VENTURE CAPITAL & PRIVATE EQUITY FINANCING IN INDIA

By Rasmeet Kohli1

Venture Capital & Private Equity Financing are
becoming increasingly popular routes of foreign investment
into India. These two asset classes have seen a phenomenal
growth in the past few years in the country and are expected
to increase further in the coming years. Before dealing with
the private equity and venture capital financing in India,
this article endeavours to explain the concepts of Venture
capital and Private Equity (PE) as these two concepts are
perceived to play into each other's territory.
Depending upon the stage at which funding is availed of,
Venture funds/PE fund can be classified into various types:
1) Angel investors: These are typically high-net-worth
individuals (HNIs) who have often been successful
entrepreneurs themselves. They re-deploy their
wealth in next-generation businesses. They invest in
new-idea enterprises (that do not yet have external
validation), help bring these ideas to market, take
significant risks and invest a lot of time and energy
in mentoring, management guidance and networking.
Angel investors are also governed by considerations
other than finance alone, such as belief in
Entrepreneurship itself.
2) Venture capital (VC) funding provides funds for early
stage companies. VC investments are traditionally
made for scaling up operations (i.e. developing,
launching and expanding new products or services).
VCs take lesser degree of risk and invest more money
than angel investors. However, a VC is about more
than financial support alone. VCs provide
entrepreneurial support and partnership-based
value-addition, often in the form of providing financial
advice, human resources, establishing networks with
customers and overall guidance in company strategy.
their exit strategy is usually up to the stage when the
company goes public or gets acquired at high value.
PE funds are generally seen to attract huge amount
of capital from investors, including pension funds,
insurance funds, university foundations and
individuals. PE investors can be domestic or foreign
private equity firms. Domestic PE firms are either
established as trusts, or set up as a company. All
Private equity (PE) investments from outside the
country are either classified as Foreign Institutional
Investment (FII) for investments in listed companies
or Foreign Direct Investment (FDI) for investment in
unlisted companies. If a PE investment takes place
in an unlisted firm, it falls under India's FDI rules. A
PE fund can also buy into listed companies. However,
in order to do such investments, the PE fund has to
become a registered FII.
After registration as an FII, there are two kinds of
transactions that can be entered by a PE Firm.
• PIPE (Private Investment in Public Equity) Deals: In
this type of transaction, the company sells shares
directly to the PE Fund. Under the FII category, the
Private investment in public equity (PIPEs) are large
transactions contracted between the PE Fund.
• Ordinary secondary market transactions (where the
PE fund buys shares on the secondary market). These
are pure FII transactions.
However, these two cases are not differentiated by capital
control2.
Various Stages of Investment for VCs/Private Equity
Funds in India

3) Private equity players are established investment
bankers and typically invest into proven/established
businesses. PE funds/players are among the largest
sources of funding for enterprises that are relatively
secure with an established track record, requiring
significantly large funds for expansion and growth.
As such, they take reasonably well-defined risks and
PE investments at various stages in India, can be understood
with the help of the following table3. PE firms may consider
entering a firm at an early stage as a venture capital fund,
later it may prefer to go for growth capital/late stage investing
and even consider investing into a company after it lists on
a stock exchange i.e. it may enter into a Private Investment
in Public Equity (PIPE) deal.

1
The author is with the NSE. The views expressed in the article are personal. The author would like to thank Ms.Anuradha Guru, NSE
for her support in writing this article.
2
The structure of PE is taken from 'Indian Financial Markets', Ajay Shah, Susan Thomas and Michael Gorham.Pg.46 and Pg.215.
3
Data source is Venture Intelligence. The data is available in public domain till 2007 at www.indiavca.org/
IVCA%20Presentation_February%202008.pdf

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According to a study4 in 2006, over 90% of private equity • Mergers and acquisitions : As the Indian economy's
funds are invested in late stage initiatives by mature firm. growth has kept a steady pace, industry-wide
As evident from the table below, maximum PE investments consolidations are an attractive route for a PE investor
(30%-40%) come in the late stage of companies or as PIPE to make an exit.
deals which are forming nearly 25%-30% of total PE There are three main areas where private equity
investments. In the year 2008, late stage deals i.e. private investors add value. These are financial engineering,
equity investments accounted for 38% of the pie in volume governance engineering and operational engineering6.
terms and 51% in value terms during 2008. Venture Capital
• Financial engineering refers to steps to add value
Investments accounted for 31% of the PE deals5.
by making capital structure more efficient - that is,
PE Investment by 2006 2007 decreasing the cost of capital. Typically, this goal is
Stage in India No.of Amount No.of Amount achieved in buyouts by taking on leverage and
Deals (US $ mn) Deals (US $ mn) bringing in outside capital.

