Amid a growing debate on regulation for private equity (PE) funds globally, PE players in India are demanding a greater clarity in the definition of private equity funds. Currently, private equity funds are covered under FVCI (Foreign Venture Capital Investor) regulations and there are no separate guidelines for PE funds.
“We need regulations on private equity funds,” said Vivek Pandit, partner, McKinsey & Co, on the sidelines of a private equity international India forum. Experts said that the need for defining private equity has become more critical with a draft proposal of the direct tax code.
“PE needs to be defined as an asset class. The proposal on removal of distinction between short-term and long-term capital gains tax will seriously impact fund returns,” said Nitin Deshmukh, CEO, Kotak Private Equity.
“We need a definition which appreciates that private equity is long-term capital, unlike a hedge fund where main motives are short-term gains. There is a huge pool of pension and insurance money waiting on the sidelines. Regulators should allow Indian pension funds to invest in this asset class,” added Pandit.
Mohit Saraf, partner at Luthra & Luthra, a law firm, said: “The flip-flop on regulations brings a lot of anxiety for LPs (limited partners).”
Sebi had notified the FVCI regulations in 2000. These regulations require FVCI to make a minimum investment of 67.77 per cent of investible funds in unlisted Indian Venture Capital Undertaking (IVCU) and the balance 33.33 per cent in listed securities or debt instruments, primarily with a view to foster investments in unlisted start-ups.
There are currently 135 Sebi-registered FVCIs (Foreign Venture Capital Investors) in India. Prashant Saran, wholetime member Sebi, said: “We need a lot of clarity on what private equity is about.”
Enumerating the issues that have emerged internationally for private equity funds, Saran said: “One of the issues that has come up is the tendency to maximise short-term gains where the existing management also sometimes tries to boost share prices. The other being leverage of target companies. About 75 per cent of target companies were behind schedule in payments. Apart from that, there are valuation issues and investor protection issues.”
Private equity experts felt that executing buyouts is still a challenge in India, mainly due to poor deal flow, lack of management talent, unenforceability of control and the challenge of managing exits.
“I think Indian enterprises are very promoter and entrepreneur driven,” said Vishal Nevatia, managing partner, India Value Fund.
“Control is a critical factor for buyouts in India,” said Bruno Seghin, partner at Navis Capital.
“Private equity deals in India are mostly growth-led rather than leveraged buyouts, as in the West,” said Deepak Parekh, chairman of Housing Development Finance Corp (HDFC). “The private equity model in India that works is the buy-in model rather than the buy-out structure,” he added. After witnessing a low in 2008 and in the first quarter of 2009, experts said that fund-raising activity by private equity players is expected to pick up by the fourth quarter of this financial year.
A majority of PE players agreed that valuation mismatch was one of the main challenges for deal closures.
“The general feeling is that private equity activity is starting to look up. We will see more deal closures going ahead. The sentiment is reviving and the fund-raising environment is much better than earlier,” said Sumir Chadha, managing director, Sequoia Capital India Advisors. On PIPEs (private investments in public equity), Luis Miranda, CEO, IDFC Private Equity, said: “PIPEs will continue to make a lot of money in India. There is a certain class of investors for whom liquidity and cash flows are very important and they will continue to support PIPEs.”
