CHAPTER - 1INTRODUCTION In developing countries like India, which strive to, have a high growth rate through rapid industrialization, the non-availability of finance has become a major bottleneck. While, there is a need, on the one hand for continuous flow of finance for development as the development process gathers momentum, the capital markets are, on the other hand, ill-equipped to cope with the need for long term finance. This situation leads to serious problems and solution is sought through “Institutional financing”. ’“Institutional Finance is nothing but finance provided by or through financial intermediaries”.'“Financial Institutions” or financial intermediaries” are investment intermediaries linking the savers and users of capital”? ‘These investment intermediaries are interposed between the ultimate borrowers and lenders to acquire the primary securities for portfolios of the lenders.’ The necessity of such a specialized machinery for the transport of capital which could co-ordinate capital and enterprise of the country.* ©” Gupta, LC. : The Changing Structure of Industrial Finance in India, 1969, pl 2 Grant, A. T.K: A Study of the Capital Market in Post — war Britain, 1937, p. 183. . ® Gurley , J.G and Shaw, E.S : Money in a Theory of Finance, 1960, pp93-94 + Lavingaton, F. : The English Capital market , 1929, p.3‘The specialized agency was expected to assess and mobilize resources, on the one hand, and to cope with the deficiency in the supply of industrial finance, on the other hand. Institutional investors would exercise a stabilizing influence on the investing community and finance industrial growth, ' The financial intermediaries “are economic units whose principal function is managing financial assets of other economic units-business concemns and individuals. Thus, they bring savers and borrowers together by selling securities to savers for money to borrowers.”* As pointed out itt one of the U.N. Reports, “the categories of enterprises’ suitable for receiving institutional assistance are (i) those of a special technical nature; (ii) those largely of commercial and profit-making nature; (fii) those large in scope which cut across, existing administrative and regional division; and (iv) those where it is found advantageous to associate private capital or enterprise with public one”. The UN Report of 1951 mentions that institutional framework is necessary for an efficient utilization of domestic resources‘ and a balance flow of capital into public and private sectors.* 1. Whyte, L.G.: Principles of finance and investment, 1950 (Vol. I), p.170. 2 Gup Benton, B, : Financial intermediaries : An Introduction, 1976 , p 3 > UN: Report on Domestic Financing of Economic Development , New York, Department of Economics Affairs, Feb. 1950, p.54 + UN. Report on Measures for the economic development of underdeveloped countries, 1951. p. IV : 5 Tid, p.44The other U.N. Report on Mobilization of Domestic Capital accepted institutional set-up as valuable medium for mobilization of internal savings and their productive employment in economic growth. Another report of the United Nations recognized that the probleth of capital shortage for industrial progress in less developed countries could be resolved by evolving suitable institutions for this purpose.” The financing institutions might encourage savings for investment? and maintain their easy flow from lenders to borrowers. Since savers, investors and entrepreneurs are often different people, it is the institutional machinery which links them together. Nevin held the view that financial institutions are to resolve the problem of scarce supplies of capital in the best interests of the economic development .* India is the largest democracy in the world. Its main strength is availability of abundant skilled and cheap manpower. The country has been on growth trajectory in all fields as a planned economy thus becoming a safe and attractive destination for foreign investment. Currently, in terms of Purchase Power Parity, it is the fourth largest economy and tenth most industrialized country in the world. 1UN. Report on Mobilization of domestic capital in certain countries of the Asia and the Far east , Bangkok, department of economic affairs, ECAFE, 1951, p.67. XUN. Report on Processes and Problems of Industrialization in underdeveloped countries, 1955, p.36. 3 Lewis, W.A : Theory of Economic Growth, 1957, p.265. ‘Nevin, E.: Capital Funds in underdeveloped Countries, 1961, p.72.Successive Govemments had taken major initiatives for industrial development, simplification of investment procedures, enactment of investor- friendly laws, liberalization of trade policy, safeguards of intellectual property rights, liberalization of exchange regulations, reforms in Capital and Stock Markets, etc. Ever since Indian economy underwent series of reforms from 1991; there have been progressive steps in banking, finance, industry, investment climate, incomes, employment, legal environment, etc. India is shining with an average growth rate in GDP at about 9%p.a. Investments from FIls, increased FDI in several sectors, surging Foreign Exchange reserves, controlled inflation rate, deregulated interest rates, etc, have been witnessed in recent years. GOI recognizes the key role of FDI for economic development and as an important source of technology and global best practices. Capital Market has undergone dramatic changes, with SEBI as regulator, yielding retums to all segments of investors-retail or wholesale. Information Technology is playing a vital role in effective functioning of all the players. Private Equity, which is a sub-set of Venture Capital, is medium to long — term finance provided in return for an equity stake in potentially high growth unquoted companies. This informal method of financing became an industry globally in the late 1970s and early 1980s in the advanced western world when a number of private equity firms were founded and recognizes as asset class, Throughout 1990s the technology hype, internet boom and massive capital investment propelled the New Economy revolution, but internet mania in the late 1990s caused IEC stocks to skyrocket until the dot com bubble burst in March 2000. Even though SEBI formulated guidelines for VCs on the basis of KB Chandrasekhar Committee, as on date there are no clear cut guidelines for Private Equity Investment. In the post-reforms era, there is availability of abundant PE funds in India in almost all sectors including Technology «ind SME too surpassingcae certain Asian countries like China, GOI, CBDT, DIPP, SEBI and RBI are closely watching the phenomenon of inflow of PE Funds into Indian Industries. "US = based PE outfit, Argonaut is investing around Rs. 50 Crores in menswear brand Koutons to fund its expansion plans, E- Planet announced a second global fund, which will have allocations for India. ‘A Report on Venture Capital (VC) investment in India seéms to be