• Governance engineering refers to processes that

Venture Capital 98 505 94 542
create value by improving incentives and monitoring
Growth PE 32 364 14 1,321 in the companies that private equity investors finance.
These steps can include the imposition of formal
Late 136 3,396 136 5,070
monitoring techniques and compensation that links
Pre IPO 14 43 14 434 pay to performance.

Private Investment 80 1,401 80 4,210 • Operational engineering refers to initiatives by

in Public Equity private equity funds to improve the firms they finance
(PIPE) through the provision of formal and informal
consulting services to boost production processes,
Buyout 7 370 7 173
working capital management, marketing and product
Buyout-Large 3 765 3 474 mix, and related areas.

Others (Includes Evolution of VC/PE Investment in India

Infrastructure In India, the evolution of PE investments can be traced back
Investments) 17 312 17 2,010 to the formation of VC Funds in India. PE has now entered
the economic mainstream and this segment has particularly
Total 387 7,156 365 14,234
gained momentum over the past few years. The concept of
Source: Venture Intelligence VC and PE is very recent in India as compared to other
Exit strategies of PEs countries like USA, UK, Europe, Israel etc where it has been
in existence since many years.
There are various forms of exit from an investment by a
private equity investor. These are: In the absence of an organized venture capital industry,
individual investors and development financial institutions
• Direct sale to investors seeking a shareholding in a
have hitherto played the role of venture capitalists in India.
firm acquired by the fund. The initial public offering
Entrepreneurs have largely depended upon private
(IPO) is a preferred exit option in developed PE
placements, public offerings and lending by financial
markets. Even Black and Gilson [1998] argue that
institutions.
well developed equity markets are a necessary
condition for venture capital investing to work, In 1973, a committee on "Development of Small and Medium
because venture investors rely on the ability to exit Enterprises" highlighted the need to foster venture capital
their investments through initial public offerings as a source of funding new entrepreneurs and technology.
(IPOs). Later, a study was undertaken by the World Bank to examine
the possibility of developing venture capital in the private
• Post-purchase listing of the company permitting sale
sector, based on which Government of India took a policy
of equity through the stock market.
initiative and announced guidelines for venture capital
• Sale to another private equity firm, referred to as a funds (VCFs) in 1988. Thereafter, Government of India
secondary buyout. issued guidelines in September 1995 for overseas venture

4
Rafiq Dossani and Asawari Desai, 'Accessing Early Stage Risk Capital in India', Stanford-Ti Study 2006.
5
Press Release by India Infoline & Venture Intelligence.
6
Kaplan and Strömberg [2008].

