Wednesday, September 18, 2013

Paper on Private Equity in India


In the past, some readers have asked if we could cover matters pertaining to the private equity sector in greater detail. Often, the difficulty we encounter is that private equity is not recognised specifically as an investment class under the Indian laws and regulations. As far as foreign private equity investments are concerned, they are generally treated as part of the foreign direct investment (FDI) regime and sometimes under the foreign institutional investor (FII) category. Private equity investments are subject to the same restrictions as other foreign investors. Moreover, a number of different laws and regulations apply in the context of investments by private equity firms, much like other foreign investors.

In this context, Professor Afra Afsharipour makes a timely contribution to the literature through her recent paper titled “The Indian Private Equity Model”. The paper analyzes the various laws and regulations that apply to private equity investments, and also the various structures and contractual arrangements used by the parties. It also contains a comparative perspective discussing the types of structures that either work or do not work in the Indian context relative to those that are well understood in other markets.

The abstract of the paper is as follows:

Private Equity (PE) firms have long invested in Western firms using a leveraged buyout (LBO) model, whereby they acquire a company that they can grow with the ultimate goal of either selling it to a strategic buyer or taking it public. Unable to undertake the traditional LBO model in India, PE investors in Indian firms have developed a new model. Under this Indian PE Model, PE firms acquire minority interests in controlled companies using a structure that is both hybridized from other Western investment models and customized for India‘s complex legal environment. PE investors in India face several challenges, including continuing restrictions related to foreign investment, the corporate governance structure of Indian firms, and securities and corporate law hurdles to investments in publicly listed companies. PE investors have thus developed an Indian PE model focusing on several major issues: (i) structuring of minority investments, (ii) investor control rights, and (iii) exit strategies. Nevertheless, recent governance and regulatory difficulties, such as uncertainty regarding the legal status of put options, highlight the insufficiency of the Indian PE model to provide investors with their desired protections.

This paper is part of the NSE Working Papers series that is gradually building up content on issues such as capital markets and corporate governance. It also has a separate series on Student Research Papers.

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