very bullish on the prospects and has estimated that as much as $4.4 billion will flow into India via VC Funds over the next one year. Government of India is in talks with team up and raise $7.0 Billion through a special fund to finance a stream of infrastructural projects. The above deals made the attempt to study recent trends, developments, issues and challenges with regard to Private Equity in India to sustain the current scenario: CONCEPTUAL FRAMEWORK OF PRIVATE EQUITY Private Equity refers to any type of equity investment in an asset in which the equity is not freely tradeable on a public stock market. PE: funds refer to the amount invested by the PE Firms. Normally, these funds are invested in limited partnerships or private limited companies. PE refers to the manner in which the funds have been raised , namely on the private market as contrasted to the public market, Passive institutional investors may invest in PE funds, which are in turn used by PE firms for investment in target companies. PE investing is always through negotiated deals and, therefore, most of the PE investments are closely held in companies that have not gone public. ? * Article on Private Equity Funding in India- Issues and Challenges by Prof. Prasad Chowdari and Dr. Rao K.S. Srinivasa , page no. 1-2. 2 Kishor, Ravi. M. (2009), “Financial Management Comprensive Text Book with Case Studies. Taxmann Publisher, 7" Edition, January. Page No. 913PE is finance for medium to long-term provided in return for an equity stake in potentially high growth unquoted companies. PE fund managers raise money from investors with an aim of investing for the long-term in a portfolio of potentially high- growth private companies. PE firms are going for listing to take advantage of liquidity and transparency. The PE firms raise capital mainly qualified institutional investors such as financial institutions, pension funds, high net worth individuals. The Institutional investors are the major investors in PE fundings. Indian Companies are showing interest in PE Investment rather than IPO because of strict IPO norms of SEBI. PE funds not only invest in companies , they also give strategic advice. PE funds invest their money across the emerging sector and start-ups in different markets allowing a greater scope for higher returns,at the same time, they are close to the prométers of the companies and have access to insider information which can be prove to be profitable. Some commentators use the term “Private Equity” to refer only to the buy-out and buy-in investment sector, Others, in Europe but not the USA , use the term “Venture Capital” to cover all stages, i.e, synonymous with “Private Equity”. In the USA “Venture Capital” refers only to investments in early stage and expanding companies. PE provides long-term , committed share capital, to help unquoted companies grow and succeed. If an investee is looking to start-up, expand, buy- into a business, buy-out a division of a parent company, turnaround or revitalize a company, PE could help to do the same. Obtaining PE is very different from raising debt or a loan from a lender, such as a bank or a financial institution, Lenders have a right to interest on a loan and repayment of the capital, irrespective of its success or failure. PE is invested in exchange for a stake in a company and, as shareholders; the investors’ retums are dependent on the growth and profitability of the business. The term “Private Equity” is used to describe the industry as a whole, encompassing both “Venture Capital” (the seed of expansion stages of investment) 6and Management Buy-Outs and Buy-Ins. Private Equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market. Categories of Private Equity Investment include leveraged buyout, angel invésting, venture capital, growth capital, mezzanine capital and others. Leveraged Buyout: The PE funds provide capital fot purchasing the company or the controlling stake in it using debt and equity capital. As the term leverage implies it involves using more of debt than equity. The buyout can be ‘Management Buy In (MBI or Management Buy Out (MBO). Angle Investing: It refers to investment in small closely held companies by wealthy individuals, in which they generally have some operational experience. They may have substantial ownership stakes and may be active in advising the “company, but they generally are not as active as professional managers in monitoring the company and rarély exercise control. Venture Capital: It refers to long term equity investment in novel technology based projects which display potential for significant growth and financial returns. It provides seed, start up and first stage financing to these industrial enterprises. Growth Capital: Growth capital is a very flexible type of financing. The money borrowed under a growth capital line of credit can be used for any corporate purposes, There are no requirements to provide invoices or other backup material when borrowing under this type of facility, so administration is simplified as well. Growth capital can be a beneficial way to extend a company's runway between rounds of financing. The extra time can be used to complete additional milestones that will raise the company's valuation, or as insurance to ensure that all intended milestones are successfully accomplished.Mezzanine Capital: It refers to investment in those companies that have already proven their viability but still have to raise money from the public market. It is associated with the middle layer of financing in leveraged buy-outs. BASICS OF PRIVATE EQUITY Private equity (which is sometimes referred to as “buyout investing”) involves the purchase of a majority or complete ownership stake of an operating company, which is either privately-held or listed on an exchange. Generally, these companies have been in existence for five or more years. The purchase typically “has a small equity investment (from 5% to 20%) and a large amount of debt. The debt will usually include a mix of bank loans, notes and bonds. Essentially, a private equity firm seeks companies that are underperforming. What’s more, the ‘management team will have a significant amount of equity and perhaps invest their personal capital. This helps to incentivize management. The private equity owners will probably have several board seats and as a result, take an active role in the company. This means taking actions like: cost cutting, adding to the management team, improving the product mix and so on. These initiatives should help to increase cash flows, which is critical to paying down the debt load. It also will lead to increase shareholder value. The exit for the equity holders can be either in: 1. A sale to a company or another private equity firm 2. An initial public offering (IPO) Investors in Private Equity Funds: Investors in PE generally stay invested for long-term horizons. Institutional investors such as foundations, endowments