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capital investment in India. Further, as a part of its mandate
to regulate and to develop the Indian securities markets,
SEBI under Sec 12 of SEBI Act 1992 framed SEBI (Venture
Capital Funds) Regulations, 1996.
Pursuant to the regulatory framework, some domestic VCFs
were registered with SEBI. Some overseas investment has
also come through the Mauritius route.
The SEBI committee on Venture Capital was set up in
July 1999 to identify the impediments and suggest suitable
measures to facilitate the growth of VC activity in India.
Also keeping in view the need for a global perspective, it
was decided to associate Indian Entrepreneurs from Silicon
Valley in the committee headed by KB Chandrasekhar. These
guidelines were further amended in April 2000 with the
objective of fuelling the growth of VC activities in India.
Thereafter, based on recommendations of the K.B.
Chandrasekhar Committee, which was set up by SEBI
during the year 1999-2000, Guidelines for Overseas Venture
Capital Investment in India were withdrawn by the
Government in September 2000, and SEBI was made the
nodal regulator for VCFs to provide a uniform, hassle free,
single window regulatory framework. SEBI also notified
regulations for foreign venture capital investors. On the
pattern of foreign institutional investors (FIIs), Foreign
Venture Capital Investors (FVCIs) were also to be registered
with SEBI.
The Advisory Committee on Venture Capital, set up under
Chairmanship of Dr. Ashok Lahiri, submitted its report to
SEBI in the year 2003. It helped SEBI in considering the
amendments to the regulations that facilitated the further
development of vibrant venture capital industry in India.
Then in July 2006, the 'Committee on Technology Innovation
and Venture Capital' was constituted by the Planning
Commission to examine issues related to technology
innovation and policies for venture capital in India. This is
a very important report from the viewpoint of Private equity
in India because it differentiated between 'Venture Capital'
& 'Private equity' unlike the other reports which mentioned
only about the venture capital funding in India. To quote,
the report stated "Venture capital funding is special; but it
must be seen as part of a spectrum of funding that an
enterprise may tap at different stages of its life cycle. An
enterprise financed by a VC fund may have obtained some
initial funding from family and friends or from an angel
investor. It may at a later stage be financed by a private equity
fund."
7
The data on PE Activity in terms of funds raised and investments made have been sourced from Emerging Markets Private Equity
Association (EMPEA) and the PWC, Global PE Report 2008. Here, the data pertaining to funds raised by PEs in different regions has
been taken from EMPEA which reports the latest data till 2008. However, countrywise PE investments and funds data for the year
2007 has been sourced from the PWC report. The data on funds raised and investments reported by EMPEA and PWC may slightly
vary due to different mechanism and sources of capturing the data.
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Regulations for Private Equity Investors and Venture
Capital Investors
The activities of VCFs are regulated by formal legislation
under the aegis of SEBI (Venture Capital Regulations, 1996
& SEBI Foreign Venture Capital Investors Regulations,
2000), FDI and RBI FEMA provisions. The important statutes
that require compliances for private equity investment in
India are the Companies Act, 1956 (the "Act"), the Foreign
Exchange Management Act, 2000 and the Securities and
Exchange Board of India Act, 1992 along with the rules and
regulation therein. While, for tax exemption purposes,
guidelines are issued by the Central Board of Direct Taxes
(CBDT). Private investment in public equity (PIPE) deals are
also governed by the SEBI DIP Guidelines, which deals with
the regulations relating to QIBs and Preferential Placement.
The Ashok Lahiri committee had debated the need to
regulate VC industry given that investment in venture capital
industry is made primarily by QIBs, which are banks and
institutions, and high net worth individuals. Further, apart
from investment restrictions laid down in the regulations, a
VCF invests in accordance with the private placement
memorandum submitted to the investors, who are largely
institutions and capable of monitoring the use of funds.
Foreign Direct Investments
Most Private equity funds make FDI under the automatic
route, which does not require any prior approval. However,
there are certain sectors such as broadcasting, courier
services, print media etc, in which investment is allowed
with the approval of Foreign Investment Promotion Board
(FIPB). Further, FDI is prohibited in few sectors like
multi-brand retail trading, gambling and betting etc.
RBI follows definition of FDI given by IMF wherein PE
investments more than 10% are treated as FDI.
Foreign institutional investors
Foreign institutional investors (FIIs), including private equity
funds so registered, investing in the public markets, have
to comply with the SEBI (Foreign Institutional Investors)
Regulations, 1995. These limits FII investment in an Indian
company to 10% of the capital, and limit the aggregate
investments of all FIIs and its sub-accounts to 24%, the
latter limit being amenable to modification subject to sectoral
limits.
Global scenario of PE firms
The PE activity can be seen in terms of the funds raised and
investments made by them7. The global scenario of PE firms
in terms of the funds raised by the PE players in different
countries for the period 2001-2008 can be seen from the
table below:
 Global Private Equity Fund Raising (2001-2008) in US $ Million

