Emergence of Private Equity and Venture Capital in the Indian Corporate landscape

Emergence of Private Equity and Venture Capital in the Indian Corporate landscape Dr. Joshy Andrews Assistant Professor, St.Aloysius College Edathua, ...
Author: Coral Garrett
0 downloads 0 Views 176KB Size
Emergence of Private Equity and Venture Capital in the Indian Corporate landscape Dr. Joshy Andrews Assistant Professor, St.Aloysius College Edathua, Alapuzha Mail: [email protected] ABSTRACT The Indian corporate sector has been dominated by three different types of companies for a long period of time; public sector, private sector and the multinationals. If we strategically categorize, we can see the emergence of a new category of companies owned and supported by Venture Capital(VC) and Private Equity(PE). Investments from this sector shows significantly increasing trend and even a large portion of investment in Foreign Direct Investment (FDI) come through this route. They consider the potential of India as an emerging economy and the high growth rate of economy as whole. They wanted to generate high returns leveraging on India’s Economic growth. It is an attempt to reveal the emergence of Venture Capital and PE in the capital formation in India. Venture capital (VC) and Private equity (PE) systems have emerged in the world as a redeemer for new businesses with novel technologies, production processes etc. but with high prospective risk. To commercialize such ventures was always a big task in front of the enthusiastic entrepreneurs. It is a real solution for that problem. Although the development of VC & PE started in the US in the mid-fifties, such initiatives is of recent origin in India. They provide funds to new and promising companies that are typically knowledge based; assume a high risk element but promise sustainable growth and higher rewards. If the support was concentrated to small and medium enterprises in the beginning, the orientation is extended to big manufacturing organizations also which extended the support as Private Equity (PE) class.

History of venture capital in India: Before the emergence of this sector, Development Finance Institutions (DFIs) had been partially playing the role of venture capitalists by providing assistance for direct equity participation. The need for venture capital in the country was felt in the middle of eighties when a lot of investors burned their fingers by investing in such endeavors. The venture capital industry in India evolved in the late 1980s with the Government of India legalized venture capital operations in 1988 and has been skimming attention ever since. Technology Development and Information Company of India Ltd. (TDICI), an equal joint venture of ICICI and UTI, was the first organization to begin its venture capital operations in India. TDICI was the investment manager and the funds were registered as UTI’s Venture Capital Unit Scheme (VECAUS). Thereafter in 1996 the regulatory environment of the industry was defined by the SEBI (Venture Capital Fund) Regulations, 1996 1

followed by the SEBI (Foreign Venture Capital Investor) Regulations, 2000 on the recommendation of Chandrasekhar committee fostering growth in the industry. There is a broad distinction between what is considered PE internationally and in India. Internationally, PE is all about acquiring a public company, and making it private. Certain improvements are made on its performance through a mix of operational and financial engineering and selling it to another investor. In India, the word PE is typically associated with growth capital which is provided to emerging companies to enable them to build scale using the capital and other management inputs and exit by going public or by a strategic sale. The Indian entrepreneur has seen PE as a source of capital and value added to enable them to grow with support of PE. The industry had predominantly relied on international sources of funding but now has also developed domestic fund sources and several funds have raised funds ether completely or partially in India. Now-a-days we can trace out specialization among PE Funds. Certain funds are focusing on specific themes which help in bringing together the appropriate skills to help build business. India today is one among the more attractive investment destinations globally, driven by a combination of various factors like strong economic growth, improved regulatory environment through de-regulation initiatives etc. As India moves on its speedy growth path, several large potential investment sectors such as infrastructure, financial services, domestic consumption offers significant VC/PE initiatives. If consider the GDP growth, it grew at 8.3%in 2010 which is an increase from 7.4% in 2009. If we consider the per capita GDP, it has increased from US$3,200 in 2009 to US$3,400 in 2010 even though the global economy as a whole experienced several corrections in its recovery from the recession. There are may other factors which raises the potential of India as an emerging destination. India now has a sizable middle class and the percentage of its population below the poverty line is gradually reducing. At the same time, disposable income among its middle class is growing and there is a great deal of cash circulation in the economy. The country has the second largest population in the world of 1.173bn, with 65% of the population between 15 to 64 years in age. High industrial production growth, increasing urbanization etc. are certain other factors.

