Post Downturn Perils & Prospects Of Private Equity In India

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A Research Paper presented at CONNOIANCE, a national level seminar on innovation in finance at Christ University.

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Post Downturn Perils & Prospects Of Private Equity In India

  1. 1. Research Paper on <br />Post Downturn Perils & Prospects of Private Equity in India<br /> <br />AMITABH VATSYA<br /> NITIE, Mumbai<br />Email: amitabhhelios@gmail.com<br />Website: http://alphaphile.blogger.com<br />http://in.linkedin.com/in/amitabhvatsya<br />
  2. 2. Scope of the presentation<br />PE Deals in India<br /><ul><li>PE in India
  3. 3. History of PE in India
  4. 4. PE deals in India
  5. 5. Regulatory Framework in India
  6. 6. Perils of PE in India
  7. 7. Recent Reforms
  8. 8. Asian LP disappointment
  9. 9. Decrease in VC Confidence
  10. 10. Transfer Pricing
  11. 11. Treaty based structures
  12. 12. Prospects of PE in India
  13. 13. Pie is getting bigger
  14. 14. Performance paradox
  15. 15. Laws of attraction
  16. 16. Way forward
  17. 17. Demand for owner mentality
  18. 18. Budget Impact
  19. 19. Hedge fund – PE convergence
  20. 20. New Regulations</li></ul>Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in India<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br />- Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />
  21. 21. History of PE in India<br />PE Deals in India<br /><ul><li> Started off in 1970s.
  22. 22. Problem of inadequate funding and financial structure
  23. 23. Formation of earliest all-India funds like IDBI, ICICI and </li></ul> IFCI<br /><ul><li> Govt. of India announced guidelines in the CCI
  24. 24. Economic liberalization of 1991
  25. 25. Doors opened for foreign companies in 1995
  26. 26. It revolution of 1997
  27. 27. Maturing of PE and VC after 2008 recession.</li></ul>Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in India<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />
  28. 28. PE Deals in India<br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in India<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger <br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> CAGR : 43.67 % ( based on Value of Investments)
  29. 29. No. of PE in Deals in 2003 : 56
  30. 30. No. of PE in Deals in 2007 : 387 </li></li></ul><li>Regulatory Framework<br />PE Deals in India<br /><ul><li> Exchange Control Regulations
  31. 31. Statutory framework governing FI in India
  32. 32. Role of Reserve Bank of India
  33. 33. SEBI regulations
  34. 34. Governs foreign private equity and venture capital </li></ul> investors<br /><ul><li> Registering off shore funds as foreign venture capital investor
  35. 35. Indian tax laws.
  36. 36. Capital gain tax regime
  37. 37. Double Taxation Avoidance Treaty (DTAT)</li></ul>Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />
  38. 38. Recent reforms regarding LP’s & GP’s<br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> Currently there are 78 PE firms in India
  39. 39. Limited Partnership model adds to the woes of PE </li></ul> fund managers<br /><ul><li> Difficult to raise funds in an extremely challenging environment</li></li></ul><li>Poor Show by Asian LP’s<br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> Poor performance of LP’s during the downturn
  40. 40. Damaged the perception of asset class
  41. 41. Change in risk appetite and investment criteria
  42. 42. Investors have deepened their due diligence as a </li></ul> result<br /><ul><li> Environment of disappointment
  43. 43. Decreased chances of investment in PE
  44. 44. Fund raising will be tough</li></li></ul><li>Decrease in Confidence of VC’s<br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />Confidence Index quarter wise<br /><ul><li> Decrease in confidence levels post downturn
  45. 45. Impact
  46. 46. Reduced propensity to invest by a Venture Capitalist
  47. 47. Decreases PE investment in India </li></li></ul><li>Arms Length Pricing<br />PE Deals in India<br /><ul><li> Need for a robust transfer pricing policy
  48. 48. Overall Tax risk management strategy
  49. 49. PE houses are expanding their global management </li></ul> footprint<br /><ul><li> Hence a need to revisit their TP Models