Regions 2001 2002 2003 2004 2005 2006 2007 2008

Western Europe 35,611 28,868 34,037 37,230 85,026 108,000 152,000 105,700

US 110,000 68,200 49,300 92,000 151,800 252,000 291,000 265,600

Asia 7,064 3,221 4,801 7,651 18,269 25,828 34,734 46,869

Latin America 624 407 417 714 1,272 2,656 4,419 4,461

CEE/CIS 575 530 406 1,777 2,711 3,272 14,629 5,559

Africa 92 151 741 1,380 791 2,353 2,340 3,218

Middle East 78 1,050 680 320 1,915 2,946 5,027 5,898

Multi-Region N/A N/A 116 618 3,630 2,580 4,077 7,721

Emerging Markets 6,561 3,231 3,489 6,454 25,765 33,193 59,160 66,517

Global Markets 154,044 102,427 94,498 141,690 265,414 399,635 508,226 445,026

Source: EMPEA, March 2009

According to the Price Waterhouse Coopers, Global Private Rank Country Investment Funds Y-O-Y
Equity Report 2008, approximately US $ 297 billion of (US $ Bn) Raised Change
private equity and venture capital was invested globally in (US $ Bn) (%)
2007 which was 0.55% of World's GDP. The global scenario 1 USA 105.72 302 35
of Private equity funds for a decade is presented in the table 2. United
below. Kingdom 40.10 48.52 -16
3. India 17.51 5.94 136
Cumulative Investments by Private Equity Funds during
4. Japan 14.71 4.62 28
1998-2007
5. Australia 14.61 6.46 -12

Regions Cumulative Investment 6. France 14.40 7.68 22

Value (US $ Bn) 7. China 10.62 11.00 3
8. Germany 8.73 6.63 112
Global 1,490.88
9. Malaysia 5.40 1.29 608
North America 709.83 10. Singapore 5.35 4.03 157
11. Taiwan 4.93 0.11 23
Europe 451.91
12. Sweden 4.89 5.49 -2
Asia Pacific 265.77 13. South Africa 4.65 2.79 270
14. Netherlands 4.60 3.68 64
Middle East & Africa 27.75
15. Korea 4.28 0.85 130
Central and South America 35.61 16. Spain 3.58 3.86 8
17. Hong Kong 2.87 15.52 220
18. New Zealand 2.73 – -8
Source: Global Private Equity Report, 2008 PWC
19. Italy 1.71 2.82 -57
20. Denmark 1.42 0.42 228
The following table gives the ranking of Top 20 countries
based on PE Investments in the year 2007. Source: Global Private Equity Report, 2008- PWC

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According to the PWC, Global Private Equity Report 2008, According the report by Grant Thornton on 'Top trends
approximately US $ 86.3 billion of private equity and venture in middle-market private equity' there are seven trends
capital was invested in the Asia Pacific region in 2007. that have recently altered the way the private equity
community conducts business. These are:
Among the nine Asian Pacific Countries featuring among
the top 20 countries based on PE Investment, India's share 1. Private equity firms are returning to the days where
is 22.24% followed by Japan with a share of 18.68% and they spend substantially more time looking for quality
Australia (18.56%). companies to invest in and are performing a thorough
due diligence rather than jumping into an investment
Rank Asian Investment % age share
headfirst.
Pacific (US $ in Asia Pacific
Countries billion) (Top 9 2. PE firms have adapted to the changing market by
Countries) PE opting to do cross-border deals. PE firms are
Investment
interested in emerging markets.
1 India 17.51 22.24
3. PE firms have transformed themselves by hiring
2 Japan 14.71 18.68 operational partners, which is a recent phenomenon.
3 Australia 14.61 18.56 The middle market firms hire partners who don't
4 China 10.62 13.49 necessarily have private equity knowledge but possess
expert knowledge in a particular sector.
5 Malaysia 5.40 6.86
6 Singapore 5.35 6.80 4. Emergence of Sovereign Wealth Fund (SWF) is also a
recent trend and PEs believe SWFs have an increasing
7 Taiwan 4.93 6.26
long term impact on marketplace.
8 Hong Kong 2.87 3.65
5. Megafunds have hired more talent to broaden their
9 New Zealand 2.73 3.47
scope, luring private equity talent away from middle
Total 78.73 100.00 market firms, therefore squeeze on middle market
compensation is another significant trend.
Source: Global Private Equity Report, 2008- PWC
6. Despite the global credit crisis, certain industry
India's Ranking in PE Investment according to various
sectors have remained particularly strong, despite the
parameters
global credit crisis. Technology, healthcare and energy
India has carved out a niche for itself in the Global private sectors continue to present strong investment
equity market. India ranks number one in terms of the opportunities and are expected to do so for years to
compound average growth rate of 79% followed by come.
Malaysia (67%) and Denmark (56%). The CAGR for US
7. With lines blurring between PE firms, hedge funds,
was 12% while for UK it was 19%. India ranked 3 rd in
lenders and bankers, PE firms are emerging as asset
terms of funds raised and investment value after USA and
managers. This trend has already begun to take place
UK. In terms of ranking based on high-tech investment,
in the larger market and is now emerging in the middle
India was ranked 3rd after USA and UK while in terms of
market.
expansion investment trends India was ranked 2 nd after
USA. The table below gives a snapshot of India's ranking
according to various parameters. PE growing in Emerging countries

