Private equity in India



FW moderates an online discussion covering private equity in India between Sanjay Asher at Crawford Bayley & Co., Satvik Varma at Independent Law Chambers and Srinivas Kilambi at KSB Partners.

FW: How would you describe recent deal activity involving private equity firms in India?

Kilambi: The level of deal activity has been patchy. While in certain sectors there has been a small increase in private equity investment, other sectors such as real estate have seen a steep decline in investment levels in the last year. While there are sectoral reasons for the decline – for example real estate has suffered on account of inconsistent government regulation at state level, and poor asset quality –PE firms appear to be awaiting significant liberalisation of the investment policies by the government before investing in India. 

Varma: PE activity at the start of 2011 is best described as cautiously optimistic, since it was reasonably slow. Deal flow picked up later in the year with reports in September 2011 that India has aggregated almost $7.57bn of PE investments – almost a 25 percent increase on the same period last year. It has also been reported that the average size of deals has increased marginally from what it was for the same period last year.

Asher: Recent deal activity involving private equity firms in India has increased substantially. The primary reason for this increase in private equity deals the sluggish initial public offering market. Obviously, projects cannot stop or be delayed so the only available mechanism to raise equity capital is private equity.

FW: Which key sectors are these PE firms targeting, and why?

Varma: The infrastructure sector continues to attract maximum PE investments. Infrastructure broadly includes the power sector, which is perhaps seeing the most substantial investments, and within power, investments are also being made in the solar power and renewable energy sectors. Infrastructure is being targeted by PE firms largely on account of the huge amount of funds the sector requires, which has made it an extremely sound and profitable investment opportunity. Government policy for infrastructure investment has also found comfort with fund managers, and this, coupled with the economic fundamentals of the sector which are very strong, is leading to enhanced deal activity. Some other key sectors for PE firms have been, banking, financial services and insurance, and, to a limited extent, the retail sector.

Asher: The sectors targeted by PE firms are generally all sectors except real estate, retail, and to an extent the infrastructure sector, which are all failing to attract PE investment.

Kilambi: We have seen a lot of activity in the healthcare, biotechnology, information technology (IT) and IT related sectors. There are a number of reasons for the focus on these sectors. First, these sectors are relatively less regulated and the regulations have been consistent over a period of time. Second, these sectors are not ‘infrastructure sensitive’, that is, the quality of roads, ports and so on, does not significantly impact the performance of these sectors. And third, there are established industry parameters in India and therefore it is easier for potential investors to assess the growth potential of companies in these sectors. Also, with increasing growth in the airline industry, we have seen significant interest – and investment – in the Maintenance Repair and Overhaul (MRO) space.

FW: Are you seeing attractive opportunities for investment in India’s developing infrastructure?

Asher: There are several opportunities in infrastructure. Unfortunately, due to the existing economic and political climate, investment in developing infrastructure is much slower than required. But this is a temporary phase which should tide over in the next 12 months.

Kilambi: Most infrastructure projects are highly regulated, require a public-private partnership and are dependent on the government, its agencies and instrumentalities, to ensure timely payment. PE firms have struggled to find viable structures for investment. Also, by liberalising the External Commercial Borrowing regime for infrastructure and by providing incentives to Indian banks to lend to infrastructure projects, the government has made it easier to finance infrastructure projects. This has resulted in making it less commercially attractive for PE firms to invest in the infrastructure space.

Varma: As stated, infrastructure continues to be one of the most attractive investment sectors that PE firms are targeting. Also, the power sector has seen a lot of PE money flow and this is largely on account of the increasing gap between the demand and supply in the sector. With increased demand there is a need to increase generation capacity. To fund such enhancement, all the power generation companies require funds, which makes investment in the sector popular with PE firms. 

FW: What incentives and policies has the Indian government introduced to actively welcome foreign private equity into the country?

Kilambi: Regrettably, there have been no significant policy changes introduced by the government of late which has significantly dampened investor enthusiasm to invest in India. It was expected that the UPA government would usher in the second phase of liberalisation by making investment and exit by PE firms easier and more commercially feasible; and remove or dilute sectoral restrictions, especially in the retail, real estate, banking and insurance sectors. While there has been a lot of press on significant policy changes being in the offing, ground reality has not changed.

