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India Venture Capital Association Perspectives on the Indian

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Perspectives on the Indian VC / PE Industry




Mahendra Swarup   - President IVCA


                                                                       1
Agenda


  • About Indian Venture Capital & Private Equity Association (IVCA)
  • Venture Capital and Private Equity
     -Early stage Venture Capital encourages entrepreneurship &
      innovation in tech / tech enabled and some other areas
     -Later stage Private Equity enables companies to compete globally, in
      terms of scale & adoption of global management / corporate
      governance norms

  • Historical role of Venture Capital & Private Equity
  • How other countries have leveraged this growth engine
  • Impact of and the growing need for VC / PE in India
  • What government can do to encourage the growth of Venture
    Capital and Private Equity in India
                                                                             2
IVCA Overview


   • The umbrella association for VC / PE Funds in India


   • Approximately 80 members, covering the entire gamut of
     VC/PE:
      -Early stage
      -Large Indian funds
      -International funds
      -Sectoral funds
      -Social funds


   • Fund size of our members ranges from US $50 million to US
     $50 billion



                                                                 3
Key IVCA activities

  • General advocacy, dealing with long term issues affecting industry

  • Comprehensive, accurate data and analysis on industry

  • Research reports / newsletters / directory

  • Events / Conferences
     - India‟s largest event – 300+ attendees, 40+ LPs, representing US$
      200bn


  • Training for VC / PE professionals – with EVCA

  • Self regulation, setting / adhering to global standards

  • Promoting India as an Investment Destination globally
                                                                           4
Historical Role of VC / PE

 • Globally, venture capital and private equity has provided a robust
   growth story
    -The global VC/ PE market was $860B in 2007, growing at a ~50% CAGR
     (2002-07). Asia was ~$90B, at a 64% CAGR (2002-07)
    -VC/ PE is an asset class which provides long-term “patient” capital &
     expertise, across all stages of a firm‟s lifecycle. They provide a host of
     benefits (e.g. vision/ strategy, operational improvement, market
     expansion, best practices, customer access, corp. governance) enabling
     firms to attain their full potential
 • India is a significant VC/ PE market, with ~$35B cumulative
   investments, since 2004
    -Over 1200 Indian companies have accessed „growth capital‟, including
     Bharti, OnMobile, MindTree and SKS
    -~$11B was invested in 2008, across industries. Energy, IT/ ITeS &
     Telecom were the top 3 sectors


                                                                                  5
   Venture capital & private equity provide
   “patient” capital and expertise to portfolio firms
                                                                                                             VC/ PE funds
                                Hedge funds                   Mutual funds
                                                                                               Early stage                     Late stage
                         • Equity, commodities,         • Mostly public companies,      • Promising startups,           • High growth companies
 Investment                currency, derivatives etc.     government bonds, gold          especially in knowledge
 focus                                                                                                                  • Inefficient companies that
                                                                                          intensive industries            can be turned around

                         • Any asset whose price is     • All publicly traded           • High growth companies in      • High growth segment
                           expected to change in          companies (e.g. Bharti,         their early stages (e.g.        companies (e.g. Bharti,
 Example of                short - medium term            Reliance, ONGC etc.)            Info Edge, Adventity,           Hexaware)
 targets                                                                                  Daksh)                        • Capital intensive sector
                                                                                                                          companies (e.g. Mundra
                                                                                                                          Port, Gammon India)
                         • Liquidity in the secondary   • Capital                       • Management expertise        • Management expertise
 Contribution to           market                                                         (e.g. strategy/ operations,   (e.g. strategy/ operations,
 portfolio                                                                                corp. governance etc.)        corp. governance etc.)
 company
                                                                                        • Capital                       • Capital
 Investment              • 0.5 – 1.5 years              • 3-5 yrs                       • 3-7 yrs                       • 3-7 yrs
 period
 Impact during           • FIIs, including mutual funds and hedge funds, pulled out • Despite the slow down, VC/ PE funds have remained
 the current               funds at short notice, which was a key cause behind the    invested in the market, and are continuing to invest in
 slowdown                  stock market downturn/ rupee depreciation                  attractive growth opportunities
                         • Indian players (e.g. Fair    • Public sector players (e.g.   • Public sector players (e.g.   • Indian players (ICICI
                           Value Capital)                 SBI, LIC)                       IFCI Venture Capital            Ventures, IL&FS PE)
                         • International players (e.g. • Indian players (e.g. Tata,       Funds, SIDBI Venture     • International players (e.g.
 Examples of               India Deep Value Fund,        Kotak Mahindra)                  Capital Ltd)               Baring Private Equity
 players in India          Indea Capital, Karma        • International players (e.g. • Indian players (e.g.          Partners, Actis, Goldman
                           Capital)                      HSBC, Fidelity)               Aavishkaar)                   Sachs PE, Temasek)
                                                                                     • International players (e.g.
                                                                                       Sequoia Capital, BVP)                             6
Source: Secondary research; Bain analysis
 VC/ PE investors actively contribute across a
 company‟s lifecycle

                                 Early stage VC/ PE                                                                      Late stage VC/ PE
 • Early Stage investors have a particular emphasis on                                                   • Late Stage investment is typically a
   seed/startup stage businesses and entrepreneurial                                                       transformational, value-added, active
   undertakings                                                                                            investment strategy


 Seed stage:                         Start-up:                         Growth stage:                       Expansion                        Mature stage:
 •    Product                        •   Key mgmt. in                  •    Product in                       stage:                         •   Stable growth
      development,                       place, initial                     development or                 •    Product shipping,               rate, likely to be
      market research                    marketing, pre-                    available, first                    funds needed for                profitable, cash
                                         sales                              institutional                       working capital                 flow positive
                                                                            financing                           or plant
                                                                                                                expansion


      Company                                                      Growth of a company                                                            Mature
     starting out                                                                                                                                Business



              The industry spans the spectrum from individuals providing seed capital to companies
               who are just starting out – to larger funds specializing in multi-billion dollar buy-outs of
                                                    large companies
Note: Although not mutually exclusive sets in India, venture capital comprises a majority of Indian early stage funds and private equity,
   most late stage funds
Source: Lit search                                                                                                                                           7
 The global VC/ PE market was $860B in 2007;
 growing at a ~50% CAGR

             Financial sponsor deal value
                                                                                                                                                 CAGR
                                                                                                                                                 (02-07)
              $1,000B
                                                                                                                                                 49%
                                                                                                                                862
                                                                                                                                                 88%
                                                                                                                        794      ROW

                     800                                                                                                         Asia            64%




                                                                                                                                 Europe
                                                                                                                                                  33%
                     600




                                                                                                                                 North America
                     400                                                                                       353
                                                                                                       248                                        59%
                     200                                                 150
                                                          124 115    117
                                                       75         91
                                       40      61
                               29
                          0
                               95      96      97      98      99       00      01      02      03      04      05       06      07



Notes: Geography is based on location of target; Asia includes Australia, Japan and India; Excludes sovereign wealth funds and infrastructure funds
Source: Thomson Financial                                                                                                                                  8
 Asia has grown rapidly as well, although a
 slowdown was witnessed in 2008
   Total VC/ PE investments in Asia
                                                                                                    CAGR
               $100B                                                                              (2003-08 )

                                                                     $89B
                                                                                                    26%

                    80
                                                                                        Others      30%
                                                              $66B

                    60                                                       $58B
                                                                                         Taiwan     104%


                                                                                         Korea       5%
                    40                                                       Japan                   0%
                                                       $34B
                                                                            Aus. /NZ                25%

                                               $21B
                    20        $18B                                           India                  73%

                                                                              China
                                                                                                    50%
                                                                            (incl HK)
                      0
                              2003             2004    2005   2006   2007    2008



                                     India has done well to attract significant VC/ PE
                                               capital, over the last 5 years
Note: India data includes investments in Real Estate
Source: AVCJ                                                                                                   9
 India is a significant VC/ PE market, with ~$35B
 cumulative investments, since 2004

              Total VC/ PE investment in India                                                                                     EXCLUDES REAL
                                                                                                                                      ESTATE
                $15B                                                                        14.0

                                                                                                                                     Total
                                                                                                                 10.8
                   10                                                                                                               $35.1B

                                                                                                                            Other
                                                                         6.7
                                                                                                                            Buyout
                                                                                                                            Late (Mature)
                     5
                                                                                                                            PIPE
                                                                                                                            Pre-IPO
                                                    2.0
                                1.6                                                                                         Growth
                                                                                                                            Early (Formative)
                     0
                               2004                2005                2006                 2007                2008


  VC/ PE investment
                                0.2                 0.3                  0.8                 1.3                  0.9
  as % of GDP

  Total deals                    85                 160                 325                  442                 398
Note: Total PE investment in Real Estate projects between 2004 and 2008 is ~$8B; 0.6B, 0.7B, 3.1B and 3.3B in 2005, 2006,
   2007 and 2008 respectively – all of it goes into “Other”
                                                                                                                                             10
Source: Bain PE database
 These investments have come from multiple
 sources, with FDI being the key route
                                                                                                                              EXCLUDES REAL ESTATE

   Only ~10% of VC/ PE investment in India                                                VC/ PE investments contribute ~40% of
           is sourced domestically                                                               all FDI inflows into India
   Source of VC/ PE funds in
   India                                                                                FDI inflows into India
                                       $14B                                                                                $19B
             100%                                                                                100%
                                       FVCI
                                    Domestic
                 80                                                                                   80                  Others



                 60                                                                                   60



                 40                     FDI                                                           40

                                                                                                                          VC/ PE
                 20                                                                                   20



                   0                                                                                   0
                                       2007                                                                                2007