and Pension Funds represent vast majority of investors in PE. Besides, high net — worth individual also invest in PEfunds, The Following table indicates PE Capital Commitments during 1995-2005 made by various investors’ types: Figure 1.1 : Shares of Various Investors’ Types (in percentage) Tavestors Type % Share Banks 8 Insurance Companies 7 Corporate Non/ Pension iB Private Pension Funds B Public Pension Funds 9 Family/ Individuals 14 Endowment! Foundations 17 Intermediaries 7 Others 12 Total 100 Source : Thomson Financial Venture Economics It may be seen from the above table that the funds to PE are subscribed majority by Endowments / Foundations, followed by Family/ Individuals, Pension Funds, Banks and Insurance Companies. RATIONALE OF PRIVATE EQUITY FUNDING Post the unlocking of financial controls on the economy since 1991; Indian companies have had increasing access to capital from various sources. Overtime, as private equity funds have started gaining attention, companies have realized that they are a viable source of funding for several reasons--- (1) Funds can be raised in far less time than it takes to get listed or to raise a loan,(2) A PE fund brings a lot of expertise and networking contacts to the table. (3) The fund can be tapped for subsequent rounds of resource raising. Raising resources through PE gives growing companies the impetus they Tequire to accelerate their growth while allowing them sufficient time to build _ sustainable value in their businesses. A company with a reasonably long track record of growth and profitability, with a sustainable competitive advantage which has been nutisred and proven stands a far better chance of attracting high valuations than one which goes public without reaching its “critical mass”. The shift has also been aided by a change in the mentality of the traditional Indian business. The new generation of Indian entrepreneurs is able to grasp and appreciate the potential benefits brought by investments made by PE funds in their companies and are taking a pro-active approach to preparing their businesses for the next stage in their life-cycles. Since 2002, It has witnessed the prevalent evolution of private equity funds in to “growth stage” and late stage” investors. ‘They invest in companies that already have established track records of revenue and profitability and are usually at an inflection point in their life cycle, where an infusion of capital greater than what the companies are generating themselves, could accelerate their growth trajectory and improve their competitiveness, market share, profitability and viability. REASONS.FOR GROWING POPULARITY OF PRIVATE EQUITY The popularity of PE investment in India is growing, since the SEBI has made strict IPO norms. The reasons for popularity of PE Investments are summarized below:- ® PE firms often work in conjunction with other providers of finance and may be able to help to put a ‘total funding package’ together for the business.© PE firms also brit in required expertise in mutiple functions. ‘The placement with reputed investor will further enhance the brand image of the company. © PE backed companies have known to grow faster than other companies. © PE helps to achieve ambition of a company and provide a stable base for strategic decision making. © The PE firms will seck to increase a company’s value to its owners, without taking day to day management control. © PE firms usually provide higher valuations in normal stock market conditions and lower valuations when stock market is booming. © Investors can also help company in improving and devloping its business and strategies. ADVANTAGES OF PRIVATE EQUITY Investing in a private equity fund has a lot of advantages compared to other investment areas, here are just five advantages of private equity for not only investors but also the companies that private equity firms acquire: @ Companies that are backed or acquired by private equity firms are often made more efficient and produce higher profits, which benefits now only the private equity firm but also the company. Private equity firms use skilled management teams to correct the problems and ineffective parts of the company and many times this intervention prevents the company from farther declining or even failing. © The management receives carried interest, a portion of the profits, so managers and their staff are motivated to produce good results to investors. Although carried interest’ is often criticized for taking money from the investors, it is a very big incentive for managers. B© Private equity firms work outside the public eye and do not have to follow the same transparency standards that public firms and funds must adbere to. This allows private equity firms to reform the companies without the constraint of having to report quarterly to the SEC or similar distractions. © Private equity firms generally perform very rigorous due diligence on potential investments. By utilizing a team of researchers the private equity firm is able to identify most risks that would nt otherwise be found, © Private equity managers are paid very well and so it is easy to attract high caliber, experienced managers that tend to perform very well. The’same goes for lower level employees at private equity firms, they tend to be the top young business school graduates. IMPORTANT ROLES PLAYED BY PE IN THE GROWTH OF INDIAN ECONOMY “Private Equity in India: Adding Human Capital to the Value — Creation” If you are a global company and India is not part of your plan , then you have missed the bus..... said by Dr. Manmohan Singh, Prime Minister of India, In the days before economic liberalization, it was just established industrial houses such as Tata or Birla which had easy access to the. capital markets and money resources largely on the basis of their pedigree. The Investment environment has radically changed since then. A whole new breed. of entreprenuers now occupies front ranking positions in their respective fields. Many of the old business houses which had the foresight to embrace change, have restrcutred, ‘reforced and have flourished. The rest have withered into insignficance. And in their stead, inany have emerged who could become future stars in manufacturing , technology or knowledge — based services. Indeed the investment environment is so attractive that investors are flocking to scores of funds, domestic and intemational , taking a heavy exposure on the future of these companies. Besides foreign institutional investors and mutual funds , 12private equity funds are also taking concentrated bets across companies and segments, Many India- dedicated funds have, and are, being set up to finance and to provide resources to the organisations as they know the potential of these organizations. And allocations in existing ones are being ramped up for corporate in South Asia, India and China . Drapher Fisher recently announced plans for setting up a $200 