What Specific Legal And Regulatory Considerations Must Be Borne In Mind When Pursuing Each Of These Differentstrategies In Your Jurisdiction
Each of the exit strategies outlined in question 8.1 is subjectto the regulations set out in the Companies Act and the rulesframed thereunder and, in the case of an IPO, must accord with theSecurities Exchange Board of India Regulations, 2018. There are various conditions andrestrictions on such transfers of shares under the Companies Act.For instance, a buyback by a company must be authorised by thearticles of association and approved by theshareholders, subject to various conditions, including thefollowing:
- The buyback must be less than 25% of the total paid-up capitaland free reserves of the company and
- The buyback cannot be initiated less than a year aftercompletion of the last buyback by the company.
In case of an IPO, the red herring prospectus issued by thecompany initiating the IPO must specify the types of securities andthe persons selling in the IPO, in accordance with the articles ofassociation of the company or in accordance with applicable law.
Private Equity Investment In The Indian Commercial Real Estate Is An Uptrend
Several private equity players, such as Xander, Blackstone, and Brookfield, are primarily focusing on the Indian real estate industry, especially the commercial segment, with several transactions recorded in the country in 2018. The business and companies, both, multinational and domestic, witnessed expansion. There have been several developments in the Indian market, such provision of the infrastructure status to the logistics sector, allowance of 100% FDI in the e-commerce market, and comprehensive tax reforms, like the Goods and Services Tax . Such developments boosted the prospects of investment in the Indian commercial real estate market. Private equity investors were focusing on investing in commercial, affordable housing, logistics, and warehousing, due to steady rentals and rental yield. Furthermore, increase in the number of buyouts was the primarily that aided the investments in the private equity market.
Need For Strong Policy Teams For Investment Funds
Due to the heightened exposure of emerging markets in global portfolios, investors have begun to realize the need to create sophisticated policy teams to consistently track regulatory affairs and policy developments. In June 2022, Sequoia India and Southeast Asia decided to double down on the region by launching a $2 billion early-stage venture and growth fund for India and an $850 million dedicated fund for Southeast Asia. To ensure that its massive capital pool is protected from policy shifts, Sequoia created a policy team with a dedicated chief policy officer in India. Similarly, the Carlyle Group recently established a position for a government affairs lead in India, and Prosus already has a strong public policy team in India. The fast-changing regulatory landscape in India coupled with the inflow of global capital has generated a new demand for public policy professionals who can navigate the public-private corridor and provide strong support for investment funds and their investee companies.
Towards 2030, as India continues to grow at a breakneck speed and positions itself on the world stage as an investment hub, the strategically interwoven world of public policy and investments will be a decisive business function. As investors continue to diversify global allocation, there is a need to keep a sharp eye on political risk, regulatory affairs, and the fast-changing regulations for the VC and PE industry in emerging and frontier markets.
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Advantages And Disadvantages Of Private Investment In Public Equity
PIPE transactions are not as convoluted and time-consuming affair as a fresh public issue of shares is for a company. In a PIPE deal, a company is able to sell newly issued shares at an agreed price or debt which may be converted into shares in future by the investor. PIPE deals offer a fast, inexpensive and a fast mode of getting into transactions. Certain factors such as difficulty in exit have forced PE firms to look towards publicly traded companies for better returns.
Advantages of PIPE deals
Some of the advantages that PIPE deals bring along with them are as follows:
What Considerations Should A Private Equity Firm Take Intoaccount When Putting Forward Nominees To The Board Of The Portfoliocompany
Private equity firms may negotiate and seek the right to appointtheir nominees to the board of directors of companies in which theyinvest, to ensure that they have complete visibility on the affairsof the company and are involved in the decision-making process.Private equity firms must consider the following factors whennominating directors to the boards of portfolio companies:
- The interests of nominee directors must be disclosed inaccordance with the applicable law to identify relatedparties
- The past conduct of the nominee director must be disclosed,including any litigation for some fraudulent or other relatedactivities
- As executive directors, nominee directors are also liable intheir fiduciary capacity to work in the best interests of thecompany with the objective of growing the company and
- Nominee directors cannot make decisions in the exclusiveinterests of the private equity investor, as this may affect thecompany. They must ensure that all decisions are taken in the bestinterests of the company as a whole and all of itsstakeholders.
The company must also discuss the terms of such appointment ofnominee director, such as:
- the director being appointed in a non-executive capacity or notbeing considered an ‘officer who is in default’
- any indemnification obligations of the company towards suchdirectors and
- any directors’ and officers’ liability insurance to beprocured for such indemnification obligations.