Note: Including real estate in 2007, VC/ PE investment in India was $17B; VC/ PE investments through the FDI route was ~50% of total FDI
Source: Industry experts; SEBI handbook; DIPP, Government of India                                                                           11
 Over 1200 Indian companies have accessed VC/
 PE capital in the last 5 years…
           A large number of Indian companies have                                                        Several of these companies have already
                    received VC/ PE funding                                                                  demonstrated remarkable success


                      Companies receiving VC/                                                                                                                         825
                                                                                                 CAGR               3800             1600
                      PE funding
                                                                                                (04-08)
                      400                  392

                                                                                    346                                        760                   600              500



                      300                                  290

                                                                                                                         500
                                                                                                                                                                     500
                                                                                                                                             300

                      200
                                              146                                                  73%
                                                                                                               68                                                    61
                                                                                                                                            86
                      100          76


                                                                                                                          30                30
                           0                                                                                                                               15
                                2004 2005 2006 2007 2008                                                                                                                   23


                                                                            Represents cumulative
                                                                            VC/ PE investment ($M)                  10                           8                     8

Note: Real estate companies have been excluded from the number of companies which have accessed VC/ PE                                                          12
Source: Bain PE database
  …spread across a broad spectrum of industries

            Annual VC/ PE investments
            in India                                                                                                                           Cumulative VC/ PE                                                                           EXCLUDES REAL
                                                                                                                                               investments, by industry*                                                                      ESTATE
            $15B                                                                                                                               (2004-08)
                                                                       14
                                                                                                                                                   $8B
                                                                                                                                                                7
                                                                                                                                                         6
                                                                                     11                                                                                   5      5
                 10                                                                                                                                                                            4
                                                                                   Other                                                                 4                                                     3
                                                                                                                                                                                                                                   3
                                                                                                 Media &
                                                                                                 Entertainment                                                                                                                               2
                                                                                                 Healthcare                                              2                                                                                                  1
                                                           7
                                                                                      Mfg        Engg &
                                                                                                 Construction                                            0




                                                                                                                                                                                                                                  Energy




                                                                                                                                                                                                                                                        Media & Entertainment
                                                                                                                                                                                                            Engg & Construction
                                                                                                                                                                                            Manufacturing
                                                                                                                                                                                IT & ITES
                                                                                                                                                                         BFSI
                                                                                                                                                               Telecom




                                                                                                                                                                                                                                           Healthcare
                                                                                     BFSI
                    5
                                                                                     IT &
                                                                                     ITES



                                             2                                                   Telecom
                               2
                                                                                    Energy


                    0
                          2004 2005 2006 2007 2008
                                                                                                                                No of deals                   34 135 377 216 99                                                   74 144 60

Note: Cumulative PE investment in real estate (2004-08) is ~$8B; (*) Total investment in other industries not shown here is ~$5B in 271 deals between 2004 and 2008
Source: Bain PE database                                                                                                                                                                                                                                                        13
 In fact, ~30% of PE portfolio companies in India
 are among the largest 500 Indian firms

              VC/ PE Deals ('04-'08)                                                                              EXCLUDES REAL
                                                                                                                     ESTATE
                                           1,410                                         $35B
              100%

                                                                                         Others       “Since many Indian
                    80                                                                                 companies are
                                                                                                       attaining mid sizes
                                           Others                                                      and looking abroad for
                    60                                                                                 M&A deals, infusion of
                                                                                                       PE capital will help
                                                                                                       them to scale up their
                    40
                                                                                  ET 500 companies
                                                                                                       businesses.”
                                                                                   and equivalent*            Head, M&A, Grant
                                                                                  private companies
                                                                                                            Thornton, May 2008
                    20              ET 500 companies
                                     and equivalent*
                                    private companies

                      0
                                       Companies                                  Purchase Price




* Equivalent private companies represent private cos. with PE valuation in the range of ET 500 cos.
Source: Bain PE database; ET 500 list; Lit search
                                                                                                                          14
 Besides capital, VC/ PE investors bring a host of
 other benefits to the firms they work with
                                                  • Early stage VC/PEs provide
                                                    capital and expertise, esp. to
                                                    first-gen entrepreneurs

       • Drive independence of boards                              1
       • Help increase transparency and                                                       • General partners bring domain
         reporting standards                                  Promotes                          expertise from their portfolio
                                                                entre-                 2        companies, previous industry
                                              8
                                               Drives        preneurship      Provides          experience and their network
                                              corporate                         deep
                                             governance                       industry
                                                                             knowledge

• VC/ PE firms typically invest                                                                       • In addition to internal
                                                               VC/ PE                  Provides         expertise, can bring in external
  for longer periods (~3-7 years)         “Patient”
  relative to hedge funds or         7
                                                             benefits to             operational        knowledge of „best
                                           capital                                               3
  mutual funds                                                portfolio               expertise/        demonstrated practices‟ across
                                                             companies                   BDP            industries

                                              Customer                        Sounding
                                               access                         board for
                                             (domestic/                         vision
                                                int’l)  Expertise on          /strategy
     • Could provide access to new           6                                                • Extensive industry/market
                                                        cross-border                      4
       customers through board access,                                                          knowledge helps portfolio firms
                                                            M&A
       portfolio firms or networks                                                              develop an ambitious yet realistic
                                                                                                vision and strategy
                                                                   5

                                                  • Experience and networks to help
                                                    identify, screen and acquire
Source: Bain analysis                               targets                                                                      15
 In particular, VC/ PE investors help drive
 corporate governance in their portfolio firms
     Mechanisms to drive
                                                                              Impact of VC/ PE on portfolio firms
    corporate governance

                                             • Independent boards and board sub-committees
                                                    - Empirical evidence suggests that firms with VC/PE funding have more independent
                                                      directors
Independence of boards                              - VC/ PE funds leverage their network to get more experts to join the boards of portfolio
                                                      companies to drive better strategy and corporate governance
                                             • Separate roles for chairman and CEO
                                                    - Firms with VC backing are less likely to have a dual CEO/Chairman


                                             • Compliance with more stringent international reporting requirements
                                                    - Greater transparency in reporting enables VC/PE firms to track their investments better
Transparency and
                                             • Less aggressive accounting systems
reporting standards
                                             • Lower earnings management
                                                    - VC backing reduces the level of earnings management at and following the time of IPO


     "PEs have helped Arch Pharma put its house in order by implementing improved
      standards in transparency"
                                                     Ajit Kamath, Director, Arch Pharma
                                                             (PE expertise helped Arch Pharma increase its sales 6x in 5 years)

Source: “Venture Capital and Corporate Governance in the Newly Public Firm”, Yael Hochberg, Kellog; “The impact of Venture Capital on the Corporate
   Governance of Australian Initial Public Offerings”, Suchard, Univ. of New South Wales; “Venture Capital and the Finance of Innovation”, Andrew Metrick,   16
   University of Pennsylvania; Literature search; Bain analysis
VC/PE Improves Corporate Governance

   VC/PE firms are “organizations that run governance systems that
    run businesses.”
             - Michael Jensen, Harvard Business School


   Public companies should adopt many private equity practices -
    increasing equity ownership by management, focus on shareholder
    value, CEO / management pay / tenure linked to performance
             - Steven Kaplan, University of Chicago Business School


   Australian Business School Study
      VC / PE backed companies better at Corporate Governance
      VC backed boards have higher percentage of independent
     directors with industry experience
                                                                      17
How other countries have leveraged VC/PE

 • Early stage VC/ PE: Govt policy has helped create an enabling
   environment for innovation in US and Israel


 • Late stage VC/ PE: Relatively fewer regulations have helped firms
   outperform the market in US and Italy


 • VC/ PE backed firms have had a significant impact on the economy
   – promoting entrepreneurship, innovation, commercialization of
   new technology, employment generation & competitiveness. Firms
   such as Google, Millennium Pharma & Crown Castle have flourished
   owing to the expertise provided by VC/ PE firms




                                                                       18
 USA, Israel and Italy could provide insights into
 the potential impact of VC/ PE funds

      Very high


                                                                                                               USA
                                                                                                             ($450B)



 Active promotion                                   Israel
of VC/ PE by govt.
  (Govt investment in
   VC/PE, regulations,
                                                                                                                                             VC/ PE
financial sophistication)
                                        Italy                                                                                             investments
                                                                                                                      China                  (2007)

                                                                                      South Korea
                                                       India                                                                                $12.5B
                                          Russia

      Moderate

                     Moderate                                         Attractiveness of
                                                                                                                               Very high
                                                                    business environment
                                                               (Current GDP size, GDP growth
                                                             projections, ease of doing business)

 Note: Italy PE/VC investment is for 2006; Euro 1 = $1.3 assumed for currency conversion
 Source: PWC Moneytree; EVCA; Venture Intelligence; IMF forecasts; Global Competitveness Report – WEF; Literature search; Bain analysis                 19
 Creating the right conditions is critical for the
 success of VC/ PE
                       Govt.
                       investment in • Investment in VC funds
                       VC/PE
                                            • Enable pension funds / banks / insurance cos to invest in VC/PE funds
Active                                      • Relatively fewer regulatory constraints on a VC/ PE fund‟s ability to
                       Encouraging
promotion of                                    • Operate in a country
                       regulatory
VC/ PE by                                       • Decide investment strategy (investing in and exiting companies)
                       framework                • Distribute funds back to investors
Govt
                                            • Incentives to VC/ PE funds, like tax benefits
                       Robust
                                            • Variety of fund sources
                       financial
                                            • Active secondary market
                       ecosystem
                                            • Bigger and rapidly growing economies present more opportunities for VC/
                                              PE businesses
                                            • Large number of startups, especially in knowledge intensive industries
               Suitable                       where small innovative companies can compete successfully with bigger
                                              ones (eg: IT, healthcare) is good for early stage VC/ PE activity
Attractiveness economic
               conditions                   • Late stage VC/ PE thrives when
of business
                                                • Industries grow very fast, since under such conditions, even established players
environment                                       need VC/ PE capital and expertise to scale up
                                                • Industries are at a mature stage, and companies need VC/ PE help to increase the
                                                  efficiency of their operations
                       Presence of          • Availability of entrepreneurs and skilled professionals
                       talent               • Presence of a good education system
 Source: Literature search; Bain analysis                                                                                  20
  USA: Early stage VC/PE has evolved rapidly,
  benefiting sectors like IT & healthcare                                                                                              Early stage    Late stage

