Private Equity in India

Private Equity is one of the most common and preferred medium of raising capital for any company.

In India, the private equity industry has developed and been blooming since the last three decades. Usually, the private unlisted companies use the method of private equity funds for growing their business and this industry has grown so much that now the global investors are interested in investing in India.

As one of the most preferred medium of capital growth, it is important to through some light on private equity funds and investments in India.

Private Equity in India

Regulatory Framework for Private Equity in India:

In India, the private equity funds are set up as trust funds and are registered as another option of investment funds. These can be also set up as companies or Limited Liability Partnership (LLP) apart from a trust fund institution. It is regulated by the following framework:

  1. SEBI (Alternative Investment Funds) Regulations, 2012:

With an intention to extend the funds that are unregulated and for increasing the stability and accountability of the market, the Securities and Exchange Board of India (SEBI) notified the Alternative Investments Funds Regulations on 21st May, 2012. It has served as a replacement for previous regulations since then. It has also repealed the SEBI (Venture Capital Funds) Regulations, 1996. The whole Alternative Investment Funds are categorized broadly into 3 categories.

The concept of private equity is prescribed under the Category II of the Alternative Investment Funds. Regulation 2(1) of the SEBI (Alternative Investment Funds) Regulations, 2012 defines private equity as under-

“An Alternative Investment Fund which invests primarily in equity or equity-linked instruments or partnership interests of investee companies according to the stated objective of the fund.”

The regulations related to private equity investments were formulated for creating a uniform structure to make the channel of funds better for governing the private pool of funds and the investment means.

In 2020, the SEBI introduced certain changes to the previous existing legal framework that are significant through its circular. The circular states that SEBI has prescribed mandatory Performance Benchmarking and Standardization of the Private Placement Memorandums (PPM) for enhancing the disclosure requirements.

The Private Placement Memorandum serves as a primary document for disclosing all the necessary information to the potential private equity investors and Annual Audits are important for the Alternative Investment Funds. The changes as notified by the SEBI have come into effect from 1st March, 2020.

  1. Companies Act, 2013:

The Companies Act is the holy book for governance and regulating the companies in India. It contains heavy regulatory and compliance burden on the privately owned companies. As per the act, private companies are not allowed to offer securities to public for raising any capital. They can get capital through the means of private placement process that allows issuing the securities only to selected number of private persons. The Private Placement Process is prescribed by Section 42 of the Act.

Section 42 states the following for private equity funds-

  1. An offer regarding the private placement of securities and issues cannot be made to more than 200 people by the private company.
  2. The securities offered under the Employee Stock Option Plan are excluded in these.
  3. It also excludes the persons who are under Qualified Institution Buyers category.

Even though the Companies Act provides a proper definition and regulations to private equity funds, but these are misplaced as they does not require heavy compliance checks because the securities of the private company are not offered to the public. The investments provided with means of private equity must be regulated methodically.

Procedure of the Private Equity transaction in India:

Private equity investments in India usually happen in the unlisted companies closely. The listed companies do not prefer investments through the private equity due the following reasons-

  1. Strict and stringent regulations regarding delisting
  2. Lack of the quality assets in the business

A private equity transaction comprises of two stages of investment. These are as follows-

  1. Early-stage investments:

These fell under the investments made through venture capital. It includes the following:-

  1. Angel investments
  2. Growth capital
  3. Seed capital
  4. Venture capital
  1. Late stage investments: It includes the following:-
  1. Buyouts
  2. Private investment in public equity
  3. Turnaround capital

A typically carried on private equity transaction has the following steps involved:

  1. Teaser document by the company:

In very first step of the private equity transaction, the investment bankers usually send a document known as the investment teaser for introducing the opportunity of the investment to the strategic partners or investors. The seller’s name is usually not disclosed in the teaser.

  1. Non-Disclosure Agreement (NDA):

Once the interested partners or investors have seen the teaser thoroughly, the next step is to sign the Non-Disclosure Agreement by the parties. The NDA serves as a measure for prevention of any illegal use of the provided confidential information in the teaser and other documents and other unlawful activities and malpractices.

  1. Confidential Information Memorandum (CIM):

The third step in Private Equity Transaction is to share the Confidential Information Memorandum to the potential investor or acquirer by the banker. It contains the details of the company, employee profile, financials, revenue data etc.

  1. Communication between the acquirer and the seller:

The acquirer might want to know further details of the companies after going through the Confidential Information Memorandum. For this he/she might get into contact with the seller company or person and their management team for ensuring certain aspects relating to credibility, financials and customer relations etc.

  1. Valuation of the company:

The buyer on the basis of the financials of the seller company performs a valuation process. This is one of the most important steps because private equity is based on the projected financials of the company of the seller.

  1. Expressing the interest:

Once the valuation is completed, the Private Equity firm or buyer sends a formal offer as an expression of interest in acquiring the company to the seller.

  1. Access to the data room:

After the seller accepts the offer, the buyer is granted access to the company’s data room that is either in physical mode or virtually. This is done to provide due diligence to the private equity firm for verifying the data and information.

  1. Meeting of the management:

The private equity firm and its management then have in-person or face to face meeting with the senior management of the seller company for discussing their collaboration and other important tasks.

  1. Intent letter:

The acquirer is required to send a letter of intent to the seller company before sending the Share Purchase Agreement. The letter contains the broad aspects of the acquisition made by the private equity acquisition and other details of equity financing.

  1. Share Purchase Agreement:

This document is to be sent by the acquirer to the seller. It contains the details and terms and conditions regarding the agreement between both the parties. Once the parties reach mutual agreement, the private equity transaction is completed and the deal is closed by the investment banker.

Author: Anil Agrawal
EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or