million fund for startups. Timothy Drapher, founder of Draper Fisher Jurveston , a Silicon Vallley venture fund, on his exploratory visit to the country in October went on record to say that he was adopting a contrarian approach. “Now that everyone’s crowding in China have to go someplace different. And that place is India” Draper is also contemplating to set up an office in India. Drapher is well known for funding Sabeer Bhatia of Hotmail , the free internet ¢ —mail service which was subsequently a old to Microsoft for over $400 million. There are several other PEs which are rushing to India. Unlike Drapher, they are not contrarians but are willing to bet on the company focussing on IT and BPO ‘businesses and having offices in Silicon Valley and Bangalore. It recently procured subscriptions to its second India VC fund of $200 milion, “On major draw in favour of India is the diversity of entreprises which span over virtually all sectors,” says Dhananjay Mungale a financial expert, who quit his high-profile job at DSP Merrill Lynch to set up his own advisory venture. The breadth of opportunity in India is much higher than places like Indonesia, Malaysia or Taiwan. Many of the private equity funds tend to seek a place on the board and participate actively in laying down the policy framework to ensure quicker rise of the enterprise. This is especially helpful in case of new economy businesses where traditional assesment by investors may not get the same valuation as may be received from a private equity investor. Again this is helpful in case of an unlisted company.India’s private equity sector is moving to the big league. Fund sizes have increased dramatically from US$10 to USS25 million just a few years ago, to between USS 400 million and USSI billion today. The minimum deals now start at around US825 million, eopilsing the average deal size of US$8 milion 2002. With the strong global interest in the Indian market continuing , the challenge is no longer about raising private equity funds, but how extract value from the portfolio investments, turning the focus from financial capital to human capital. During the first half of fiscal year 2005-06, US$7.96 billion of foreign direct investment (FDI) poured into India - more than triple the FDI in the corresponding period a year before, This is set to explode further, with sweeping reforms by the Indian Government to loosen restriction on FDI across various sectors, which will lead to more international corporations and financial investors entering the Indian market, Examples include the retail sector , where 51 percent FDI is now allowed in single brand products; the telecoms services scetor, where the FDI limit has been raised from 49 per-cent to 74 per cent; and selected infrastructure sectors, such as the development of new airports, laying of natural 05 pipelines, petroleum infrastrcure, captive mining of coal and lignite , mining of diamonds and precious stones, as well as the development of townships where complete foreign ownership is now welcome. PEs not only provides resources of funds to the new ventures but also focuses on. identifying and upgrading both product/process innovation and management functions in accordance to the global economy. PEs plays a critical nile in the innovation process, not only as a source of finance to innovation but through other functions that lie at the core of hightech Development. PEs bridge between sources of finance, entrepreneurs, scientists, suppliers, and customers by providing not only the required sources of funds but also an added value of technologies and requirements. PEs typically also add value to their portfolio companies through assistance in strategic decisions in the day today management of the firms. PE capitalists with technology & entrepreneurial background generate more value added than PEs with financial background. Figure 1.2 _Private Equity: What do they bring in besides capital? Quantitative Value Addition Qualitative Value Addition Change of Ownership 7 Capital Structure Bificiency in Management Wider knowledge base and information system Experience with broader base of | board Infusion of Fresh Capital Strategy shift in terms of international Markets Enhanced technology Manufacturing experience Brand Image Corporate Governance Private equity not only gives quantitative value addition but also gives qualitative value addition to the company . It provides fresh capital, efficiency inmanagement, wider knowledge base and information technology , manufacturing experience , brand image and good corporate governance. SOME OTHER IMPORTANT ROLES ARE — Intermediation and Market Building - The enhanced access to. business and advisory/consultancy services and to knowledge/technology that PE provide will contribute to the emergence of new markets in the global economy. Moreover PEs help enterprises global product and global capital markets. This is particularly important for SMEs and clusters wantitig to expand the range of markets in which they would like to operate e.g new markets for intermediate inputs which the Globalization process is opening. Source of External Capabilities - PEs complement the capabilities of innovative SMEs, sometimes in those arcas were entrepreneurs are less likely to be knowledgeable and capable e.g. export marketing; know whom, management, etc, + Facilitating Complex Contracting - This is particularly so in relation to marketing agreements, alliances, strategic partnerships, M&A, etc—many. of thesé critical for fast access to global product markets. A central condition for success in many of these is “prior experience which entrepreneurs frequently do not have. A PE sector may eventually have such capabilities and thereby have a strong impact on innovative enterprises quest to rapidly build global market share. ; Promoting International Links ~ It provides promotion and global links to the enterprise thus increasing the industry visibility of the firms to go for global expansion with the right partner. Supporting of the Global Expansion of Promising Innovative SMEs - The value roles of PE is to provide equity based (generally private) finance and support’ organizations could play important roles in’ promoting innovative SMEs and clusters in industrializing economies PE could 16become a pillar of the Knowledge Economy—by facilitating the provision y being a node of three overlapping networks; and because its capabilities are largely based on tacit knowledge. of services-to Innovative SME’ Moreover, by promoting SME they are promoting invention (and indirectly innovation and diffusion), self-organization and creation of new teams & tacit knowledge, and the continuous building of new markets. Interactive learning lies at the basis of these processes. Facilitate the Transition to a Learning Economy — Since the PE are earned and qualified investors, this could provide enterprise a new learning environment that constitute a