      VC/ PE activity has grown to over $300B in                                             Early stage VC/ PE focused on knowledge
                        the US                                                               intensive industries, e.g. IT & healthcare
    VC/ PE investments in USA                                                            Early stage VC/ PE investments in USA
                                                                            455
             $450B                                                                                100%
                                                                                                                            Others

                                                                                                       80              Other Healthcare      Healthcare
                                                                                                                            Biotech                  20%
                 200
                                                                                                       60                  Hardware
                                                                                                                       Semiconductors

                                                                                                       40
                                                                                                                           Software
                 100                                               80-100                                                                      IT
                                                                                                                                              63%
                                                            ~50                                        20
                                                     24                                                                Communications
                                       13     11
                          1      5
                     0                                                                                   0
                         1980

                                1984

                                       1988

                                              1992

                                                     1996

                                                            2000

                                                                    2004

                                                                            2007




                                                                                                                           Post 2000
                                                                                              •    IT & healthcare have witnessed technology
                                                                                                   disruptions that enabled small innovative players
                                                                                                   (typical VC targets) to compete with larger ones
Note: VC/PE investment in USA has been assumed to be 80-90% of the investment in North America in 2000 and 2004
Source: “Venture Capital and the Finance of Innovation”, Andrew Metrick, University of Pennsylvania; “The Private Equity                                   21
Market: An Overview”, Nellie Liang et al, Federal Reserve Board, Bain PE database; Literature search; Bain analysis
    USA: Early stage VC/ PE backed firms have
    helped generate employment & drive revenues
         Early stage VC/ PE backed firms have
                                                                                                     Early stage VC/ PE backed firms have had a
       outperformed other US firms in growth of
                                                                                                        significant impact on the US economy
                employment and sales…

     Performance of early stage VC/ PE backed companies                                             Contribution of early stage VC/ PE backed companies
     vs national average (2003-05)                                                                  to the US economy (2005)

                 13%                                                                                       10%
                                                11.3%                                                                    9.0%

                    10
                                                   Early VC/ PE backed companies
                                                                                                               8                              7.8%

                                                                                   8.5%

                      8                                                                                        6
                                                                                    All companies




                      5                                                                                        4
                            4.1%


                      3                                                                                        2
                                    1.3%

                      0                                                                                        0
                           Employment                             Sales                                             Employment in            Sales of
                                                                                                                     early VC/ PE          early VC/ PE
Note: Study was done on ~23000 VC backed companies of all sizes between 2003 and 2005                               backed firms as       backed firms as
Source: Venture Impact, Third edition                                                                              % of private sector   % of the economy   22
  USA: Favorable government policies have been
  a key enabler for the growth of VC/ PEs (1/3)
   (Year)

  1946                              1979                                           1994                                    2000               2007



                                                       Pre-boom                                                                    Post internet
       The early years                                                                          Boom period
                                                         period                                                                     boom period

  ~$1M                            ~$0.6B                                          ~$21B                                    ~$50B             $455B
  (VC/PE investment in
  calendar year)


  • Key developments
    - The first VC fund, ARD was established in 1946
    - The US government allowed individuals who had invested $25000 in small businesses to write off capital
      losses against ordinary income
    - Small Business Act was established in 1958
         Private corporations allowed to provide professionally managed capital to risky companies
     - Limited partnerships developed
  • Impact
    - Regulations became conducive for VC/PE funds
    - VC/PE investments grew from ~$1M in 1946 to ~$0.6B in 1979
    - A pool of professional managers for new venture investments was created

Source: “Venture Capital and the Finance of Innovation”, Andrew Metrick, University of Pennsylvania; “The Private Equity                       23
Market: An Overview”, Nellie Liang et al, Federal Reserve Board, Bain PE database; Literature search; Bain analysis
  USA: Favorable government policies have been
  a key enabler for the growth of VC/ PEs (2/3)
   (Year)

  1946                              1979                                           1994                                    2000               2007



                                                       Pre-boom                                                                    Post internet
       The early years                                                                          Boom period
                                                         period                                                                     boom period

  ~$1M                            ~$0.6B                                          ~$21B                                    ~$50B             $455B
  (VC/PE investment in
  calendar year)


      • Key developments
         - Investment rules were relaxed for US pension funds in 1979, allowing them to invest in
           VC/PEs
                   Pension funds became one of the biggest contributors to VC/PE funds in the US
             - Participation of pension funds in VC hastened the participation by other institutional investors
             - Progressive reduction in capital gains tax from 48.5% to 20%
      • Impact
         - Investments in and by VC/PE funds grew rapidly, from ~$0.6B in 1979 to ~$21B in 1994




Source: “Venture Capital and the Finance of Innovation”, Andrew Metrick, University of Pennsylvania; “The Private Equity                       24
Market: An Overview”, Nellie Liang et al, Federal Reserve Board, Bain PE database; Literature search; Bain analysis
  USA: Favorable government policies have been
  a key enabler for the growth of VC/ PEs (3/3)
   (Year)

  1946                              1979                                           1994                                    2000               2007



                                                       Pre-boom                                                                    Post internet
       The early years                                                                        Boom period
                                                         period                                                                     boom period

  ~$1M                            ~$0.6B                                          ~$21B                                    ~$50B             $455B
  (VC/PE investment in
  calendar year)


    • Key developments                                                                   • Key developments
       - Communication revolution – internet and                                            - The internet bubble burst
         telecom technology evolved rapidly                                                 - VC/ PEs still had money committed to them
       - Some VC/ PE funds made huge returns in                                          • Impact
         1995 -96 during the internet boom
                                                                                            - VC/ PEs began to invest a lot more (compared
    • Impact                                                                                  to earlier) in sectors other than IT, and in
       - Rush to invest in VC/ PE, resulting in VC/ PE                                        more mature companies
         investments growing from ~$21B in 1994 to                                              Average transaction sizes increased as a
         ~$50B in 2000                                                                            result of investing in more mature
       - Development of the communication                                                         companies
         infrastructure, which would help the economy                                       - VC/PE investment grew from ~$50B in 2000 to
         tremendously (even though VC/ PE funds                                               ~$455B in 2007
         would lose money on such investments)
Source: “Venture Capital and the Finance of Innovation”, Andrew Metrick, University of Pennsylvania; “The Private Equity                       25
Market: An Overview”, Nellie Liang et al, Federal Reserve Board, Bain PE database; Literature search; Bain analysis
    Israel: Regulation has enabled development of
    knowledge-intensive industries (1/3)
               Favorable                                                                     Targeted policies
                                                 Policy and business                                                                  Strong VC-startup
               background                                                                      to encourage
                                                     experiments                                                                         co-evolution
                conditions                                                                         VC/PE
1980                                    1989                                       1993                                     1997                                2007
                                                                                                                           ($440M)                             ($1.2B)

 • Pre-existing high-tech                                • Significant policy                                    • to create a solid                • Success of the
   industry with innovation                                experimentation and learning                            base for the VC                    highly
   capabilities                                            from their results                                      industry The                       profitable
        - Comprehensive govt programto                          - The Inbal Program was                            Yozma Program                      Yozma funds
          support company R&D                                     launched in 1992 to stimulate                    was implemented                    encouraged
        - Restructuring of the military-                          publicly traded VC funds by                      in 1993                            entry of more
          dominated electronics industry                          reducing the downside on the
                                                                                                                        - $100M govt.                 professional
        - Good engineering schools                                investment
                                                                                                                          owned VC fund               VC companies
                                                                      Upto 70% of initial capital                        was set up, to
 • Domestic capital market                                             assets were insured                                invest $80M in 10 • Large number
   liberalization                                               - Technological Incubator’s                               private VC funds     of IPOs
 • Business links with US                                         program was launched to                                 (Yozma funds)
                                                                  encourage R&D & innovation                              and $20M directly
                                                                                                                                             • Large scope of
   industry and capital markets                                                                                                                M&A
                                                                                                                          in startups
        - Spurred by a program called                    • Emergence of startups oriented
                                                                                                                        - Non-govt. limited
          BIRD, promoting joint R&D                        towards both product and
                                                                                                                          partners could
          between Israeli and US                           capital markets                                                buy the govt‟s
          companies
                                                         • Limited Partnership became                                     share at cost plus
                                                                                                                          interest (5-7%)
                                                           the prevalent form of VC
                                                           organization

                                                                                                                                                               26
Source: “Venture capital policy in Israel: A comparative analysis and lessons for other countries”, Gill Avlimelech and Morris Teubal, Hebrew University;
    Israel: Regulation has enabled development of
    knowledge-intensive industries (2/3)
               Favorable                                                                     Targeted policies                         Strong VC-startup
                                                 Policy and business
               background                                                                      to encourage                               co-evolution
                                                     experiments
                conditions                                                                         VC/PE
                                        1989                                      1993                                        1997                              2007
     1980
                                                                                                                          ($440M)                              ($1.2B)