Varma: A significant issue is the changes proposed to the Public Takeover Code Regulations, which will impact PE deal activity if and when it is approved. In early July, the Securities and Exchange Board of India (SEBI) proposed changes – yet to become operational – to the SEBI Substantial Acquisition of Shares and Takeovers Regulations (Takeover Code). Amongst the major changes proposed is the increase in the threshold limit from 15 to 25 percent at which level the Takeover Code gets triggered. SEBI has also proposed to increase the resultant mandatory open offer size from 20 to 26 percent. Thus, once approved, acquirers will be able to hold up to 25 percent without triggering the Takeover Code, and once triggered are required to acquire from the public shareholders up to 26 percent, which can lead to the resultant equity holding at 51 percent, which is controlling equity. Once approved, the change will most definitely lead to a significant increase in PE investments in listed companies since generally PE firms like to acquire a substantial percentage in the investing company to be able to prevent against mismanagement and to be able to exercise control. 

Asher: There are sufficient incentives and policies which have been framed to actively welcome foreign private equity into the country. However, the uncertainty surrounding taxability through the Mauritius route needs to be resolved sooner rather than later. In fact, the Central Board of Direct Taxes should provide clear clarification on whether investment through Mauritius will have short and long term capital gains tax benefits.

FW: What general advice would you give to PE firms on how to structure and negotiate buyouts in India, with a view to minimising risk and maximising future value?

Varma: Negotiated buyouts by PE firms in India are not very commonly seen. Generally speaking, the best way for PE firms to minimise risks and maximise returns is to ensure that the target in which the investment is made has a strong management team with established credentials and with whom the PE firm shares its long-term vision and commitment. Another way to generally maximise future value is to ensure that the PE investment is made in a growth sector which will continue to serve a purpose and business need through the life of the investment. 

Asher: My general advice would be to structure exits in a careful manner considering the rules and regulations concerning foreign direct investments in India.

Kilambi: Depending on the sector and broad terms of investment, there are a number of mechanisms that can be affected to maximise returns and minimise risk. For instance, in some transactions, we have recommended to PE clients that instead of an equity investment, they should consider a mezzanine investment via quasi-equity instruments. Some of the key elements that we ask our clients to build into any PE investment structure are: to ensure that the Indian partner has sufficient incentives/ disincentives to remain committed to the company/project throughout the investment term; to control the cash flow of the investee company at all times; and to clearly outline the timing of the exit and exit mechanisms so as to set expectations of both parties clearly and precisely.

FW: What tax considerations do PE firms need to make when conducting operations and executing buyouts in India? Have there been any recent regulatory changes in this area? 

Asher: Most PE firms enter India through Mauritius. It is important that the entry and exit through Mauritius is done in a tax effective manner keeping in mind the recent Vodafone decision and other decisions relating to taxability of share sale by a foreign entity.

Kilambi: The first thing that PE firms investing in India need to determine is the jurisdiction from which they propose to invest into India. For this purpose, they must examine the relevant Double Taxation Avoidance Agreements (DTAA) between India and the investor country and design a tax-efficient structure for their investment. Of late, there has been significant pressure from the Indian government to reduce ‘treaty shopping’ and it is likely that loopholes in a frequently used DTAA will be plugged, unfavourably to investors, in the next few months. Also, Indian tax authorities are seeking to expand their jurisdiction to impose tax liability on non-resident to non-resident transactions involving Indian securities. Therefore, it is critical that PE investors consider all these trends along with current regulations, before finalising their investment strategy.

FW: Could you outline the new rules on investments in long-term securities? What impact could this have on the PE market?

Kilambi: Two significant clarifications were recently issued by the government. The first relates to determination of total foreign investment in a downstream investment, wherein if the foreign investment in the parent company is less than 50 percent, then any subsidiary of such an entity would not be considered to have any foreign investment. The second relates to allowing the conversion of quasi–equity instruments to be converted into equity as per a pre-determined formula based on the performance of the company. The first clarification enables a PE investor to deal with any restrictions on the percentage of shareholding that they may hold as per existing government guidelines. The second clarification allows a PE investor to maximise the value of its investment, since the number of shares that the PE investor would receive at the end of the term of the convertible instrument would be directly linked to the performance of the company and not some arbitrary figure under the previous regulations.