  50. 50. Historical Models such as Cost plus may no longer be appropriate
  51. 51. Transfer Pricing is neither an exact science nor a </li></ul> static target<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />
  52. 52. Treaty Based structures<br />PE Deals in India<br /><ul><li> Treaty based structures to mitigate exposure to source
  53. 53. country taxation
  54. 54. By investing in Treaty protected special holding
  55. 55. companies
  56. 56. Indian Scenario
  57. 57. Tax authorities scrutinizing PE investments
  58. 58. High profile Vodafone case
  59. 59. Fund managers face challenges while structuring in </li></ul>India<br /><ul><li> Proving detrimental for PE growth</li></ul>Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />
  60. 60. The increasing pie<br />PE Deals in India<br />Private Equity worldwide assets under management<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br />- Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> PE funds under management : $ 2.5 trillion
  61. 61. Forecasted to grow to $ 3.5 trillion by 2015
  62. 62. Pie is getting bigger
  63. 63. Indian market share in this pie is bound to grow </li></li></ul><li> PE during downturns<br />PE Deals in India<br />PE funds raised during downturns<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br />- Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> Healthy returns during recent global economic slowdowns
  64. 64. Average IRR of vintage year investments
  65. 65. Europe : 17.4%
  66. 66. US : 12.67%
  67. 67. Blooming tomorrow for PE’s in the future</li></li></ul><li>Top destinations for PE investors <br />PE Deals in India<br />Top countries for PE investment and funds raised<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> India accounted for only 6% of the global PE deals volume in 2009
  68. 68. Deal activity declined by 39 % ( volume wise)
  69. 69. India accounted for only 2% of the global PE deals value in 2009
  70. 70. Deal activity declined by 68 % ( deal size wise)</li></li></ul><li> New Regulations<br />PE Deals in India<br /><ul><li> Minimum aggregate firm commitment
  71. 71. Revised format for quarterly reporting by FVCI </li></ul> and DVCFs<br /><ul><li> Reduced application and registration fees
  72. 72. Reduced registration and renewal fees by FIIs
  73. 73. REIT Regulation for exit option awaited
  74. 74. Draft for REIT Regulation is ready, final verdict to </li></ul> be delivered<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br />
  75. 75. Impact of budget on PE <br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> Deduction in IT for long term infra bond </li></ul> investment<br /><ul><li> Tax holidays for hotels
  76. 76. Tax holidays for deduction of CapEx for natural</li></ul> gas/crude or petroleum oil pipeline<br /><ul><li> Proposal for payment of import duty on </li></ul> depreciated value<br /><ul><li> Capital gain tax free conversion of private/unlisted public company to Limited Liability Partner
  77. 77. Increased Minimum Alternate Tax
  78. 78. Increase in ambit of Services Tax</li></li></ul><li>Hedge Fund – PE convergence<br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> Natural synergy between two asset class
  79. 79. Distress debt investing – a potential area
  80. 80. Will be in large supply in the near </li></ul>future<br /><ul><li> Route for structurally diversified </li></ul> exposure<br />
  81. 81. Demand for Owner Mentality<br />PE Deals in India<br />Introduction<br />PE in India <br /> - History of PE<br /> - Present Status of PE<br /> - Regulatory Framework <br />Perils for PE in Indian<br /> - Recent Reforms <br /> - Asian LP disappointment<br /> - VC’s low in confidence<br /> -Transfer Pricing<br /> -Treaty based structures<br />Prospects of PE in India<br /> - Pie is getting bigger<br /> - Performance Paradox<br /> - Laws of attraction<br />Way Forward <br /> - New Regulations<br /> - Budget Impact<br /> - Hedge fund & PE <br /> - Owner Mentality<br /><ul><li> Value unlocking through business ownership
  82. 82. Highly motivated owner executives
  83. 83. A talented Board of Directors
  84. 84. Strategy formulation
  85. 85. Managerial expertise
  86. 86. Network of relationship</li></li></ul><li> Thank You <br />

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