Parameters
Ranking based on Growth of PE
investments (CAGR for 1998-2007) (79%)
Ranking based on Investment Value
(US $ 17.51 Bn)
Ranking based on High Tech Investment
Trends (US $ 5.17)
Ranking based on Expansion Investment
(US $ 7.18)
Ranking based on Buyout investment
(US $ 0.97)
Source: Global Private Equity Report, 2008- PWC
Rank
According to the World Economic Forum's 'The Global
1 Economic Impact of Private Equity Report 2009', from 2004
to 2007, the dollars raised by PE funds investing in the
3 emerging economies of Asia, Russia and the former Soviet
Union, Latin America and the Middle East and Africa have
3 increased between eight- and thirty-fold.
Further the report stated that emerging markets account
2
for a very modest share (under 4% on a US dollar weighted
basis) of PE activity over the years 1990 through 2008. The
19
share has grown in recent years particularly in the growth
equity category. Therefore, financial markets matter for
private equity activity and particularly the equity market

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development matters the most for the development of private
equity. This is because the PEs exit through the public
offering route.

According to Emerging Markets Private Equity Association

(EMPEA), PE players in the emerging markets8 raised US $
66,517 million which constituted 14.95% of the total funds
raised by the PE funds around the globe. The details
pertaining to the funds raised and investments made by
the PE players in emerging markets and their shares
vis-a-vis total PE funds raised in the Global Market is
depicted in the table below:

Years Funds %age share Investments %age share of

Raised in of funds in Emerging investments
Emerging raised to Market made to Source: EMPEA
Markets funds raised (US $ Mn) Global PE
(US $ Mn) globally Investments PE Investment is growing at a fast rate in Brazil, Russia,
India and China (BRIC) economies. In recent years, there
2001 6,561 4.26 3,676 3.29
has been an explosion of private equity investing in BRIC
2002 3,231 3.15 1,891 2.23 markets due to the common growth story being witnessed
2003 3,489 3.86 6,677 5.91 by these four countries. The rapid economic growth, tax
exemption benefits, prudent fiscal policy and sound
2004 6,454 4.56 7,239 7.12 economic reform are some common features of the BRIC
2005 25,765 9.71 12,050 10.85 economies which have lured the PE investments.

2006 33,193 8.31 35,821 9.12 Why PE Investments in India?

2007 59,160 11.64 50,480 7.90
Indian economy is one of the fastest growing economies of
2008 66,517 14.95 47,835 NA the world. The strong fundamentals of India such as average
GDP growth of 8.5% for last five years, increasing saving
Source: EM PE Industry Statistics by EMPEA,March 2009. and investment rate, its stable democratic government, well
educated population, abundance of English language
speakers have caught the attention of the PE players and
have brought it on the priority list of all PE funds.

On the one hand, Indian growth story has lured the Private
equity investors and on the other the Indian economy has
gained significantly from the PE Sector. PE firms have shared
their global exposure and has had its spillover effect on
various fronts such as as- corporate governance standards,
knitting global connectivity, building executive teams,
improving/raising organizational capability, enhancing
evaluations and creating liquidity. Further, PE firms also
provide the domestic entities the necessary mentoring and
advice without having to go to public markets.

PE penetration in Emerging Market versus Developed VC/PE Flows in India

Markets can be seen with the help of the following graph
which shows Private equity Investment as a percentage of In India venture capital plays a vital role in the development
GDP (2007) in developed and emerging countries. and growth of innovative entrepreneurships. Venture capital

8
Here Emerging markets of Africa, Asia, Central/Eastern Europe, Russia, Latin America, and the Middle East are taken into
consideration.