 • Pre-existing high-tech                                • Significant policy                                     • The Yozma                       • Success of the
   industry with innovation                                experimentation and learning                             Program was                       highly
   capabilities                                            from their results                                       implemented in                    profitable
        - Comprehensive govt programto                          - The Inbal Program was                             1993 to create a                  Yozma funds
          support company R&D                                     launched in 1992 to stimulate                     solid base for the                encouraged
        - Restructuring of the military-                          publicly traded VC funds by                       VC industry                       entry of more
          dominated electronics industry                          reducing the downside on the
                                                                                                                         - $100M govt.                professional
        - Good engineering schools                                investment
                                                                                                                           owned VC fund              VC companies
                                                                      Upto 70% of initial capital                         was set up, to
 • Domestic capital market                                             assets were insured                                 invest $80M in 10 • Large number
   liberalization                                               - Technological Incubator’s                                private VC funds     of IPOs
 • Business links with US                                         program was launched to                                  (Yozma funds)
                                                                  encourage R&D & innovation                                                  • Large scope of
   industry and capital markets                                                                                            and $20M directly
                                                                                                                           in startups          M&A
        - Spurred by a program called                    • Emergence of startups oriented
                                                           towards both product and                                      - Non-govt. limited
          BIRD, promoting joint R&D
                                                                                                                           partners could
          between Israeli and US                           capital markets                                                 buy the govt‟s
          companies
                                                         • Limited Partnership became                                      share at cost plus
                                                           the prevalent form of VC/ PE                                    interest (5-7%)
                                                           organization

                                                                                                                                                               27
Source: “Venture capital policy in Israel: A comparative analysis and lessons for other countries”, Gill Avlimelech and Morris Teubal, Hebrew University;
    Israel: Regulation has enabled development of
    knowledge-intensive industries (3/3)
               Favorable                                                                     Targeted policies
                                                 Policy and business                                                                  Strong VC-startup
               background                                                                      to encourage
                                                     experiments                                                                         co-evolution
                conditions                                                                         VC/PE
 1980                                     1989                                    1993                                      1997                                2007
                                                                                                                           ($440M)                             ($1.2B)

 • Pre-existing high-tech                                • Significant policy                                    • The Yozma                        • Success of the
   industry with innovation                                experimentation and learning                            Program was                        highly
   capabilities                                            from their results                                      implemented in                     profitable
        - Comprehensive govt programto                          - The Inbal Program was                            1993 to create a                   Yozma funds
          support company R&D                                     launched in 1992 to stimulate                    solid base for the                 encouraged
        - Restructuring of the military-                          publicly traded VC funds by                      VC/PE industry                     entry of more
          dominated electronics industry                          reducing the downside on the
                                                                                                                        - $100M govt.                 professional
        - Good engineering schools                                investment
                                                                                                                          owned VC fund               VC/ PE
                                                                      Upto 70% of initial capital                        was set up, to
 • Domestic capital market                                             assets were insured
                                                                                                                                                      companies
                                                                                                                          invest $80M in 10
   liberalization                                               - Technological Incubator’s                               private VC/ PE     • Large number
 • Business links with US                                         program was launched to                                 funds (Yozma         of IPOs
                                                                  encourage R&D & innovation                              funds) and $20M
   industry and capital markets                                                                                                              • Large scope of
                                                                                                                          directly in
        - Spurred by a program called                    • Emergence of startups oriented                                                      M&A
                                                                                                                          startups
          BIRD, promoting joint R&D                        towards both product and
                                                                                                                        - Non-govt. limited
          between Israeli and US                           capital markets                                                partners could
          companies
                                                         • Limited Partnership became                                     buy the govt‟s
                                                                                                                          share at cost plus
                                                           the prevalent form of VC
                                                                                                                          interest (5-7%)
                                                           organization

                                                                                                                                                               28
Source: “Venture capital policy in Israel: A comparative analysis and lessons for other countries”, Gill Avlimelech and Morris Teubal, Hebrew University;
 Early stage VC/ PE capital & strategic expertise
 played a key role in Google‟s dramatic growth
“As Google grew…the Google guys were
  receiving much more than money from
  Doerr and his firm [KPCB]. They were
  getting the guidance they needed to                                                                        2009
  operate a growing, privately held business in
  a professional manner, while retaining the
  sense of innovation and entrepreneurship                                                              • Total Employees:
  they held dear.” [Sequoia and KPCB had
                                                                                     2005                 ~20K
  pushed Larry & Sergey to hire Eric Schmidt as
  the Chairman and CEO]                                                                                 • Total Market Cap:
                                                                                 • Google sold            ~$100B (on 9 Jan
                     The Google Story, late 2001                     2004                                 2009)
                                                                                   additional 14M
                                                                                   shares at $295
                                                              • IPO took place     each raising
                                        1999                    on August 19,      ~$4B
                                                                2004, raised
                                                                                 • Total Market cap:
                        • Another round                         US$1.7B, and
         1998             of funding of                         gave Google a
                                                                                   ~$80B (Jun
                                                                                   2005)
                          $25M was                              market cap of
   • The first funding    announced, with                       more than $23
     was secured in the   the major                             billion                        Key
     form of a $100K      investors being                                                            Early stage VC/ PE
     contribution         venture capital                                                            funding
     from Andy            firms Kleiner                                                              Primary stock market
     Bechtolsheim, co-    Perkins Caufield &
     founder of Sun       Byers (KPCB) and
     Microsystems         Sequoia Capital
Source: Google Press Releases; OneSource; The Google Story; Lit search                                                    29
   US: Late stage VC/ PE expertise helped large
   companies outperform their peers
    Revenues of late stage VC/ PE
                                                                                                                         …and improvement in
    -backed large companies have                          …driven by higher investments
                                                                                                                         employee productivity
    grown faster than their peers
  Avg. annual growth of sales                             Avg. annual growth of capex                          Avg. annual growth of sales per employee

        13%                                                     15%         14.6%                                      15%

                   10.8%
                                                                                                                                   12.3%
           10

                                                                   10                                                     10
             8
                                     6.1%

             5                                                                                                                                        5.5%
                                                                     5                                                     5
                                                                                             3.5%
             3



             0                                                       0                                                     0
       Late stage VC/ PE-
       backed large US cos.
       All US companies        Faster growth also led PE-backed large US companies to create
                               jobs at 5.7% per annum, compared to the US average of 1.1%
Note: Study covers only PE-backed large US companies between 2002-07                                                                                            30
Source: “The Impact of Private Equity Acquisitions and Operations on Capital Spending, Sales, Productivity and Employment”, Robert J. Shapiro and Nam D. Pham, Jan 2009
   Italy: Similarly, late stage VC/ PE expertise
   helped mid-cap firms outperform competitors
     Revenues of late stage VC/                                                                                         As a result, employment at
                                                             Profit margins show a similar
    PE-backed medium firms have                                                                                         such enterprises have also
                                                                         trend
    grown faster than their peers                                                                                              grown faster

  Avg. annual growth of sales                             Avg. annual growth of EBITDA                             Avg. annual growth of employees
                    10.0%
        10%                                                     15%         14.3%                                        13%

                                                                                                                               10.7%
             8                                                                                                            10
                                                                   10


             6                                                                                                             8

                                                                     5

             4                                                                                                             5
                                     3.3%

                                                                     0
             2                                                                                                             3

                                                                                                                                           0.3%
             0                                                      -5                       -4.1%                         0

        Late stage VC/ PE-backed             Medium enterprise
        medium enterprises in Italy          benchmark


Note: Study covers only 32 buy-outs in Italy between 2002 and 2004                                                                                   31
Source: “The Economic Impact of Private Equity and Venture Capital in Italy”, PWC and AIFI, March 2006; Bain analysis
India: Studies show VC/ PE backed companies
outperform competitors

                    PE Backing Improved Performance

                                              29.9
                   30     27.5
                                               PE
                          PE
                                             Backed
                         Backed    18.6
                   20

                                   Non                12.3
                                       PE              Non
                   10
                                  Backed               PE
                                                      Backed

                   0
                               Sales        Operating Profit

 Source Four - S                                               32
VC/PE impact in India


 • Past success of growth capital (VC & PE) in India provides
   cause for optimism. However, regulatory actions will be
   required to enable the industry achieve full potential


    -Significant role essayed by VC/ PE funds in the continued success
     of telecom and ITeS/ BPO industries

    -Current financial slowdown necessitates VC/ PE investment,
     especially in energy and infra industries

    -However, VC/ PE funds face regulatory challenges in:
     qualifications to operate in India, flexibility of investment & exit,
     and the existing tax regime

                                                                             33
 ~40% of VC/ PE investments are made during
 the initial stages of a company

  Number of VC/ PE deals in India                                       EXCLUDES REAL
                                                                           ESTATE
                              85     160    325    442       398
               100%                                         Other
                                                            Buyout


                                                                          Total
                   80
                                                             Late
                                                           (Mature)      1,410

                   60

                                                             PIPE

                   40                                      Pre-IPO

                                                            Growth

                   20

                                                             Early
                                                          (Formative)
                    0
                              2004   2005   2006   2007      2008
  % companies in which
  growth capital was          35%    35%    39%    40%       42%
  invested in initial years
  Total investment ($B)        2      2      7     14         11

                                                                                  34
Source: Bain PE database
  In recent years, „growth capital‟ has become a
  preferred source for raising funds in India
    Growth capital is already more popular than                                                               Investments made by VC/ PE are in the same
          IPOs and secondary offerings                                                                               range as inbound M&A as well
  Capital raised by Indian corporates                                                                        Investment in Indian companies

     $15B                                                                                                     $20B                            18.9
                                                                               14.0



                                                                                                                 15                                         14.0




                                                                                   Growth capital (VC/ PE)
        10




                                                                                                                                              Inbound M&A

                                                                                                                                                            Growth capital (VC/ PE)
                                                                             7.5
                                                6.7                                                              10
                                                          5.8                                                                     7.9
                                          5.5
                                                                                                                                        6.7
                                                           Secondary issue




