Paper on Private Equity in India

In the past, some readers have asked if we could cover
matters pertaining to the private equity sector in greater detail. Often, the difficulty
we encounter is that private equity is not recognised specifically as an
investment class under the Indian laws and regulations. As far as foreign
private equity investments are concerned, they are generally treated as part of
the foreign direct investment (FDI) regime and sometimes under the foreign
institutional investor (FII) category. Private equity investments are subject
to the same restrictions as other foreign investors. Moreover, a number of different
laws and regulations apply in the context of investments by private equity
firms, much like other foreign investors.
In this context, Professor Afra Afsharipour
makes a timely contribution to the literature through her recent paper titled “The
Indian Private Equity Model
”. The paper analyzes the various laws and
regulations that apply to private equity investments, and also the various
structures and contractual arrangements used by the parties. It also contains a
comparative perspective discussing the types of structures that either work or
do not work in the Indian context relative to those that are well understood in
other markets.
The abstract of the paper is as follows:
Private Equity (PE) firms have long
invested in Western firms using a leveraged buyout (LBO) model, whereby they
acquire a company that they can grow with the ultimate goal of either selling
it to a strategic buyer or taking it public. Unable to undertake the
traditional LBO model in India, PE investors in Indian firms have developed a
new model. Under this Indian PE Model, PE firms acquire minority interests in
controlled companies using a structure that is both hybridized from other
Western investment models and customized for India‘s complex legal environment.
PE investors in India face several challenges, including continuing
restrictions related to foreign investment, the corporate governance structure
of Indian firms, and securities and corporate law hurdles to investments in
publicly listed companies. PE investors have thus developed an Indian PE model
focusing on several major issues: (i) structuring of minority investments, (ii)
investor control rights, and (iii) exit strategies. Nevertheless, recent
governance and regulatory difficulties, such as uncertainty regarding the legal
status of put options, highlight the insufficiency of the Indian PE model to
provide investors with their desired protections.

This paper is part of the NSE
Working Papers
series that is gradually building up content on issues such
as capital markets and corporate governance. It also has a separate series on
Research Papers

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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