I t ndia may finally be inching towards handing private equity (PE) and venture capital (VC) funds independent status as investors.
India's apex planning body, the Planning Commission, is set to include a short note on PE funds in its mid-term re- view of the ongoing 11th Five- Year Plan (2007-12), said Gopal Srinivasan, who chairs the Confederation of Indian Industries' (CII) national com- mittee on PE and VC. He is also chairman of TVS Capital Funds Ltd, the asset manage- ment arm of the TVS Group.
“It's the first time a govern- ment body will talk about PE and the role it can play in the economy,“ said Sri Rajan, a member of the committee. The note “makes a point that it is important to recognize PE as an important source of capi- tal“.
Industry bodies representing PE and VC firms have been lobbying hard this year for reg- ulatory changes to recognize the sector, as it evolves into its own, as different from foreign institutional investors (FIIs) and other classes of investors.
The Indian Venture Capital Association (IVCA) had in April put forth a set of recom- mendations to a finance minis- try working group, set up under the chairmanship of U.K.
Sinha, managing director, UTI Mutual Fund, to review India's foreign portfolio investment policy.
“When we spoke to the regu- lators and said that in certain years, over 50% of the FDI (for- eign direct investment) has come through PE, this got their attention since, till then, they didn't realize the impact of PE,“ said Rajan.
Sinha did not answer calls made to his mobile phone.
Mint could not independently confirm with the Planning Commission if it is to make a point on PEs in its review.
“Our objective is for the government to start recognizing us as a different investment class and appropriately frame the regulatory environment for us because we are a different class of risk capital. We think long term and we bring in gov- ernance,“ said Mahendra Swarup, president, IVCA.
Among its recommendations to the working group, IVCA has sought for affirmative rights in the PE business not to be con- sidered as promoter control.
PE firms typically enter into contracts giving them affirma- tive rights that prevent their portfolio companies from tak- ing certain decisions on their own. This, according to capital markets regulator Securities and Exchange Board of India (Sebi), amounts to control and makes the PE firm a promoter in the company.
Another recommendation is to simplify India's delisting process. Globally, PE firms buy struggling companies, delist them and, after turning them around and making them prof- itable, list them again. In In- dia, difficult delisting rules make it nearly impossible for PE firms to take companies private.
CII has also suggested the open offer threshold in equity purchases be raised to 26% from 15%. IVCA has recom- mended the limit at 35%. Un- der Sebi rules, any entity buy- ing a 15% stake or more in a company has to make an open offer to public shareholders of that firm to buy another 20% stake.
Rajan, also a partner at man- agement consultancy Bain and Co. India Pvt. Ltd, said as many listed companies in India have annual revenue of less than Rs100 crore, the open offer limit should be higher.
To help create a larger pool of domestic capital, IVCA and CII have suggested that insur- ance and pension funds be al- lowed to make formal alloca- tions to the PE and VC asset class. Globally, pension funds such as the California Public Employees' Retirement System and the Canada Pension Plan Investment Board are among the biggest investors in PE firms.
“Earlier, these concerns were voiced individually when PE and VC (industry) was not even a $1 billion (around Rs4,700 crore) business. So it was considered as a small part of the overall FDI,“ said Muneesh Chawla, managing director, Blue River Capital Ad- visors (India) Ltd. “But now, it is a $15 billion industry and a significant part of the FDI coming into the country. So it's time it gets recognized as a separate asset class.“
Swarup and Rajan are opti- mistic about the outcome.
“They (regulators) are noticing the difference between PE and VC and a straight defined FDI or FII,“ said Swarup.
IVCA is due to make another presentation to the depart- ment of industrial policy and promotion (DIPP) in two weeks. “Once they understood how critical PE is to the FDI in the country, the DIPP was very keen to understand what could be done,“ said Rajan.
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I t ndia may finally be inching towards handing private equity (PE) and venture capital (VC) funds independent status as investors.
India's apex planning body, the Planning Commission, is set to include a short note on PE funds in its mid-term re- view of the ongoing 11th Five- Year Plan (2007-12), said Gopal Srinivasan, who chairs the Confederation of Indian Industries' (CII) national com- mittee on PE and VC. He is also chairman of TVS Capital Funds Ltd, the asset manage- ment arm of the TVS Group.
“It's the first time a govern- ment body will talk about PE and the role it can play in the economy,“ said Sri Rajan, a member of the committee. The note “makes a point that it is important to recognize PE as an important source of capi- tal“.
Industry bodies representing PE and VC firms have been lobbying hard this year for reg- ulatory changes to recognize the sector, as it evolves into its own, as different from foreign institutional investors (FIIs) and other classes of investors.
The Indian Venture Capital Association (IVCA) had in April put forth a set of recom- mendations to a finance minis- try working group, set up under the chairmanship of U.K.
Sinha, managing director, UTI Mutual Fund, to review India's foreign portfolio investment policy.
“When we spoke to the regu- lators and said that in certain years, over 50% of the FDI (for- eign direct investment) has come through PE, this got their attention since, till then, they didn't realize the impact of PE,“ said Rajan.
Sinha did not answer calls made to his mobile phone.
Mint could not independently confirm with the Planning Commission if it is to make a point on PEs in its review.
“Our objective is for the government to start recognizing us as a different investment class and appropriately frame the regulatory environment for us because we are a different class of risk capital. We think long term and we bring in gov- ernance,“ said Mahendra Swarup, president, IVCA.
Among its recommendations to the working group, IVCA has sought for affirmative rights in the PE business not to be con- sidered as promoter control.
PE firms typically enter into contracts giving them affirma- tive rights that prevent their portfolio companies from tak- ing certain decisions on their own. This, according to capital markets regulator Securities and Exchange Board of India (Sebi), amounts to control and makes the PE firm a promoter in the company.
Another recommendation is to simplify India's delisting process. Globally, PE firms buy struggling companies, delist them and, after turning them around and making them prof- itable, list them again. In In- dia, difficult delisting rules make it nearly impossible for PE firms to take companies private.
CII has also suggested the open offer threshold in equity purchases be raised to 26% from 15%. IVCA has recom- mended the limit at 35%. Un- der Sebi rules, any entity buy- ing a 15% stake or more in a company has to make an open offer to public shareholders of that firm to buy another 20% stake.
Rajan, also a partner at man- agement consultancy Bain and Co. India Pvt. Ltd, said as many listed companies in India have annual revenue of less than Rs100 crore, the open offer limit should be higher.
To help create a larger pool of domestic capital, IVCA and CII have suggested that insur- ance and pension funds be al- lowed to make formal alloca- tions to the PE and VC asset class. Globally, pension funds such as the California Public Employees' Retirement System and the Canada Pension Plan Investment Board are among the biggest investors in PE firms.
“Earlier, these concerns were voiced individually when PE and VC (industry) was not even a $1 billion (around Rs4,700 crore) business. So it was considered as a small part of the overall FDI,“ said Muneesh Chawla, managing director, Blue River Capital Ad- visors (India) Ltd. “But now, it is a $15 billion industry and a significant part of the FDI coming into the country. So it's time it gets recognized as a separate asset class.“
Swarup and Rajan are opti- mistic about the outcome.
“They (regulators) are noticing the difference between PE and VC and a straight defined FDI or FII,“ said Swarup.
IVCA is due to make another presentation to the depart- ment of industrial policy and promotion (DIPP) in two weeks. “Once they understood how critical PE is to the FDI in the country, the DIPP was very keen to understand what could be done,“ said Rajan.