Limited Liability Partnership (LLP) – a milestone in PE/VC Initiatives It was a strategic decision when India enacted Limited Liability Act in January 2009. The Ministry of Corporate Affairs (MCA), Government of India, defines the Limited Liability Partnership (LLP) as “A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in a flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership”. It was felt that a legal framework for governing and regulating LLP’s would bring together a combination of entrepreneurs, knowledge and risk capital, which can then provide an impetus to the growth of the Indian economy. The LLP framework helped HNIs, corporations, pension funds etc., to come together and pool money and invest in attractive opportunities. The capital gains or profits generated from such investments were than shared among the partners according to the agreement signed at the incor2

poration of the LLP. The legal framework protected the investors against double taxation in the form of corporate taxes paid by the firm invested in and again at hands of the individual partners. LLP structure has gained strong popularity and 2607 LLPs were registered by October 2010, within two years of enactment of the Act.

Routes of VC/PE Investments in India There are 4 major routes through which VC/PE investments happen in India: • The investor can register with SEBI (Securities Exchange Board of India) as a Domestic or Foreign Venture Capital Fund. This route provides for certain pass through tax benefits (No capital gain or with-holding tax on dividend). But it comes with some disadvantages that certain services of such funds are restricted as per the SEBI Regulations. • Direct Investment in an Indian company from outside India. This is usually done through a Mauritius subsidiary. The Indian Mauritius Tax-treaty provides the benefit of charging no capital gain tax in either India or Mauritius on the sale of shares of the sale of shares of an Indian company by a Mauritius company. • Investment in an Indian subsidiary of a US company. This is mainly done by US companies or investors who have set up their back end systems or support processes to cater to the front-end business in the US. Funding comes through Foreign Direct Investment (FDI) through the automatic route in sectors where 100% FDI is permissible. • The 4th route is similar to that mentioned in point 2 where a US company invests in a subsidiary in India by routing the investment through a Mauritius subsidiary of the US company to avail tax benefits of the India-Mauritius Tax Treaty.

Basic Categorization of VC/PE funds in India If we classify VC/PE funds based on the nature of promoters, it can be broadly classified into five categories based on the promoters of the fund. The five major categories can be traced as; a. Corporate Venture (CORPVEN): These include VC/PE operations set up by non financial companies. Large companies (e.g., Intel, Siemens) that have venture capital investment divisions within their organizations would fall under this category. Usually, in a CORPVEN program, the entire investment funds would be provided by the parent company. The corporations use a venture program to invest in companies that can have strategic significance to their existing or future operations. b. Financial Corporations (FINCORP): VC/PE operations that are promoted by financial institutions such as banks, term lending institutions, etc. would fall in this category. Examples of VC/PE firms under this category include ICICI Venture, IL&FS Investment Managers, and AXIS PE. c. Investment Banks (IBANK): VC/PE operations that are promoted by investment banks fall under this category. Investment banks are also widely called as merchant bankers in India and they provide a range of services such as underwriting, trading of securities, advisory services, etc. Financial corporations that do not have significant fund based operations would fall in this 3

category. Examples of VCPE firms under this category would include the venture operations of JM Financial, Motilal Oswal, etc. d. Government Institutions (GOVT): VCPE firms and operations that are backed and managed by governments, multilateral agencies, and development financial institutions would fall in this category. Even if the venture operations are of the type of FINCORP, if there is a strong government influence on the investment operations, then it would be classified under the GOVT category. For example, Gujarat Venture Finance Limited (GVFL) would be classified as a GOVT VCPE fund. e. Private Equity/ Venture Capital Firm (PRIV): Boutique or specialized VCPE fund management companies would fall under this category. These are promoted by independent fund managers, who raise capital from various investors to make investments. Examples in this category would include Nexus Venture Partners, TVS Capital, etc

VC/PE Flows in India The scenario of PE/VC investments caught momentum in the late 1990s with the growth of Indian IT companies and with the simultaneous global dot-com boom. On the back of global IT boom, Indian IT sector was viewed as a prominent funding opportunity and consequently saw a lot of Venture capital being pumped into the country. However, the dot com downfall in 2001-02 burst the bubble and it led to huge losses for the PE and VC Community, especially for those who had invested heavily in start ups and early companies. After almost three years of downturn in 2001-2003, the PE market began to gradually recover towards the end of 2004. By early 2004, fund raising in the US, which accounted for more than 60 per cent of the world's PE market, had begun to stabilize. The ripple effects were soon felt in other parts of the world, including emerging markets like China and India. Consequently, PE investors began investing in India in a big way. Table:1 VC/PE Investments in India Year