          5      4.5
                                                                                                                      5.5
                                                                             IPO




                                                                                                                  5
                       2.2 2.0
                                     1.9
                                                                                                                            2.0

          0                                                                                                       0
                    2005                 2006                           2007                                           2005         2006           2007


Note: $1=Rs 45, assumed during currency conversions; VC/ PE excludes real estate investments; IPO, secondary issue and inbound M&A
   includes real estate while growth capital does not                                                                                                                                 35
Source: SEBI – Handbook of statistics, 2008; Capital IQ database; Thomson database; Bain PE database; Bain analysis
 Growth capital has already had a significant
 impact in India – particularly, in telecom…
         VC/ PE firms have invested in different                    CEOs/ promoters vouch for the strategic
            parts of the telecom value chain                             benefits they have received
             Target                  PE firm        Amount   Year   “Warburg Pincus supported the company
                                                     ($M)
                                                                     in developing the strategy and investor
       Cellular Operators
                                                                     focus, in its public listing.”
       Bharti              Temasek                  2000     2007
       Televentures
                                                                                 Chairman & MD, Bharti, Oct 2005
       Idea Cellular       Providence, Citi, Sequoia 966     2006
                           and others
       Tata Teleservices   Temasek                  360      2007   “Partnering with Warburg Pincus helps
       Bharti              Warburg                  292      1999    management focus. They’ve helped us
       Televentures
                                                                     look at things in a different light. And, they
       Bharti              CVC International        214      2004    know how to move a company from
       Televentures
                                                                     something small to something much
       Telecom Infrastructure
                                                                     larger.”
       Bharti Infratel     Citi, Temasek and others 1000     2007
                                                                                             Chairman & MD, Bharti
       Aditya Birla        Providence               640      2008
       Telecom
       Bharti Infratel     KKR                      250      2008
                                                                    “We hope to tap Temasek's network and
       Quippo              IDFC, GIC and others     190      2008
       Infrastructure
                                                                     experience to grow Tata Teleservices'
                                                                     share of the market and to fulfill our vision
       Acme Tele Power     Capital Partners         150-200 2007
                                                                     of becoming a market leader.”
       Aster Infra &      New Silk Route, NYLIM     117      2007
       Aster Teleservices India                                                  CEO, Tata Teleservices, Mar 2006
                      Total ~$6.5B in ~35 deals
Source: Bain PE database; Lit search                                                                                  36
 …and in the ITeS/ BPO industry
       Over ~$5B of growth capital has helped                       CEOs/ promoters cite the powerful role
        create leading Indian ITeS/ BPO firms                            played by the VC/ PE funds
            Target               PE firm            Amount   Year
                                                     ($M)           “We believe this partnership with General
       Aricent            Sequoia Capital India,   765       2006    Atlantic will be a platform for
       (Flextronics)      KKR                                        Hexaware’s global business
       Genpact            General Atlantic, Oak    500       2004    development and take the company to
                          Hill                                       the next level.”
       InterGlobe         StanChart PE, Credit     145       2008
       Technology         Suisse, Others
                                                                       Executive Chairman, Hexaware, Mar 2006
       Quotient
       eServe             CVC International        120       2003

       Intelenet Global   Blackstone               109       2007
       Services                                                     “General Atlantic has played a very, very
       Patni Computers    General Atlantic, GE     100       2002    powerful role in helping us fill gaps. For
                          Capital, Bank of New                       instance, in becoming a standalone
                          York, iSolutions
                                                                     enterprise we have had to go through a re-
       Quatrro BPO        Olympus Capital          100       2006    branding exercise, making a transition
       Solutions
                                                                     from our identity as GECIS […] to Genpact.
       Hexaware           General Atlantic         67.6      2006
       Technologies
                                                                     We certainly had no idea how to do
                                                                     that. That's an area where GA was
       WNS Global         Warburg Pincus           40        2002
       Services                                                      incredibly helpful.”
       FirstSource        Temasek                  35        2004                        CEO, Genpact, May 2006

                  Total ~$5.0B in ~400 deals
Source: Bain PE database; Lit search                                                                              37
 …helping create a new cohort of first-generation
 Indian entrepreneurs
  Target                                                        Date                          Amount   Date of      Current
                    Industry        Entrepreneur (s)                        Investor (s)
   firm                                                       founded                          ($M)    funding     Employees
Daksh    • BPO (Voice –            • Sanjeev Aggarwal          Jan 2000    Actis, CVC           29     2000-2002     22,000
(now IBM   Customer                • Pawan Vaish                           International,
           Service)                                                        General Atlantic
Daksh)                             • M.J. Aravind
                                   • Venkat Tedanki
Vishal           • Retail chain    • Rama Chandra              Jul 2001    Gaja Capital        9.5       2006        13,400
Retail                               Agarwal
                                   • Uma Agarwal
MindTree         • ITeS            • Ashok Soota                    1999   Walden, Sivan,       9        1999        5,600
                                     (and 9 other                          Capital Group,       14     Aug 2001
                                     partners)                             and Franklin
                                                                           Templeton
Educomp          • Education       • Shantanu Prakash         Sep 1994     Gaja Capital        3.7       2005        4000
                   (tech-based
                   education
                   products &
                   services
Info Edge • Online                 • Sanjeev                  May 1995     ICICI Ventures      1.5       2000        1,800
(India)     recruitment,             Bikhchandani                          KPCB                 6        2006
            matrimonial &
Ltd                                • Hitesh Oberoi
                   real estate
(Naukri.com,       classifieds
Jeevansathi,
99 acres, etc)



Source: Bain PE database; Company websites; OneSource; Lit search                                                        38
 Growth capital has facilitated Bharti‟s
 transformation into a ~$35B telecom pioneer
  PRELIMINARY

         Bharti Airtel Market Cap (in March)
                                                                                       CAGR     “Beyond providing the capital
          $40B                                                                        (02-08)
                                                                               35                to support its rapid growth,
                                                                        32                       WP also helped Bharti
              30                                                                                 Airtel with important
                                                                                                 strategic inputs and
                                                                                                 mentoring to its
              20                                               17                      67%       management team.”
                                                                                                 Sonal Kapasi, Head, Investor
                                                        9                                               Relations, Bharti Airtel
              10                            6
                       2         1
                0
                    2002       2003      2004          2005   2006     2007    2008
                                                                                                “While we could have raised
Revenue ($B)         0.3        0.5        1.1         1.8     2.6      4.1    6.7               funding from other sources,
                                                                                                 Warburg Pincus’
                              2004                                                               involvement helped us in
1999                                                          2007
                              • CVC                                                              scaling up significantly.”
• Warburg                                                     • Temasek
                                International                                                        Akhil Gupta, JMD & CFO,
  Pincus invested                                               Holdings
                                invested                                                                          Bharti Airtel
  $290M                                                         invested $2B
                                $210M


Source: OneSource; Bain PE deal database; Lit search                                                                      39
    IDFC PE helped transform the GMR Group into
    one of India‟s leading infrastructure players
    GMR Infrastructure revenues
                                                                                                                                     PRELIMINARY
    (Rs Cr.)
                                PE funding of ~$                    CAGR               IDFC PE strongly supported GMR’s growth
                 3K             150M by IDFC PE,                  FY (04-08)         plans, with key strategic & financial expertise
                                CVC and ICICI
                                Ventures
                                                                                    • IDFC PE provided strategic inputs for GMR‟s
                                                          2.4
                                                                                      expansion into new businesses, negotiations
                                                                                      with potential partners. Also drove their brand
                    2
                                                                                      building and corporate governance effort
                                                   1.7
                                                                                    • GMR leveraged IDFC PE‟s expertise in valuing
                                                                                      infrastructure projects & helped them
                          1.0      1.0     1.1                       24%              through their IPO process
                    1


                                                                                     IDFC PE provided patient capital to GMR; even
                                                                                               in the face of turbulence
                    0
                        FY 2004 FY 2005 FY 2006 FY 2007 FY 2008                    • Provided significant support to GMR during
                                                                                     challenging times
    EBITDA margin        42%       41%    43%      33%    28%                          - The Andhra Pradesh government was looking
    EBITDA               0.42      0.42   0.46     0.56   0.67                           to renegotiate the power purchase agreement
                                                                                         for the Vemagiri plant
  “There were not many institutions which had the                                      - The vendor allotment process for the public
    wherewithal to finance infrastructure projects. IDFC                                 private partnership (PPP) to construct the new
    PE’s insight into the infrastructure sector                                          Delhi international airport was challenged in
    encouraged us to partner them…IDFC PE became the                                     court
    best brand ambassador for our group.”
                             G M Rao, Chairman, GMR Group                                                                                  40
Source: Investing in infrastructure, Private Equity International; Private Equity Impact, Venture Intelligence, GMR; Bain analysis
 Growth capital has enabled Spectramind (now
 Wipro BPO) to become a ~20K employee firm
                                                                                            PRELIMINARY
  Wipro BPO has grown to a ~20K employees                     …made possible through funding and
               organization…                                      support at the right time

            Number of employees                     CAGR     • First round of funding: $10M by HDFC
            at Wipro BPO                                       and ChrysCapital in 2000
                                                   (02-08)
            20K                             19               • Second round: ~$100M strategic
                                                               investment by Wipro for a 90% stake in
                                                               2002
              15
                                       13                    “While there were other investors who were
                                                              interested, we could identify a lot with
                                                              the ‘fire-in-the-belly’ attitude of the
              10                                              Chrysalis team. They shared the same
                                                    40%       kind of aspirations and ambitions as us
                                                              and took pride in doing something for
                                                              India.”
                5
                         3                                   “ When we came up for our second round of
                                                               funding, our thinking was to see if we
                                                               could bring in an investor who could
                0                                              offer more than the existing investors
                       2002          2004   2008               had already brought to the party.”
                                                                         Raman Roy, Founder, Spectramind