key sector in the creation, diffusion and adaptation of tacit knowledge, codified knowledge and technology. LIMITATIONS OF PRIVATE EQUITY INVESTMENT Despite these attractions, there‘ are several constraints on Private Equity firms operating in India. Ironically, although rising valuations have helped existing PE investors to earn high retums, they are now making it difficult to find new investments. This is because many Indian firms that are chased by PE funds are demanding a high valuation at the outset, making them less attractive to the funds. Another constraint is the strong attachment of many Indian entrepreneurs to their ventures, which makes them reluctant sell their stakes and accept minority ownership-even when it is clear that the ventures would be managed better by new owners. For this, the incidence of private equity buy-outs has been much smaller in India than in any other developed countries. ‘The relatively slow pace of reforms in India’s state sector is also limiting factor. In many emerging markets, the privatization of state owned firms has offered rich’ opportunities for private equity investors. In India, however, progress with privatization has been halting, providing far few opportunities for PE funds in this area.‘Why PE Investment not Popular?’ The promoters will not prefer for PE Investment for the following reasons:- ‘© The fear of losing control over the company © Fear of losing confidentiality of internal information of the company. © Considered as high cost option Outsiders involvement in the management is not acceptable. Investor will have more interest in day to day operations. EVOLUTION OF PE INVESTMENT IN INDIA In India, the evolution of PE Investments can be traced back to: the formation of VC funds in India, PE has now entered the economic mainstream and this segment has particularly gained momentum over the past few years. The Concept, of VC&PE is very recent in India as compared to other countries like USA, UK, Europe, Israel where it has been in existence since many years. In the absence of an organized Venture Capital Industry, individual investors and development financial institutions have played the role of venture capitalists in India, Entrepreneurs have largely depended upon Private Placements, Public offerings and lending by financial institutions. In 1973, a Committee on “Development of Small and Medium Enterprises” highlighted the need to foster Venture Capital as a source of funding new entrepreneurs and technology. Later, a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector, based on which Government of India took a policy initiative and announced guidelines for venture capital funds (VCFs) in 1988. Thereafter, Government of India issued guidelines in September 1995 for overseas venture capital investment in India. 1 Kishor, Ravi. M. (2009), “Financial Management Comprensive Text Book with Case Studies, Taxmann Publisher, 7” Edition, January. Page No. 913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 fueling 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 others 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”. MILESTONES: PRIVATE EQUITY CAPITAL IN INDIA With the first formal private equity and venture capital vehicle in India can be traced back to the setting up of the Risk capital foundation in 1975, the history of the industry in India is entwined with the liberalization of the Country’s economy- a process which began hesitantly in the 1980s and gained significant momentum in 1991. Pre- 1995 Until the mid- 1990s, the need for private equity was met largely by development finance institutions like IDBI, ICICI and IFCI. 1984: The Industrial Credit and Investment Corporation of India (ICICI) decides to allocate funds for venture capital type activity, 1986: ICICI-launches a venture capital scheme to encourage startup ventures in the private sector in emerging technology sectors. 1988: Technology Development and Information Company of India Ltd. (TDICI) is set up to encourage private sector ventures in emerging technology sectors. (TDICT has since been renamed ICICI Venture Funds) with strong encouragement and financial support from the world Bank, the Government of India announces guidelines for venture capital funds. IFCI- Sponsored RCF is converted into the Risk Capital and Technology Finance Corporation of India Ltd. (RCICI). 1989: Regional Venture Capital Fund APIDC Venture Capital (APIDC VCL) is set up in Andra Pradesh, followed by Gujarat Venture Finance Ltd. (GVFL) in Gujarat. Can bank Venture Capital, sponsored Canara Bank, is also setup. 20The first Private sector funds come into being , credit capital venture fund (India) Ltd. is set up by Lazard credit capital in association with Asian Development Bank and the commonwealth Development Corporation. (ANZ Grindlays — now part of standard chartered — had earlier set up India Investment Fund using funds from overseas Indian.) 1995-2000 During this period, Several Foreign PE/VC Firms like Baring Private- Equity partners , CDC Capital, Draper International, HSBC Private Equity and Warburg Pincus enter the country. Firms like chrys capital and west bridge capital, set up by managers of Indian origin with foreign capital, also make their entry. The Venture capital arms of companies like Intel and GE become active in India. The main focus is on information technology and internet related investments 1995: Overseas Investment in Venture Capital is permitted, along with tax incentives for such investments VC Funds can be floated by firms other than Banks and Financial Institutions. 1996: The Securities and exchange board of India (SEBI) issues that SEBI (Venture Capital Funds) Regulations, 1996. Infrastructure leasing & financing services limited (IL&FS) acquires credit capital venture fund leading to the creation of what in now IL&FS Investment Managon limited (IML). 1999: Small Industries Development Bank of India (SIDBI) setup SIDBI Venture Capital. a2000: Based on the recommendations of the K.B. Chandrasekhar Committee, SEBI amends the 1996 regulations to help fuel the growth of the industry. Mutual fund house unit Trust of India (UTI) setup is private equity am, UTI Venture Funds. 2000-2005 * An economic recession in the U.S. and a slowdown in the technology sector result in some foreign PE Investors quitting India 2001-2003. The remaining funds focus largely on later stage and PIPE investments. 2002: Infrastructure Development finance company (IDFC) sets up IDFC private equity While successful exits- especially in the Business Process Outsourcing (BPO) sector- bring some cheer, investors clearly prefer late stage companies. 2003: Funds like ICICI Venture and Actis become active in buyouts. 2004: Investments activity picks up. Six PE- backed Companies — including Patni Computer Systems and Biocon go public successfully. 