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How Are Private Equity Funds Managed
A private equity fund is managed by a general partner , typically the private equity firm that established the fund. The GP makes all of the fund’s management decisions. It also contributes 1% to 3% of the fund’s capital to ensure it has skin in the game. In return, the GP earns a management fee often set at 2% of fund assets, and may be entitled to 20% of fund profits above a preset minimum as incentive compensation, known in private equity jargon as carried interest. Limited partners are clients of the private equity firm that invest in its fund they have limited liability.
Are Private Equity Firms Regulated
While private equity funds are exempt from regulation by the Securities and Exchange Commission under the Investment Company Act of 1940 or the Securities Act of 1933, their managers remain subject to the Investment Advisers Act of 1940 as well as the anti-fraud provisions of federal securities laws. In February 2022, the SEC proposed extensive new reporting and client disclosure requirements for private fund advisers including private equity fund managers. The new rules would require private fund advisers registered with the SEC to provide clients with quarterly statements detailing fund performance, fees, and expenses, and to obtain annual fund audits. All fund advisors would be barred from providing preferential terms for one client in an investment vehicle without disclosing this to the other investors in the same fund.
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How Are Management Incentive Schemes Typically Structuredin Your Jurisdiction What Are The Potential Advantages Anddisadvantages Of These Different Structures
Targets generally offer the following management incentives toensure that management-level personnel use the private equityinvestment to meet the milestones agreed with the investor:
The advantages and disadvantages of these structures may varybased on:
- the type of company and the industry in which it operates and
- any commercial policies that the company and its investors mayimplement to incentivise employees.
Subject to the company’s performance and preference, thecompany may determine the percentage of such options and incentives and the vesting period for the same.
Top Domestic Pe Firms In India
Kotak Investment Advisors Limited is a part of Kotak Mahindra Group and invests in promising private companies. Kotak Investment Advisors focuses on various businesses other than private equity, like real estate, infrastructure, etc.
Location: Mumbai, India
Website:
2. Chrys Capital
One of the leading alternative investment firms, Chrys Capital manages a total of over $4 billion assets. The company focuses on consumer, Healthcare, IT, Financial Services.
Location: New Delhi
Website:
3. True North India Value Fund
True North is Indias 1st private equity fund which raised money from the domestic market. It launched India value fund with a combined investment size of around $2 million.
Location: Mumbai
Website:
4. Motilal Oswal Private Equity
Established in 2006, MOPE Advisors Private Limited is an asset management arm of Motilal Oswal group. The company engages in investing in mid-market space.
Location: Mumbai
Website:
5. IDFC Private Equity Fund
IDFC Private Equity, known as Investcorp, is a leading alternative investment firm providing investment services across all sectors. The company exclusively focuses on infrastructure services.
Location: Mumbai
Website:
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Types Of Private Equity Firms
Investors in private equity firms have to do so after adjudging if they want to be passive investors, who let the management of the company conduct the business and generate optimal returns or active investors who, in turn, provide operational support and give strategic guidance to ensure that the business growth is along the desired lines. Active PE or private equity firms often maintain relationships with C-level management like CEOs and CFOs for the companys growth.
What Specific Issues Should Be Borne In Mind Whenstructuring Cross
Cross-border private equity transactions are governed byregulations issued by the RBI, specifically under FEMA. Key factorsto be considered in cross-border private equity transactions arethe pricing regulations and taxation laws applicable to thetransaction. The shares issued to, or purchased by, a foreigninvestor are closely monitored by the RBI through the mandatoryfilings and disclosures, including the annual return of foreignliabilities and assets made by companies and filed with theRBI.
The RBI also restricts and regulates payment processes inprivate equity transactions. For instance, the RBI restrictsdeferred payment for the purchase of shares between a residentbuyer and non-resident seller and vice versa, asfollows:
- Not more than 25% of the total consideration for the purchaseof shares shall be deferred and
- Such deferred payment must be made within 18 months of the dateof execution of the transfer agreement.
In addition, the tax status of a foreign investor or seller mustbe appropriately warranted by such foreign investor for the purposeof determining the tax implications of such cross-bordertransactions, which may also be affected if India is a party to adouble taxation treaty with the host country of the foreigninvestor or seller.
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Private Equity In India: What Excites Investors
Despite obstacles, private equity in India is creating jobs and delivering real growth, according to investors at a recent Wharton India Economic Forum.