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financing started in India in 1988, with the formation of
Technology Development and Information Company of India
Ltd. (TDICI) promoted by ICICI and UTI Bank. At the same
time, Gujarat Venture Fund Limited & Andhra Pradesh
Industrial Development Corporation in the early 90s was
started by State level Financial Institutions. Thus, venture
capital was initially the prerogative of development Financial
institutions. The mid 90's saw the rise of Foreign Venture
Capital Funds which focused on development capital without
any sectoral focus and was dependant more on
opportunities. After the success, of these funds, there was
emergence of a number of India-centric foreign VC firms.

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.
According to Venture Capital Intelligence, private equity
firms invested US $ 10,793 million over 399 deals in India
in 2008. However, this was less than the previous year PE
investment of US $ 14 billion over 439 deals)
Source: Venture Intelligence
In the three year period ended December 2008, PE and VC
firms invested almost $32 billion (i.e. a staggering
Rs. 1,30,000 crores) into Indian companies. However, the
volume of PE deals decreased by 24.17% during the year
2008 due to economic downturn.
PE Investments by Industry-No. of Deals
In the late 1990s, the flows were only in IT Companies and
now it is across a wide range of sectors, though the maximum
number of deals have been made in Information Technology
and IT enabled services (IT/ITeS) sector.
During the year 2008, maximum number of PE deals was
made in IT/ITeS sector. Primarily, investments by Private
equity investors are made in IT/ITeS, Manufacturing,
Healthcare and Banking and Financial services.
Industry No. of Deals (%)
IT & ITES 27

Manufacturing 12
Year No. of Deals Value of Deals Banking and Financial Services 11
(US $ million)
Others 11
2000 280 1,160
Healthcare & Life Sciences 8
2001 110 937
Energy 7
2002 78 591
Media & Entertainment 6
2003 56 470 Enginnering & Construction 6
2004 71 1,650 Other Services 4

2005 146 2,200 Shipping & Logistics 3

2006 299 7,500 Hotels & Resorts 3

2007 439 14,234 Telecom 2

2008 399 10,793 Source: Venture Intelligence (Press Release from www.india
infoline.com)

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Company Wise Top PE Investment in India in 2008 Opportunity for SMEs

Company Sector Amount Investors The Small and Medium Enterprises (SMEs) in India is an
(US $ mn) emerging segment and look for various avenues for raising
funds. In such a scenario, PE investments are an alternative
Aditya Birla Mobile 640 Providence
and viable source of financing the SMEs not only because
Telecom Service
of the financial support that they can provide but also
Indiabulls Power 395 Farallon because of the global exposure that can be provided to the
Power Capital, LN SME sector. This is in form of deploying members of their
Mittal team on the boards of directors of their investee companies
Cairn India Oil & Gas 278 Orient Global and taking active part in their governance and activities.
Exploration This would bring more accountability, transparency and
Bharti Infratel Telecom 250 KKR corporate governance. Further, the portfolio companies
would also get exposure to global standard practices in
Café Coffee Coffee Chain 250 JP Morgan
operations, human resources management, financial
Day
planning, reporting and investor relations.
Source: Venture Intelligence (Press Release from www.india
infoline.com) Opportunity in Key sectors