2005: Investors increasingly focus on non-IT Investments including in Industries like manufacturing, healthcare and those dependent on domestic consumption. Early stage investments re-emerge on investors’ radar screens with several silicon valley VCs beginning to meke direct investments in Indian Companies, SEBI allows PE/VC Investments in Real Estate. Warburg Pincus $1 billion plus gains from its investments in telecom services firms Bharti Airtel makes the global private equity industry sit up and take notice, Highly successful IPOs of PE- backed Companies- Including that of wind energy firm suzlon energy and print media firm HT Media ~ reinforce India’s attractiveness as a destination for Private Equity Investing. 22WHY PE INVESTMENTS IN INDIA Indian economy is one of the fastest growing economies of the world. The strong fundamentals of India such as average GDP growth of 8.5% for the last five years, increasing saving and investments 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 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 spilover effect on various from such as — corporate governance standard, 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. REASONS FOR PRIVATE EQUITY PLAYERS BEING ACCEPTED IN INDIAN ECONOMY ARE- Another practice that private equity players in India have yet to actively adopt is to supplement executive teams in portfolio companies with a talented board of dierctors, who not only play an active role in formulating the company’s strategies but also use their network of relationships, contacts and mangerial expertise to implement various startegic intiatives for the company, or to diversify into new area through a greenfield project. These board members are expected to devote a significant amount of time outside board meetings to contribute to the company’s growth and value creation. The private equity industry in india is at a key injection point.Investors the world over are increasing their allocations on India. The robust economy, 23supportive government, and recent industrial reforms could see several hundred billion dollars channeled to the newly opened infrastructure sector alone. OPPORTUNITIES AND CHALLENGES FOR PRIVATE EQUITY PLAYERS IN INDIA The increasing impact of private equity on Indian business is a dual effect of indigenous factor 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 There were various advantages for running 2 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, OPPORTUNITY FOR SMES The small and Medium enterprises (SMEs) in India is an emerging segment and look for various avenues for raising funds. In such as scenario, PE investments are an alternative and viable source of financing the SMEs not only because of the financial support that they can provide but also because of the global exposure that can be provided to the SMEs sectors. This is in form of deploying members of their team on the boards of directors of their investee companies and taking active part in their governance and activities. This would bring more accountability, transparency, and corporate governance. Further, the portfolio companies would also get exposure to global standard practices in operations, human resource management, financial planning, reporting and investor relations.OPPORTUNITY IN KEY SECTORS “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 & 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 in to 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 There were various problems associated with the PE firms 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. 25REVIEW OF LITERATURE Lamer, Josh (2000)'explains the recent tremendous growth in private equity funds and how have these funds created so much value. The pool of U.S. private equity funds has grown from $5 billion in 1980 to over $175 billion in 1999. Private equity's recent growth has outstripped that of almost every: class of financial product. Whether you are an entrepreneur seeking private equity finance, a private equity investor grappling with the industry's changes, or an investor interested in private equity as a potential investment, It presents a collection of real world cases-supplemented by detailed industry notes-that explore the exciting and dynamic world of venture capital and buyout funds, The private equity industry is experiencing tremendous change. Buyout firms are raising funds of more than $20 billion; the sizes of venture funds are rising again toward the $1 billion mark. At the same time, the industry is globalizing at a rapid rate. Feldman, Stanley J. (2005)* explain a complete explanation of the issues that determine private firmvalue. Principles of Private Firm Valuation combines recent academic research and practical real-world experience to help readers better, understand the multitude of factors that determine private firm value. ‘Lemer, Josh (2000), “Venture Capital and Priavte Equity : A Casebook (Hardcover) Wiley Publisher. 2 Feldman, Stanley J. (2005) “Principles of Private Firm Valuation (Wiley Finance) (Hardcover), Wiley Publisher, 1 edition, April 6. 26For the financial professional serving private firms-who are increasingly being called upon to give advice on issues related to firm valuation and deal structure-this comprehensive guide discusses critical topics, including how firms create value and how to measure it, valuing control, determining the size of the marketability discount, creating transparency and the implications for value, the value of tax pass-through entities versus a corporation, determining transaction value, and the valuation implications of FASB 141 (purchase price accounting) and 142 (goodwill impairment). The entrepreneurial explosion in the United States over the last thirty years has resulted in a record number of established private businesses. Smolarski, Jan et. Al. (2005)! in their study examined how Indian VC and PE firms manage several dimensions of risk by making a comparison between Indian and U.K. funds, Kautilya Shastri (2005)? suggested that India is experiencing a second wave of interest in PE; the first was in the late 1990s. But unlike the late- 1990s boom of flows to technology companies money is heading into broad range of sectors, reflecting the strong performance of the economy and should continue to gather strength. Palmeri, Christopher, Sasseen, Jane (2006) 3 have ‘observed that the size and scope of the buyouts are raising concerns about a potential wave of credit defaults down the line. With so much money chasing deals, PE firms are pricing for perfection, even as they venture into unfamiliar areas, And if companies can’t generate enough cash to meet mounting interest payments, bankruptcy may loom. "Smolarski, Jan et.al. (2005), “Risk Management in Indian Venture Capital and Private Equity Firms: A Comparative Study”, Wiley Periodicals, Inc. *Kautilya Shastri (2005) , “Indian Private Equity Takes a Wider View”, Euromoney , 00142433, Nov., Vol.36, Issue 439. . *.Palmeri, Christopher; Sassen, Jane (2006), ‘Private Equity : A Bid Too Far?”, Business Week, 00077135, 16" Oct, Issue 4005. 