Source: Venture Intelligence; Lit search                                                                41
  SKS has provided over 500K loans to retail
  clients across India; now backed by PE funding
        SKS has experienced rapid growth…                                          …driven by private equity funding

Total loans outstanding (Rs Cr.)                                               “Investment from Sequoia Capital
                                                         CAGR                    catapulted SKS onto its current growth
                                                       FY (04-07)
           300                                                                   trajectory. Most recently, Sandstone
                                                265                              Capital, Kismet Capital and Silicon Valley
                                                                                 bank combined to make the largest private
                                                                                 equity investment in microfinance ever.
                                                                                 Without these supporters, SKS could not
           200          March 2006:                                              have established its strong foundation.”
                        1st round of PE
                        funding ~$3M                                                               Ex- CEO, SKS Microfinance

                                                                                PE funding provides numerous benefits
                                                         183%

           100                            88                                   • Private equity funding helped to build
                                                                                 credibility of SKS and the microfinance
                                                                                 sector as a whole
                                34                      March 2007:            • PE investment provided SKS funds to
                                                        $11.5M by Sequoia,
                       12                               Khosla Ventures,
                                                                                 double its outreach from 3.3 million to 8
                 0                                      Unitus etc.              million members over next two years
                     FY 2004 FY 2005 FY 2006 FY 2007    Nov 2008: $75M by
                                                        Sandstone, SVB etc.)   • PE funding used when cost of debt high
Total loan                                                                         - Interest rates hiked during early 2008
                       25       74        173   513
clients (000s)
                                                                                   - Increased cost cannot be passed to customers
Total branches         11       26        80    275                                - PE useful alternative in such situations
Source: SKS Microfinance                                                                                                        42
 In the current context, VC/ PE can play an
 enhanced role…equity & debt markets are down
                                                      Debt markets have stayed down for the last 3-6
  The number of IPOs declined sharply in 2008
                                                                         months

 No. of IPOs
                                                      • While the RBI has taken steps to
            125
                                                        increase liquidity and lending,
                                          106           corporate lending rates have not
                                                        dipped yet
            100
                                     92


              75              72
                                                      • Credit continues to remain
                                                        tight…lenders are being very risk-
              50                                        averse and are fearful of taking
                                                 38     exposure
                     34

              25



                0
                      4


                              5


                                      6


                                            7


                                                  8
                    '0


                            '0


                                    '0


                                          '0


                                                '0




Source: Businessworld; Lit search                                                               43
  Indian companies still have aggressive growth
  and investment plans which need funding
A high % of leading corporates have announced                                               Energy/ Power, industrial goods and infra
         ambitious investment plans                                                        companies most likely to require investment
Announced capex/(EBITDA+Cash) ratio
                                                                                                                     Funds
        100%                                                                                   Sector                                           Comments
                                                                                                                  requirement

                                                                                         • Energy/                                      • On-going/ domestic
             80 0-0.5                                                                      Power                                          demand driven cap–
                                                                                                                                          intensive projects
                                                             1-2                         • Infrastructure                               • Stimulus package by
                                                                                                                                          GoI for Infra to boost
             60                                                                                                                           demand
                   0.5-1                                     2-5
                                                                        Will             • Industrial                                   • Need to monetise on-
                    1-2                                                 probably           goods                                          going projects
             40                                    1-2
                               2-5                                      require
                                                                        external         • Telecom                                      • Domestic growth to
                    2-5                                                 funding                                                           drive expansion plans
                                         2-5                  >5
             20
                               >5                  2-5                                   • IT/ ITeS                                     • Global slowdown to
                     >5                  >5                                                                                               significantly reduce
                                                   >5                                                                                     capex
               0
                   Overall Telecom Infra         Indus. Energy/
                                                 goods Power


 Note: Capex data is available for 287 out of top 500 Indian firms (in terms of revenues); N=287 for overall bar; N=10, 11, 36 and 32 for telecom, infra, industrial
    goods and energy/ power bars respectively;
  Source: Prowess database; Bain analysis                                                                                                                          44
  VC/ PE funds, with considerable dry powder,
  become even more important
     Dry powder* with some leading PE firms for India/ Asia investments
     (Available only for few firms and for a subset of their funds)                                                                                                       Total= $13.8B




                                                                                                                                                                                               0.3
                                                                                                                                                                                               0.2
                                                       2.5                                  2.2                           1.6                    1.3     1.3     1.2     1.0   0.7 0.4
                         100%
                                             "Dry powder"
                                               available
                                80



                                60



                                40        Amount invested



                                20



                                   0
                                                    Carlyle                             IDFC PE                          Actis               ICICI      Baring    3i     Stan HSBC




                                                                                                                                                                                               TVS
                                                                                                                                                                                                GP
                                                                                                                                                                                     Sequoia
                                                                                                                                            Venture                     Char PE

     % of the firms' funds for 33%                                                          N.A.                         82%                    27%     100%     100%    100% 100%     100%
     which above split is available                                                                                                                                                  25% 100%

                          Total dry powder for these sample VC/ PE firms is ~$8B. The total dry
                         powder for all the VC/ PE firms investing in India is significantly higher

*Only for India/ Asia-specific funds raised in last 5 years (2004-08); Data rows mentions the % of total funds for which the information is available                                                45
Source: Preqin, AVCJ, Bain analysis
 …especially for funding the infrastructure sector

      Op Cash Flow/ Interest payment

                                              915                        25                      136                       55                        39
                         100%

                                                                                                                           >5                       >5
                               80
                                                                                                                                                    2-3
                                                                                                                          3-5
                               60                                                                                                                   1-2

                                                                                                                                                    0-1
                                              2-3                                                                                                                        High debt
                                                                                                                          2-3
                               40                                                                                                                                        service
                                              1-2                                                                                                                        obligations
                                                                                                                          1-2
                                              0-1                                                1-2
                               20                                       2-3                      0-1                                                <0
                                                                                                                          0-1
                                                                        1-2
                                               <0                       0-1
                                                                                                  <0
                                                                        <0                                                 <0
                                 0
                                           Overall                  Telecom              Indus Goods Energy/ Power                                 Infra



Note: N=915, 25, 43, 136, and 55 for overall, telecom, infra/ real estate, industrial goods, energy/ power bars respectively, where N represents # of companies in that sector which are
   among top 1000 Indian firms (in revenue terms); Source: Prowess database; Lit search; Bain analysis
                                                                                                                                                                                      46
How Government Could Ignite This
Growth Engine


 • A number of regulatory actions could significantly aid
   continued VC/ PE industry growth


 • Targeted regulations could lead the industry to greater
   heights, especially on FVCI registration (e.g. bringing
   FVCI applications under automatic route, removing min.
   capitalization requirements etc.), increasing operational
   flexibility (e.g. defining „promoters‟ clearly, providing for
   a time-bound delisting process etc.) and providing tax
   pass throughs



                                                                   47
    However, the industry is currently constrained
    due to regulatory challenges in 3 areas
  PRELIMINARY                                                                                              Concerned govt.
                               Description                             Key issues
                                                                                                             department
                             Regulations that          FVCI registration: Restricted list of sectors      • Ministry of Finance
    Qualification            prevent a VC/ PE firm     open to FVCI investments, Delays in
                                                                                                          • SEBI
    to operate               from qualifying to        approving FVCI applications, minimum
                             operate in India          capitalization norms, fit and proper criteria      • RBI
                                                       Acquisition of shares in listed
                                                       companies: Issues around promoter
                                                       definition, persons acting in concert,             • SEBI
    Flexibility of           Restrictions on the       preferential acquisition in excess of 15%,         • Ministry of Finance
                             fund managers‟            open offer, insider trading, affirmative rights,
    investment               ability to create the
    and exit                                           lock-in
                             portfolio of his choice
                                                       Delisting of public companies:                 • SEBI
                                                       Complicated process for going private, lack of
                                                       alternate junior bourses                       • Ministry of Finance

                             Aspects of the            Tax pass through for VC: Limiting tax pass
                                                                                                  • Ministry of Finance
                             current tax regime        through for VC firms to specific sectors
                             that increases the
    Tax regime               burden on VC/PE           Complicated tax regime for capital gains: • Central Board of Direct
                             funds, compared to        Difference between the sale of listed and   Taxes
                             global benchmarks
                                                       unlisted companies shares                 • Ministry of Finance



                                                                                                            IVCA_Feb 11_Nishith Desai   48
Source: Nishith Desai Associates; Bain analysis
                  …which have considerably impacted their
                  operations (1/2)
                                   Issue                     Key aspects                                             Impact
                                             • There have been considerable delays in            • Anxiety amongst PE/VC investors
      Qualification to operate




                                               approving FVCI applications since 2006            • Poor reflection of India‟s regulatory system
                                                  - Reasons for the bottleneck were not shared
                                                    in the public domain
                                              • Lack of clarity on the minimum                   • Certain FVCI applications are believed to
                                 FVCI           capitalization requirement for FVCI                have been kept on hold on grounds of low
                                 registration   applicant to get regulatory clearance              capitalization of the applicants

                                             • RBI has prescribed that the investments           • The investment horizon is significantly
                                               by FVCI entities shall be restricted to             limited.
                                               certain select sectors like infrastructure,       • It distorts the level playing field between
                                               biotech, IT etc.                                    domestic and offshore private equity players.
Flexibility of investment &




                                              • „Promoters‟ of listed companies is not
                                                clearly defined, and so PE investors could
                                 Acquisition    potentially acquire the promoters‟
                                 of shares in   obligations                                  • The investment becomes more risky, and so
                                 listed       • The definition of „control‟ causes confusion   the threshold IRR increases
             exit