Knowledge at Wharton Staff
The private equity industry in India has evolved over the past two decades from nascent levels to a size and sophistication that global investors find attractive. PE investors in the country also find it encouraging that more teams of professional managers are available than earlier to run the businesses they target. Outcomes at those companies are decidedly better when those managers have some equity skin in the game.
Yet, Indias PE industry faces hurdles such as the absence of a well-developed capital market that would allow firms to leverage their equity with borrowings and thus put more money to work in the businesses they target. Regulatory obstacles and sudden changes to government policies are also common, and PE investors have learned to anticipate those. They also have the occasional brush with opacity or integrity issues with the existing managements at some of their target firms. A panel of executives heading the Indian arms of global of PE investment firms discussed those and other trends at the Wharton India Economic Forum held in early January in Mumbai, adding that they shared those views in their personal capacity, and not on behalf of their companies.
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Opportunities For India In Pipe
India is attracting PE investment because of its strong market fundamentals. Another reason for making India an attractive market for PE investments is the lack of PE opportunities in the North American market and Europe where the deal activity is sluggish couple with tight credit conditions.
A great opportunity has arrived for the emerging small and Medium Enterprises segment of India who are looking to raise funds. This is the place where PE investments can establish themselves as an alternate and viable source of financing the SMEs not only because of their financial capabilities but also because of their ability to offer a global platform to the SME sector. The PE firms can deploy their members as Board of Directors in their investee companies and take proactive part in their governance and operations. Such a step will improve accountability, transparency and corporate governance of the investee company. On the other hand, the SMEs will also get to benefit from PE investments in terms of alignment of global best practices in their company such as in terms of operations, global human resource management, financial planning and reporting and investor relations.
This does not mean that there are no challenges. In order to attract and develop a robust PE investment ecosystem, both the regulators and Indian businesses need to work towards removing legal, cultural and attitudinal barriers that continue to block the PE investments reach their optimal level.
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Are Break Fees Permitted In Your Jurisdiction If So Underwhat Conditions Will They Generally Be Payable What Restrictionsor Other Considerations Should Be Addressed In Formulating Breakfees
Break fees are deal protection measures whereby a party to atransaction agrees to pay a fixed fee to the other party if thetransaction is not consummated due to the occurrence of a specificevent provided in the investment agreement. Although not verycommon, break fees are permitted in Indian private equitytransactions and are a matter of contractual agreement between theparties. The parties may agree on break fees and specificperformance measures in the investment agreement if either partyvoluntarily disrupts or chooses not to complete thetransaction.
The break fees are generally held in escrow, and the parties mayagree on the events that trigger payment of the break fees , such asthe following:
- The target or a selling shareholder chooses a differentinvestor
- Either party decides to stop negotiations and/or
- Any disclosures are made or facts arise in the due diligenceprocess which may affect the investor’s decision to consummatethe transaction.
An important exception that must be considered in this regard isthe extent of the application of any force majeure events,such as modifications to the foreign direct investment regulationsrequiring prior government approval of any investments fromneighbouring countries, aimed at Chinese investments intoIndia.
An Introduction To Private Equity Financing
Private equity has been a driver of growth in the world economy for decades. While growth and profitability remain the primary goals of the PE industry, the contribution of the PE industry to economic development is undeniable. Furthermore, the ability of timely investment to sustain and gestate ideas into economic realities has permitted the PE industry to take on a parental role in the economy.
The basic method by which PE investments work in India is not substantially different from the manner in which they work elsewhere.
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A typical investment commences with the PE investor seeking out a company requiring investment or being approached by such a company. Following this, a basic document, such as a memorandum of understanding, a letter of intent, or a term sheet is executed between the investor and the company, in order to lay out the framework of the investment.
Once the initial document is in place, the investor usually conducts, at the minimum, a legal and financial due diligence on the company. This is often accompanied by a business due diligence and a background check on the promoters of the company.
Simultaneously, along with the due diligence process, the investor and the company will negotiate one or more investment documents, including share subscription agreements, share purchase agreements, and shareholders agreements with the company and the promoters/shareholders.
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Challenges To Pipe Deals In India
A number of challenges exist which need to be overcome in order to facilitate more PIPE deals in India and take it to their optimum level.
On the other hand, these PE firms would be more inclined towards investing and resurrecting those companies where they have already invested if they wish to achieve windfall gains typical of PE investment.