Varma: New rules have been proposed by the market regulator, SEBI, relating to PE investments, which will impact the PE market. The regulations proposed by SEBI seek to monitor all classes of Alternate Investment Funds (AIF) operating in India and if approved in their current form, are likely to bring about major changes in the way private equity firms operate in India. The proposed regulations seek to create many categories of AIFs and it is proposed that each category will require a separate registration. Aside from the administrative challenges of such proposed requirement, the current regulation also prohibits an entity registered in one category to undertake deals which technically may fall under a separate category. Such registration requirements take away a deal of flexibility and are also likely to overstrain the administrative functioning of SEBI to process the applications and requests of PE funds. There currently appears to be lack of clarity among PE firms on whether the same fund sponsor will be permitted to operate across different sectors even after seeking separate registration for each category of investment, as is standard business practice among PE investors.

Asher: The new rules on investment in long term securities do not adversely affect the PE market.

FW: What trends do you expect to see in private equity activity for the remainder of 2011, and into 2012?

Varma: Despite allegations of corruption and scams, and on the assumption that there is political stability in India, PE deal activity and outlook for the remainder of 2011 and into 2012 looks reasonably optimistic, largely on account of most PE firms continuing to believe in India’s long-term growth story. With interest rates continuously rising, increased pressures of inflation, and lack of alternative avenues of funds, especially since the equity markets have themselves been quite volatile, the market conditions are suitably favourable for enhanced PE activity. Infrastructure will continue to attract the largest PE activity, but with approximately 14,700 MW – or nearly 10 percent – of India’s installed power-generation capacity being in the form of renewable sources of energy, one can expect greater PE investments in solar, wind, hydro, and biomass projects. This would be following a global trend towards clean energy, but with a large number of independent power producers entering the business, the potential of this largely untapped market coupled with strong financial opportunities will make it exceptionally attractive for PE investment. 

Asher: I am expecting to see much higher investment by PE firms for the remainder of 2011 and into 2012.

Kilambi: Unless there is significant liberalisation of the investment policy by the government, there is unlikely to be a major uptick in PE activity in India in the coming year. There will continue to be significant investment in the healthcare, biotechnology, IT, and IT related services sectors. In other sectors such as infrastructure and real estate there will likely be sporadic PE investments focused more on specific projects rather than at an entity level. Also, the economic situation in the western world is likely to have a material impact on deal sizes and the type of transactions being undertaken in India. 


Sanjay Asher is a partner at Crawford Bayley & Co. Mr Asher has extensive knowledge of corporate and commercial practice, and practices in the fields of corporate advisory, regulatory and compliance, commercial transactions, mergers and acquisitions, joint ventures, technical and financial collaboration, and capital insurance and exchange control regulations. He is a member of Institute of Chartered Accountants of India, the Bar council of Maharashtra and Goa, and Incorporated Law Society. Mr Asher can be contacted on + 91 222 266 3353 or by email:

Satvik Varma is the founder and managing partner of Independent Law Chambers. His areas of speciality include M&A, joint ventures, foreign direct investment, private equity placements, cross-border technology transactions, commercial litigation, and arbitration. Mr Varma is a dual qualified attorney, licensed to practice law both in India (1998) and in the State of New York (2003), where he enrolled after securing a masters of laws (LL.M.) from Harvard Law School. He is a frequent speaker at various panels and writes regularly for many of India’s leading business newspapers, magazines and journals. Mr Varma can be contacted on +91 98732 82762 or by email:

Srinivas Kilambi is a partner at KSB Partners. He has 17 years of experience in the field of corporate finance and general corporate advisory services. Key areas of his practice include private equity, venture capital funding, structured finance, project finance, investments, capital markets advisory including treasury operations and purchase/sale of debt instruments. He has also advised on corporate acquisitions, portfolio acquisitions, portfolio divestments and a range of structured products. Mr Kilambi can be contacted on +91 124 424 1700 or by email:

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Sanjay Asher

Crawford Bayley & Co.


Satvik Varma

Independent Law Chambers


Srinivas Kilambi

KSB Partners

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