisor that contributes to the success of its clients by creating condence and value. We help our clients achieve their potential through our leading approach, which incorporates various service dynamics, including: • An industry-aligned delivery model that harnesses our broad range. Practices focused on specic industries draw on knowledge, skills and our experiences of that industry in India and around the world. This helps us customize our approach to the unique needs of each client. • Our services are broadly classied 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-dened 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 denes 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 rm 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 Pacic M&A Investment Bank of the Year and Asia Pacic 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 rms 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-Pacic and emerging markets and global funds focused on Latin America and emerging markets, respectively. • The deals have been reclassied, wherever required, based on Ernst & Young’s sector-classication policy. • The gures have been rounded off to the nearest whole number. Methodology [...]... information about our organization, please visit www.ey.com How Ernst & Young’s Global Private Equity Center can help your business Value creation goes beyond the private equity investment cycle to portfolio company and fund advice Ernst & Young’s Global Private Equity Center offers a tailored approach to the unique needs of private equity funds, their transaction processes, investment stewardship and portfolio...Ernst & Young’s Private Equity practice At Ernst & Young, our Private Equity practice offers a broad range of services to assist you and your investee companies every step of the way — from your fund setup to the transaction life cycle Our teams work closely with you, offering incisive and proven industry... Zutshi Tax and Regulatory Advisory Services Email: sudhir.kapadia@in.ey.com For general enquiries, please contact: Commercial Due Diligence Email: amit.zutshi@in.ey.com Private Equity Jeff Bunder Philip Bass Sachin Date Global Private Equity Leader Email: jeffrey.bunder@ey.com Global PE Markets Leader Email: philip.bass@ey.com EMEIA & UK PE Leader Email: sdate@uk.ey.com Q2 2012 11 Our offices Ernst &... improvement • Market entry options • Working capital management To speak with one of our professionals, please contact the appropriate person below Rajiv Memani Country Managing Partner & National Head Private Equity Email: rajiv.memani@in.ey.com Sunil Chandiramani Advisory Services Email: sunil.r.chandiramani@in.ey.com Amit Khandelwal Transaction Advisory Services and Transaction Support Email: amit.khandelwal@in.ey.com... unique needs of private equity funds, their transaction processes, investment stewardship and portfolio companies’ performance We focus on the market, industry and regulatory issues If you lead a private equity business, we can help you meet your evolving requirements and those of your portfolio companies from acquisition to exit through a highly integrated global resource of 152,000 professionals... loss occasioned to any person acting or refraining from action as a result of any material in this publication On any specific matter, reference should be made to the appropriate advisor www.ey.com/privateequity ED None . and regulatory update 6 Outlook 9 Methodology 10 Private equity roundup — India 2 Private equity roundup — India Moderate deal activity in Q2 2012 Q2 2012. 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