                                 companies      whether PE investors with affirmative
                                                rights (to protect minority shareholder
                                                interest) will be deemed to be in control




                                                                                                                          IVCA_Feb 11_Nishith Desai   49
Source: Nishith Desai Associates; Bain analysis
              …which have considerably impacted their
              operations (2/2)
                                   Issue                     Key aspects                                      Impact
                                               • Insider trading issues during private    • The investment becomes more risky, and
Flexibility of investment and




                                                 investment in public equities (PIPE) are   so the threshold IRR increases
                                Acquisition of   not specifically dealt with by any
                                shares in        regulatory regime
                                listed
                                companies      • Threshold value ascribed to open offers  • Limits PE activity in publicly traded
                                                 under the Takeover Code is too low (15%)   companies
              exit




                                               • There is a lengthy delay in delisting stocks • Buying out a public company is a long &
                                Delisting of   • Lack of efficient junior bourses in India      difficult process
                                public                                                      • Delays in delisting small stocks is
                                companies                                                     particularly burdensome, as the costs of
                                                                                              the retained listing can be large
                                               • The govt. has restricted the scope of tax • Uncertainty on investor taxability and
                                Tax pass         pass through (no income tax, no dividend    mismatch on characterization of income
                                through for      distribution tax) to domestic VCFs to
                                VC                                                         • Undermines the importance of private
                                                 investments in select sectors
       Tax regime




                                                                                             equity in other sectors
                                Complicated    • The tax on capital gain depends on         • Tax considerations affect investment
                                tax regime       whether the company is listed or not,        decisions
                                for capital      whether the gain is long term or short     • Confusion and unnecessary administrative
                                gains            term, and even on the type of exchange       delays

                                                                                                                   IVCA_Feb 11_Nishith Desai   50
Source: Nishith Desai Associates; Bain analysis
Lessons from other markets: Regulations

• In UK, venture capital activity is regulated by Financial Services Authority (FSA) under
  the Financial Services and Markets Act, 2000 and operate under FSA authorisation under
  the single authorization process.

• TSX Venture Exchange, Inc. operates as a subsidiary of TSX Group, Inc. The goal of TSX
  Venture Exchange is to provide venture companies with effective access to capital while
  protecting investors. Further, it also operates a Capital Pool Company (CPC) program
  that permits an IPO to be conducted and an Exchange listing to be achieved by a newly
  created company that has no assets, other than cash, and has not commenced
  commercial operations.

  Source:
  http://www.tsx.com/en/listings/products_services/venture_market_information.html

• In case of NYSE/Nasdaq the delisting of securities is carried out as per the Security
  Exchange Act, 1934 and Exchange Rules and the process is typically completed within 90
  - 120 days.
                                                                         IVCA_Feb 11_Nishith Desai   51
                Potential recommendations

                                  Issues               Aspects                                Recommendations

                                                                        The general permission from RBI for FVCI registration could
                                              •Delays in approving FVCI
Qualification to




                                                                        be made in line with FII Regulations and brought under
                                              applications
                                                                        automatic route.
   operate




                                             •Lack of clarity on        Considering the drawdown based model, the minimum
                                FVCI         minimum capitalization     capitalization limit for FVCI should not be made a condition to
                                registration for FVCI                   obtaining registration as a FVCI.

                                              •Restriction on FVCI      The additional sectoral restrictions prescribed by RBI since
                                              investments to select     October 2008 should be withdrawn.
                                              sectors
Flexibility of investment and




                                                                        A specific carve out for QIBs from being regarded as
                                              „Promoters‟ are not       promoters unless voluntarily offered for.
                                Acquisition   clearly defined           Private Equity investors should not be so identified unless
                                of shares in                            voluntarily so disclosed by them.
                                listed
                                companies •Control‟ is not clearly      The definition should be harmonized with the one provided by
              exit




                                             defined for PE investors   Foreign Investment Promotion Board vide the Press Note 2 of
                                             with affirmative rights    2009 i.e. ability to appoint a majority of directors.




                                                                                                                  IVCA_Feb 11_Nishith Desai   52
        Potential recommendations
                                 Issues              Aspects                                 Recommendations
Flexibility of investment and




                                                                         The confidentiality agreement shall be an agreement on the
                                                                         part to the potential investor to refrain from dealing in the
                                                                         securities of the listed company for some defined period of
                                             •Insider trading issues     time following access to due diligence information.
                                             during PIPE                  Specific carve out for any acquisition of UPSI pursuant to a
              exit




                                                                         due diligence carried out by a private equity investor
                                                                         subject to such investor holding the shares for a minimum
                                                                         holding period of one year.
                                                                         Threshold value ascribed to Open Offers under the Takeover
                                                                         Code should be revised to 30% as under City Code with the
                                                                         same additional trigger for acquisition of control.
                                Acquisition
                                of shares in •Threshold values to open
                                listed       offers                      Preferential allotment made by the concerned listed
                                companies                                company should not trigger under Regulation 10 of
                                                                         Takeover Code, the requirement to make „open offer‟.


                                                                         Lock-in period for promoters should be reduced to 1 year.
                                             •Lock-in for promoters




                                                                                                                 IVCA_Feb 11_Nishith Desai   53
                Potential recommendations
                                  Issues             Aspects                                   Recommendations

                                                                           Delisting should be a time bound process.
Qualification to




                                                                         Post delisting from the main markets, junior exchanges like
   operate




                                            •Lengthy delays in delisting OTCEI could offer a platform for shareholders to trade
                                Delisting
                                            public companies             unoffered shares without any listing obligations on the
                                                                         Company.


                                                                           The existing section 10(23FB) of the ITA should be restated
                                            •Restriction of tax pass for   to the original position as it existed pre 2007. Clear
                                Tax pass
                                            domestic VCFs through to       exemption from withholding of tax on interest by portfolio
                                through
                                            select sectors                 companies in line with mutual funds.
Flexibility of investment and
              exit




                                                                                                                  IVCA_Feb 11_Nishith Desai   54
VC & PE Industry: Issues and
         Proposals



                               55
     LIST OF REGULATORY ISSUES


1.   Approval process for seeking registration as an FVCI

2.   Tax pass through for domestic venture capitalists

3.   Private Equity Investments

4.   Domestic asset pool: Regulatory challenges

5.   Going private – simplifying the delisting process

6.   Press Note No. 2 and 4 (2009 series)

7.   Microfinance NBFCs and Press Note No. 4 (2009 series)

8.   Limited Liability Partnerships – Taxation

9.   Loans by commercial banks for domestic acquisitions

                                                             56
          APPROVAL PROCESS FOR SEEKING
             REGISTRATION AS AN FVCI



Concerned Authority(s):


Ministry of Finance
Securities and Exchange Board of India
Reserve Bank of India


                                         57
    Approval process for seeking registration as an FVCI


•   There have been considerable delays in approving FVCI applications since 2006.
    Despite clearance of select applications in recent times, the process still suffers
    from lag.
 The general permission from RBI for FVCI registration could be made in line with
  FII Regulations and brought under automatic route thereby helping in expediting
  the FVCI registration process. Accordingly, SEBI shall have total control when it
  pertains to application for registration as a FVCI.


•   There is an expectation that the FVCI applicant be capitalised upfront at the time
    of seeking approval. This is not consistent with the standard industry practices of
    VC and PE funds.
 The minimum capitalization for FVCI should not be made a condition for
  obtaining registration as an FVCI.



                                                                                    58
    Approval process for seeking registration as an FVCI


•   Although RBI has started clearing FVCI applications in recent times, it has
    prescribed additional conditions that the investments by FVCI entities be
    restricted to select sectors being infrastructure, biotechnology, IT related to
    hardware and software development, nanotechnology, seed research and
    development, research and development of new chemical entities in pharma
    sector, dairy industry, poultry industry, production of bio-fuels and hotel-cum-
    convention centers with seating capacity of more than 3,000. These sectoral
    restrictions, which are not even based on the present position of law in this space,
    would seriously disincline foreign investors from investing into India.


 The additional restrictions prescribed by RBI should be withdrawn for all
  registered FVCIs and the specific investments in real estate sector should be
  restricted to those that are in compliance with Press Note 2 of 2005.




                                                                                     59
  TAX PASS THROUGH FOR DOMESTIC VENTURE
                CAPITALISTS



Concerned Authority(s):


Ministry of Finance
Securities and Exchange Board of India



                                          60
Tax pass through for domestic venture capitalists


•   Government has restricted the scope of tax pass through to VCFs for investments
    in a few sectors as identified under section 10(23FB) of the Income Tax Act, 1961.
    It is highly prejudicial to limit the tax pass through treatment to only select
    sectors and this is absolutely contrary to the principles on the lines of which the
    VC industry operates in various other jurisdictions.
 A tax pass through status at the pooling level (i.e. the trust income) is not a tax
  benefit as the investors in turn, are taxed on the income received from the trust.
  Accordingly, the existing section 10(23FB) of the ITA should be re-enacted to
  provide for automatic income tax exemption to VCFs registered with SEBI (like in
  the case of mutual funds) which will eliminate the taxation at the pool level while
  maintaining the same at investor level.




                                                                                    61
            PRIVATE EQUITY INVESTMENTS




Concerned Authority(s):


Stock Exchanges
Securities and Exchange Board of India



                                         62
    Private Equity Investments


•   PIPE transactions by private equity investors allow capital infusion in the
    concerned listed company’s balance sheet as opposed to acquisition from existing
    shareholders.
 Preferential allotment made by a listed company even if such investment exceeds
  15%, should not trigger the requirement to make ‘open offer’ under Regulation 10
  of the Takeover Code.