No. of Deals

2005 2006 2007 2008 2009 2010

123 302 405 311 206 253

Value of Deals (US$ Billions) 2.0 7.9 19.0 10.4 3.4 6.2

Source: IVCA report 2010

As per the Indian Private Equity & Venture Capital Association(IVCA) report the first phase of VC/PE journey come to an end in the late 2008 due to the financial meltdown and the US housing bubble. It is evident from the table that the size of the deals that if the total value of deals was US$19 Billion in 2007, it came down to US$ 10.4 Billion, US$3.4 Billion etc. in the coming

4

years. Again there is an improvement in 2010 with US$ 6.4 Billion in 2010. The number of deals also shows improvement in 2010 as 253 from 206 in 2009. Table.2 Sector Investment Breakup (2005 – 2010) Sector Value Volume (in US$mn) Real Estate & Infra Mgmt 13,043 203 Telecom 6,886 53 Banking & Financial Services 5,850 186 Power and Energy 3,772 78 IT & ITeS 3,708 277 Pharma, Healthcare & Biotech 2,124 141 Media, Entertainment& Publishing 1,922 86 Textiles& Apparels 1,423 59 Others 1,085 75 Automotive 1,030 45 Manufacturing 988 49 Shipping& Ports 722 13 Engineering 710 32 Hospitality 661 35 FMCG, Food& Beverages 635 34 Electrical & Electronics 634 19 Cement 567 13 Retail 471 31 Logistics 463 31 Oil & Gas 437 16 Agriculture& Agro Products 366 24 Aviation 291 19 Education 286 29 Metals & Ores 265 11 Plastic & Chemicals 259 19 Travel &Travel Services 196 12 Mining 164 4 Breweries & Distilleries 27 2 Printing & Stationary 18 3 Gems & Jewellery 17 1 49,018 1600 Total Source: IVCA Report 2010

It is evident from the table that sectors like Real Estate& Infra Management, Telecom, Banking & Financial Services, Power& Energy, IT& ITeS, Pharma,Healthcare& Biotech etc. shows high investment during the period. Sectors like Media, Entertainment&Publishing, Textile&Apparels, Automotive and Others are leading the queue. 5

Table:3 Top 10 Investors (2005-2010) Investor Sequoia Capital India International Finance Corporation Bennett Coleman & Co. Ltd. Citigroup Venture Capital ICICI Venture IDFC Private Equity Goldman Sachs Investment Partners IL& FS Investment Managers Ltd. Intel Capital Reliance Capital

Volume 57 53 52 39 32 31 27 23 22 22

Source: IVCA report 2010

If we consider the major investors, most of them are foreign VC/PE firms. It is also noted that domestic firms also included in the list of top ten investors during the period. Considering the region wise distribution of funds, the report reveals that the western region accounts for most of the investments made by both domestic and foreign investors. The southern region occupies the second highest position followed by the north and east. Table:4 Largest Recipients of VC/PE Funds (2005-2010) Investee

Volume

Bharti Airtel GMR Infrastructure DLF Ltd. Idea Cellular HDFC NSE Lodha Group Nitesh Estates Moser Baer India GVK Energy

4 8 3 8 2 6 5 6 4 3

Value (US$ mn) 3,166 1152 1050 951 769 697 680 621 528 404

Source: IVCA report 2010

It is clear from the table that the major beneficiaries of VC/PE funds during the period are technology and Infrastructure development Companies. It is because of the high potential in these areas in a developing country like India.

6

Conclusion With its solid performance during the study period of 2005 to 2010, the Indian PE has reemerged in good shape from the testing times of the global credit meltdown and subsequent economic problems. While the period ahead looks bright, it remains to be seen whether current conditions will prove to be a strong platform for sustained growth. Certainly, the Indian growth story remains on track and continues to attract PE interest. New opportunities in several underpenetrated sectors like infrastructure, financial services, healthcare and manufacturing are waiting to be tapped and appear to be generating an increased level of PE engagement. The PE industry itself is demonstrating interesting signs of growth and evolution. The number of domestic funds continues to expand, with the experience gained in the global PE funds are spinning out new breakout funds and promoters are warming up to the idea that PE partners are more than just another source of capital and can help them achieve exceptional growth, way beyond what the promoters can achieve alone. Reference 1. 2. 3. 4. 5. 6. 7. 8. 9.

MCA21eservices,Ministry of Corporate Affairs, GOI(http://wwwmca.gov.in) Private Equity Investing in India, KPMG India. Report of K.B. Chandrashekhar on venture capital, SEBI October 2000. Report on venture capital in India, SEBI, Dr. Ashok Lahiri, November 2003. BainIVCA VC/PE research survey 2011. http://www.ventureintelligence.in http://www.avci.com http://www.indianangelnetwork.com http://www.researchpeindia.com

7

Suggest Documents