27They also explained why PE players are moving beyond their normal stomping grounds into areas where they may confront complex new issues, keeping in mind, 436 new funds had raised a record $300 billion worldwide as of early October 2006, 2006, according to industry tracker- Private Equity Intelligence. : Erica Duecy (2006)'indicated that even though fueling companies’ growth through strategic M&A has become tougher in recent years, as PE firms buy up more and more available brands, thus pricing acquisitive foodservice firms out of market. Resonbush, Steve (2006)* opined that the big PE funds and pension fund are drawn to one another because of the dynamics of the industry. The players in the top quartile of private equity ‘funds tend to stay there, unlike the public markets, where the concept that past performance is no guarantee of future profits is accepted as common wisdom. Zaczkiewick, Arthur (2006)° looked at the business conditions facing PE firms in 2006 and indicated that it is a good time to borrow money'to grow a business, With global M&A volume reaching $2.37trillion in the first nine months of 2006, it was described that the current conditions are unprecedented. ‘Erica Duecy (2006), “Money to Grow — Chains Show Acquired Taste for Upstart Brands”, Nation’s Restaurant News, 16" Oct., pp. 132-134. 2Rosenbush, Steve (2006) , “The Money Behind the Private Equity Boom”, Business Week Online, 11" Oct. 3.Zaczkiewiez, Arthur (2006) , “Private Equity Firms Let the Good Times Roll”, WWD: Women’s Wear Daily; 15" Nov., Vol.192 Issue 103, Special Section pp.30-30. 28Walker, Jacqui (2006)' in his research article discussed that the competition among PE firms for quality deals is deterring superannuation funds from investing in private equity based on the data collected from Australia. Wells, Kathryn (2006)? finds out the cause for the stock market crash in the Gulf earlier this year which provided a clear illustration of the adage that one man’s meat it another man’s poison. Some market observes believe that many of the large number of firms that have begun raising PE funds in the region in recent months will struggle to produce good results for their investors without having any idea what PE is really about by hinting that there may a risk of bubble developing in this market too. f Li Shan (2006)°forecasted the culmination of the state monopoly of the financial system in China. Efficient pricing across the credit spectrum and diversified investment products in each risk segment will aid allot capital over a wider cross section of the economy. The author also predicts that public and private equity will become commonplace, and the derivatives and commodities market will.develop to enhance the diversity and efficiency of the Chinese financial system. Walker, Jacqui (2006), “Super Funds Spurn Venture Capital’, Vol. 28 Issue 42, pp.61-61. : *Wells, Kathyn (2006) , “Collapsing Stock Markets Boost Private Equity”, Euromoney, 00142433, Nov 2006, Vol. 37, Issue 451 ?.Li Shan (2006) , “Toward Financial Efficiency”, Far Eastern Economic Review; Nov. 2006, Vol. 169 Issue 9, p 50-53. 29Chaze, Aaron (2006)! reported that in India there is an increasing trend in PE investment in the Finance Industry. Subhash , KB. (2006) ? has taken deep inside view of the Indian ventures business firms both an historical and a comparison with other nations. Although small, India has been growing small, India has been growing fast and appears to ~ have significant potential. Fraser-Sampson, Guy (2007)* provides a full explanation of all types of private equity activity, how returns should be viewed, and how each sub-asset class should be modeled and evaluated. The book offers basic instruction for beginners who understand investing but have no prior knowledge of private equity. It offers specific practical advice on modeling and evaluating venture funds and includes a full analysis of the proper examination of detailed specifics and a chapter dedicated to due diligence. Fund executives and investment managers will find this to be a practical, reliable resource, " Chaze, Aaron (2006), “Private Equity Investing in India Shifts into High Gear”, Global Finance; March, Vol.20 Issue3, p10-10. 2-Subash , K.B. (2006) , “How to Teach the Big Baby to Walk : Cash of the Indian Venture Capital Industry”, Journal of Private Equity ; Fall, Vol.9 Issue 4, pp.76- 91. + Praser-Sampson, Guy (2007), “Private Equity as an Asset Class” Wiley Publisher, April, 16 30Lemer, Josh, Hardymon, Felda and Leamon, Ann (2008)'The private equity ‘and venture capital industry has become a leading pillar of modem investment, growing from $5 billion in 1980 to more than $530 billion in 2006. Yet many of its features remain puzzling even to advanced business students. private equity investor grappling with the industry's changes, or an investor interested in private equity as a potential investment, Venture Capital & Private Equity: A Casebook, Fourth Edition will shed light on the history and workings of this complex area and prepare you for a career in the prestigious and profitable world of venture capital and private equity. The private equity industry is experiencing tremendous change. Buyout firms are raising funds of more than $20 billion; the sizes of venture funds are rising again toward the $1 billion mark. At the same time, the industry is globalizing at a rapid rate. Cendrowski, Harry Martin, James P., Petro, Louis W. (2008)? “Private Equity: History, Governance, and Operations is an invaluable guide to understanding the world of private equity investing. Harry Cendrowski and his colleagues have drawn on their extensive experience and expertise to produce a book that is remarkably comprehensive and authoritative." it also provides a thorough examination of the rarely appreciated relationships among internal control design and operation, corporate governance and sound investment decision-making and management. It is an important contribution to the literature of finance. “Lemer, Josh, Hardymon, Felda and Leamon, Ann (2008) “Venture Capital and Private Equity: A Casebook (Hardcover) , Wiley Publisher, 4% edition, May 2. 2.Cendrowski, Harry Martin, James P., Petro, Louis W. (2008) ‘Private Equity: History, Governance, and Operations”, June 30. 