According to Venture Intelligence PE Impact Study, PE and
VC investment, when chosen and leveraged well, helps
companies create innovative business models, scale up
rapidly and accelerate growth in several ways that add
significant value to the Indian Economy. PE and VC firms
are forging active partnerships with their investee companies
to improve capital efficiency, business strategy and corporate
governance, besides opening up new markets
internationally. About 59% of the PE backed companies
are focused on the domestic market. While the growth rate
of exports at PE-backed companies (at 31%) lags that of
large cap companies, it is still higher than at non PE backed
companies (26.3%) and midcap companies (27.8%).
According, to Venture Intelligence report, out of the total
PE backed companies, 44% of them are large cap companies,
43% are midcap companies and 13% are small cap
companies.
Opportunities and Challenges for Private Equity players
in India
The increasing impact of private equity on Indian business
is a dual effect of indigenous factors such as an expanding
domestic market and globalization which would further scale
up the PE Segment. However, at the same time, there are
various opportunities and challenges that are faced by
private equity players in India.
Opportunity
According to Dossani (2006), there were various advantages
for running a PE firm in India such as cost competitiveness
which may be vanishing fast; development of a strong capital
market environment which is capable of providing capital
for the next stage growth.
Sectors like back-end retail, logistics, infrastructure, power,
renewable energy, hospitality, transportation and
telecommunication have gained favour among the private
equity firms. Even the Research and Development sector
has caught momentum. Initially, lack of capital to invest in
R&D held back corporate India. Private Equity capital is
helping address this issue. Growth in R&D investments at
PE-backed companies is over twice that at their non PE-
backed counterparts.
Other new investment avenues with huge potential for PE
investments are education and agriculture sector in India.
According to the Venture Capital Intelligence report on
'Private Equity Pulse-Education', over 80% of the fund
managers are looking forward to invest into education
companies in India . Kaizen is India's first private equity
(PE) fund being raised to focus on investing in education
businesses. Rabobank Group, launched the India Agri
Business Fund, the first PE fund to focus on investing in
agribusiness in India. The $100 million fund aims to boost
the growth of the sector by making value-added equity
investments, with a focus on small and medium enterprises
and companies in rural areas. Even Microfinance and Clean
Technology are some emerging sectors for PE players.
Challenges
According to Dossani (2006), there were various problems
associated with the PE firm in India. They are, lack of well
established domestic network of entrepreneurs, financiers,
firms and research institutions; poor operating environment
including poor corporate governance at the smaller firms
and an inefficient legal system; tax environment and a costly
process to create a tax-efficient structure for international
investors.

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Complex Regulatory Issues and Fiscal Challenges Bibliography

The main barriers to entry for PE's in India are complex 1. SEBI October 2000,'Report of K.B Chandrashekhar
regulatory issues relating to sector investment and on Venture Capital'
ambiguities in the Indian interpretation of the tax codes as
well as the regulatory costs. Moreover, what aggravates the 2. SEBI, Dr. Ashok Lahiri, November 2003, 'Report on
problem is that there are multiple regulations and little Venture Capital in India'.
harmonization of guidelines across government agencies
(SEBI, RBI, CBDT, Ministry of Company affairs). As on date 3. Government of India, Planning Commission New Delhi
there are no clear cut guidelines for Private Equity July 2006, Report on Technology Innovation and
investment. Venture Capital

4. Rafiq Dossani and Asawari Desai, 'Accessing Early

Future Prospects
Stage Risk Capital in India', 2006

Private equity in India has delivered higher returns over a

5. Grant Thornton Report on 'Top Trends in Middle-
longer time frame and has outstripped other investment
market private equity available on
avenues. Over the eight year period (2000-2008), on an
www.grantthornton.com.
average, sales of PE backed companies grew at 24.9%, a
significantly higher rate than non PE backed companies
6. India's Financial Markets-An Insider's Guide to how
which grew by 15.5%, Nifty (19%) and CNX Midcap (20.6%).
the markets work by Ajay Shah, and Susan Thomas
and Michael Gordon, Elsevier, 2009.
Further, PE backed companies showed annual Profit After
Tax (PAT) growth of 34.6% for the period (2000-2008), 7. Government of India, National Knowledge
significantly higher than non-PE backed companies which Commission, 2008, Report on Entrepreneurship in
showed PAT growth of 25.30%, Nifty 50 companies posted India.
26.4% PAT growth and CNX Midcap companies showed
profit after tax growth of 25.4 % 8. Globalization of Alternative Working Papers Volume
2, World Economic Forum, Report on 'The Global
Private equity has entered the economic mainstream and Economic Impact of Private Equity, 2009'.
has gained a lot of momentum over the past few years. As
the report of the Planning Commission on 'Technology 9. Pricewaterhouse Coopers, Global Private Equity
Innovation and Venture Capital" mentions, VC/PE funding Report 2008.
is a percentage of our FDI inflow, it should be nurtured and
encouraged further as it creates new ventures and new 10. KPMG, Private Equity Investing in India, 2008-A
employment and is invested for the long term and is not survey of private equity investor and their portfolio
that can be pulled out at short notices.. Therefore, PE companies.
investments can significantly contribute to forex reserves
and also reduce the rupee volatility and be one of the factors 11. Capvent, Venture Intelligence Report on 'Private
towards contribution of financial stability. Further, a simple Equity Impact, 2009'.
well defined regulatory regime with no scope of confusion
can help the private equity industry to grow further. 12. TSJ Media, Venture Intelligence, India Venture capital.

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