•   Threshold value ascribed to Open Offers under the Takeover Code, i.e. 15%, is
    very low and becomes a major impediment for private equity investors.
 15% as a trigger percentage is of a much lower threshold with respect to the
  realities of today. The trigger should be revised upwards to 30% and thus be in
  line with other matured jurisdictions.




                                                                                 63
Private Equity Investments


•   In order to make an investment, a private equity investor requires detailed
    information and due diligence is carried out. In case of the investee company
    being listed, there are regulatory hurdles for the investor in accessing non-public
    information under the existing insider trading rules.
 Private equity investors should be allowed access to non-public information
  under a Confidentiality Agreement which inter alia, could restrict such investor
  from dealing in securities of the concerned company for a particular time frame.


•   Clarity on the definition of the term ‘promoter’ (as provided under Regulation 2
    (h) of the Takeover Code) is required considering that there are several
    obligations attached to promoter(s).
 Private Equity investors add value, enhance corporate governance, have no intent
  to exercise management control and are not part of the promoter group.
  Accordingly, unless voluntarily accepted, private equity investors should not be
  characterised as promoters.
                                                                                    64
Private Equity Investments




•   ‘Control’ is not clearly defined (Regulation 2 (1)(c) of the Takeover Code) for PE
    investors with affirmative rights. These rights are minority protection rights
    where the investor has a veto to block certain actions. Globally, private equity
    investors often seek such affirmative rights.
 The definition should be harmonized with the one provided by Foreign
  Investment Promotion Board vide the Press Note 2 of 2009 i.e. ability to appoint
  a majority of directors.


•   Clause 2.6 of the DIP Guidelines mandates that conversion of outstanding
    convertibles to equity and exercise of outstanding warrants be done before filing
    the prospectus.
 The said Clause 2.6 of the DIP Guidelines should be revised to allow conversion
  simultaneous with the IPO allotment.

                                                                                   65
       DOMESTIC ASSET POOL: REGULATORY
                  CHALLENGES




Concerned Authority(s):


Reserve Bank of India
Insurance Regulatory and Development Authority of India



                                                          66
    Domestic asset pool: regulatory challenges (Banks)


•   High risk weight-age has been assigned to VCF investments in a bank’s
    investment portfolio. This disrupts the risk- adjusted values of the assets on its
    balance sheet.


 The risk weightage allocated to such investments into VCFs should be reduced.
  Further, investments by banks or their subsidiaries into VCFs should not be
  counted under the capital markets ceiling.


•   Prior RBI approval is required for investments by banks that are 10% or more of
    the VCF’s equity/ unit capital.


 The ceiling limit prescribed on investments by banking companies’ participation
  should be increased to 30%the equity/ unit capital of concerned VCFs .


                                                                                   67
    Domestic asset pool: regulatory challenges (Insurance companies)


•   Insurance Regulatory and Development Authority of India (IRDA) has prescribed
    very low ceilings within which insurance companies have to restrict their
    investments in venture capital funds (3% and 5% for life insurance and general
    insurance companies, respectively). This seriously restricts the ability of
    insurance companies to participate in venture undertakings.


 To encourage participation by insurance companies in venture financing, the
  investment ceiling of 10% (up to which percentage limit of VC fund’s corpus an
  insurance companies can extend its exposure) should be relaxed in such a manner
  that a venture fund with a smaller corpus could issue higher percentage of units/
  shares to an insurance company and the position could be reduced for a
  comparatively larger corpus size.




                                                                                68
 GOING PRIVATE – SIMPLIFYING THE DELISTING
                   PROCESS


Concerned Authority(s):


Stock Exchanges
Securities and Exchange Board of India




                                             69
    Going private – simplifying the delisting process


•   The lengthy delay in delisting stocks is particularly burdensome for the small
    stocks as the costs of the retained listing on the exchange can be large.


 SEBI should revise Clause 1 to Part B of Schedule III to the Delisting Guidelines to
  set a prudent timeline within which time the panel (as set up by the concerned
  stock exchange from where the delisting is being proposed), takes its decision.


 Regulation 8(5) of the Delisting Guidelines states that the delisting process is to
  be kept open for an additional period of 6 months beyond the date on which the
  exit price has been displayed on the trading terminals. The timeline for tendering
  shares should be reduced to 90 days of such date of discovering the exit price.




                                                                                   70
   Going private – simplifying the delisting process


 SEBI should institute a central authority to allow standardization in both
  procedures and documentation as far as the process of delisting from the regional
  exchanges is concerned.


 Post delisting from the main markets, junior exchanges like OTCEI could offer a
  platform for shareholders to trade unoffered shares without any listing
  obligations on the Company.




                                                                                71
       PRESS NOTE NO. 2 and 4 (2009 SERIES)



Concerned Authority(s):


Foreign Investment Promotion Board




                                              72
                    PRESS NOTE NO. 2 and 4 (2009 SERIES)


•   Press Note 2 (2009) states that for computing indirect foreign investments in the subject
    Indian Co, if the Indian investment Co is foreign owned or controlled, the entire
    investment by the Indian investment Co into the subject Indian Co would be categorized as
    indirect foreign investments. Whereas, in case of a subject Indian Co which is 100% owned
    by the Indian investment Co, the extent of indirect foreign investment shall be taken to be
    the percentage of actual foreign investments in the Indian investment Co.
    This leads to an anomalous situations where an Indian Co (which is a wholly owned
    subsidiary of the Indian Investment Co with lesser amount of foreign investment) may
    have a higher indirect foreign investment computation vis-à-vis another subject Indian Co
    (with the latter having a comparatively higher extent of foreign investment but which is
    not a wholly owned subsidiary of an Indian Investment Co).


   A new Press Note should be issued to bring uniformity, consistency and homogeneity in
    the computation of indirect foreign investments.




                                                                                            73
                   PRESS NOTE NO. 2 and 4 (2009 SERIES)


•   Vide Press Note 4 (2009) FDI in an ‘Investing Company’ requires prior FIPB approval.
    Consequently the automatic route, which is open to direct FDI in most sectors barring a
    few, is not available to FDI made through an Investing Company even if the downstream
    investee company is in a sector eligible for automatic approval.


   FDI regulations should not create a distinction in treatment between FDI into a company
    made directly and FDI into the same company made through an Investing Company.


•   Press Note 4 (2009) debars an Investing Company from leveraging in India although its
    operating subsidiary can.


   Restriction on the Investing Company from leveraging does not make economic sense
    when in effect, economic substance of both the investing company and its downstream
    operating company is the same. Accordingly, the said restriction should done away with.



                                                                                        74
  MICROFINANCE NBFCs AND PRESS NOTE NO. 4
               (2009 SERIES)



Concerned Authority(s):


Ministry of Commerce and Industry/
Foreign Investment Promotion Board
Securities and Exchange Board of India


                                            75
    Microfinance NBFCs and Press Note No. 4 (2009 Series)


•   Press Note 4 (2009) states that foreign investment in investing companies will
    require prior Government/FIPB approval, regardless of the amount or extent of
    such foreign investment. The Press Notes however fails to appreciate the
    dynamics of certain sectors like microfinance which depends on entities primarily
    set up as Non-Bank Finance Companies (NBFC) as a preferred legal form for
    microfinance delivery.


 A new Press Note should be issued by Ministry of Commerce & Industry clarifying
  that NBFCs engaged in microfinance activities are not subject to Press Note 4
  (2009). Separately, the prescribed minimum foreign investment requirement for
  NBFCs (US$ 0.5 million) should be reduced for those engaged in microfinance
  activities.




                                                                                  76
    Microfinance NBFCs and Press Note No. 4 (2009 Series)


•   Schedule 3 to SEBI VCF and FVCI Regulations prohibit SEBI registered VCFs and
    FVCIs from investing into NBFC structures except those investing into equipment
    leasing or hire purchase companies. This therefore excludes microfinance NBFCs
    from receiving VC investments.


 Schedule 3 to SEBI VCF and FVCI Regulations respectively should be revised to
  take microfinance NBFCs out of the prohibited ‘negative’ lists and thereby
  allowing domestic and offshore VCs to participate in such NBFCs.




                                                                                77
LIMITED LIABILITY PARTNERSHIPS – TAXATION




Concerned Authority(s):


Reserve Bank of India
Ministry of Corporate Affairs
Central Board of Direct Taxes


                                            78
    Limited Liability Partnerships – Taxation


•   Tax regime for assessing LLPs is unresolved.


 To encourage use of LLP structures for setting up venture capital funds, a robust
  tax regime will have to evolve that taxes the investors and not the LLP that pools
  the capital. This entails revising section 184 for exempting LLP income from tax
  and adding proviso to section 115-O for exempting distributions made by LLPs by
  way of dividend payouts.
 Limited Liability Partnerships should be considered to be eligible to register
  under the VCF Regulations and accordingly it should be extended the pass
  through benefits under the existing section 10(23FB) of the ITA.




                                                                                 79
Loans by commercial banks for domestic acquisitions




Concerned Authority(s):


Reserve Bank of India
Ministry of Corporate Affairs




                                                      80
Loans by commercial banks for domestic acquisitions


•   There is a general restriction imposed on commercial banks from extending
    finance to concerns for private equity acquisitions even if consolidated financials
    support the credit decision. This seriously handicaps Indian acquirers as their
    catchment of domestic capital sources gets severely restricted in domestic
    transactions.
 Policy on allowing finances for domestic acquisitions should be liberalized. RBI
  could assume the same stance as was taken in 2001 to allow banks to participate
  in PSU divestments by specifying borrower eligibility. That should achieve the
  purpose of ensuring that only long term and strategic investors are able to access
  the window.




                                                                                    81
  Thank You

mahendra@indiavca.org




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