31"Harry Cendrowski really hits a homerun with his newest book about the private equity (PE) industry. "For years, private equity has been a misunderstood asset class, Harry Cendrowski's book defines private equity in clear, concise terms. Anyone in the financial world will benefit from the insights, guidelines, and experiences detailed inPrivate Equity: History, Governance, and Operations." Bob Clone, Senior Portfolio Manager, Alternative Investments Division, Michigan Department-of Treasury . A unique governance-and-operations guide to the high equity industry Private Equity covers a multitude of information centered on private equity, including the history of the industry, governance best practices, and operations assessments. This invaluable resource presents a novel framework for the analysis of private equity investments. Korb, Brian, Finkel Aaron(2008) ' A career in today's private equity (PE) arena—which also includes venture capital as well as PE fund of funds, hybrid funds, and secondary fands—can be extremely rewarding. But with the popularity of this profession on the rise and the number of candidates far outweighing the positions available, landing a job in this field can be a difficult endeavor. Gaining a better understanding of the PE career path and how the hiring process works is a distinct advantage for those seeking to break into the business. Along the way, Getting a Job in Private Equity also offers case studies of more than thirty people who have successfully navigated the PE hiring path. These people candidly discuss what worked for them, what their interviews were like, and what, if anything, they would have done differently. Sample resumes from fifteen of these individuals are also included. ‘Korb, Brian, Finkel Aaron(2008), “Getting a Job in Private Equity: Behind the Scenes Insight into How Private Equity Funds Hire (Glocap Guide) (Paperback) Wilesy Publisher, November10. 32Laffer, Arthur, Hass, William, Pryoy, Shephered G. (2009)', The world is changing and has never been more challenging to private equity players, public companies, and investors. With record market volatility and a global economic crisis, decision makers of all types can learn from successful private equity players and other top value builders. Private equity is growing at a rapid rate, with $2.7 trillion in transactions since 2001 and buyouts occurring in every type of market, including declining ones. And now, with the end of investment banks as we know them, the door is open to more opportunities than ever. Decision makers seeking to take full advantage of the new, interconnected world of business and economics will learn how to make the best decision the first time around, quickly and with conviction— the key to seizing the private equity edge. Even though there were some researchers studied the PE funding in India, still there seems to be some possibility on the clarity between VC and PE. There was no attempt so far by any researchers ‘about the factors influencing on the PE Funding in future. . Kishor, Ravi. M. (2009), explains the conceptual ftamework of private equity investment and operational practices , advantages and exit strategies of private ‘equity investment ‘Laffer, Arthur, Hass William and Pryor G. Shepherd(2009), “The Private Equity Edge: How Private Equity Players and the World's Top Companies Build Value and Wealth” McGraw-Hill Publisher, 1 edition February 19. ? Kishor, Ravi, M. (2009), “Financial Management Comprehensive Text Book with Case Studies. Taxmann Publisher, 7 Bdition, January. Page No. 913 33Research Problem. Private Equity Investment has been developed as an important funding source in the entrepreneurial market place. Structural and Regulatory framework of private equity investment is sill at infancy stage. So there is a need to identify the problems attached with the operations of private equity investment in India. ” ‘That is why the topic of research work on “Private Equity Investment in India” has been selected. Thus, keeping in mind the innovative nature of private equity. The research study has been design to have a deep inside in the operations of Private Equity Investment in India. Research objective The objective of this research is to study the role of private equity in India, analyzing their investment strategies, their particular strategies, by studying their entry strategies into Indian financial markets, regulatory norms in India and how it is beneficial to Indian companies. An attempt also made to understand their investment patterns. The studies also deal with some of the major deals in India, this help to understand the investment pattern and than the exit strategies of the PE firms. The research also help to understand what could be the scenario of the private equity investments in the near future, and comparison of the Indian scenario with rest of the world. 1. To study conceptual framework of Private Equity. 2. To study trading practices of Private Equity. 3. To study organizational pattem of Private Equity. 4, To study regulatory framework of Private Equity, 5. To study Private Equity Practices in India. 6. To study role of Private Equity in promoting investment.Research Hypothesis 1, Private Equity Fund is responsible for growing mergers & Acquisitions deals in India. . 2. Private Equity fund Stimulate the bullish phase in Indian Stock market, 3. Private Equity Fund accelerates the pace of investment opportunities in India, 4, Private Equity Fund encourages the first generation entrepreneurs to develop their business units. Study Area Due to limited time and Specific nature of research, Delhi and NCR areas has been selected for the Study by using purposive sampling technique. Research Methodology. In the present study the 100 respondents has been selected as sample size by using random purposive sampling technique, The data has been collected by the two sources Primary source and Secondary source. For the collection of primary data questionnaire has been prepared and Secondary data is collected from the various books, magazines, journals, company annual reports , news paper like, The Times of India, The Economic Times, The Financial Express, The Pioneer and other sources. Keeping in view the above said objectives the data has been collected, tabulated and analysed, Plan of the Study ‘The present study has been classified in to seven chapters. The chapters name are as follows: 1. Introduction 2. Corporate Sector in India, 3, Fund Mobilisation in India. 4, Regulatory framework of Private equity in India, 5. Operational Practices of Private Equity in India, 6, Participation of Private EquityFunds in Mergers and Acquisition in India, 7. Conclusion & Suggestions, 35Limitation of the study There are several limitations, in this study. Availability of reliable and timely information is generally a major constraint in completing the study like private equity. However, efforts.is made to have complete information with regard to private equity investment in India ‘Thus, efforts is made to analyze the nature and rationale of private equity. As an exploratory study, the goal of this research effort is to seek greater understanding that can lead to building a foundation for more extensive research in the future. Getting primary data from the company is very difficult. For being a private company the employees of the company are reluctant to give any information, which is specific to that company. Getting the Tesponses were not willing to give opinion to the questions. They left many of the questions unanswered. 36