i OVERVIEW

i Deal activity

A year of several big ticket structural reforms, 2017 in India saw an overhaul of the indirect tax regime through the new Goods and Services Tax (GST) Law and introduction of the Real Estate Regulatory Authority (RERA) as a real estate sector regulator. The Insolvency and Bankruptcy Code (IBC) became the most important talking point as there was a push from both the government and the Reserve Bank of India, the central bank, for banks and financial institutions to resolve the large volumes of non-performing assets on their books through recourse to the process under the IBC. This has in turn created renewed interest in distressed assets from strategic as well as private equity players.

On the other end of the spectrum, the markets have taken time in coming to terms with the short-term effects of structural reforms such as GST and the demonetisation exercise implemented at the end of 2016 and this has reflected in growth rates and short-term shocks like a current account deficit and inflation. Macroeconomic parameters, however, have improved on most counts and India continued to be among the world’s fastest-growing economies. In fact, driven by a supportive and stable government, in the latest edition of the World Bank Doing Business Report, India has jumped 30 notches on the rankings for ease of doing business and has been recognised among the top-five reformers considering a variety of parameters.

The pro-active government has continued to push India as a more attractive investment destination by rationalising and simplifying the process of investing and doing business in India. Although there was an overall decline in the volume of deal-making in the private equity (PE) space compared to 2017 (though not the value), regulatory reforms, the introduction of more robust enforcement mechanisms and a large number of distressed assets on the block that are likely to fetch attractive valuations have kept PE investors on their feet.

Over the course of the year, the government announced significant liberalisation of foreign investments. Chief among these was a simplification of the foreign investment regime. Further, to reduce procedural bottlenecks, the government abolished the Foreign Investment Promotion Board (a body through which all foreign-investment-related approval applications had to be routed) and also increased the number of sectors where investment was permitted without prior government approval (discussed below).

In terms of numbers, while the total PE investments were lower than in 2016, the overall value of investments made in 2017 was nearly 76 per cent higher according to publicly available deal information. Estimates from public sources and market research firms put PE investments in India between US$21 billion and US$24.4 billion for 2017. This represents a noticeable increase in PE activity, and has clearly broken through the US$10 billion mark over the past three years. There were many significant deals (both in terms of volume and size) seen in sectors such as technology, healthcare, infrastructure and banking and financial services.

The technology and financial sectors were the beacons of 2017, accounting for over US$16 billion in investments and some of the largest deal sizes. Japanese internet and telecom conglomerate SoftBank Group’s investment in Indian technology start-ups Flipkart, Ola and Paytm were some of the largest PE investments in 2017. Bain Capital’s billion-dollar investment in Axis Bank was another among the top PE deals of 2017. Canadian pension fund CPPIB continued to remain among the most prominent investors for 2017 with its investments in Indian infrastructure companies such as telecom tower firm Bharti Infratel and logistics parks operator Indospace Core.

Value of PE exits have been reported to have increased nearly 57 per cent from the previous year to around US$13.5 billion in 2017. Top PE exits accounted for nearly 20 per cent of the total exits in 2017. Exits by KKR and Co, Qatar Foundation, Tiger Global Management and Apax Partners were among the biggest exits of 2017. Exits in 2017 can typically be grouped into exits through the open market, mergers and acquisitions, secondary sales and IPOs. This significant increase indicating an easier and more stable exit market is a positive development, as PE investments in India have faced liquidity issues in previous years.

An increased momentum in deals involving the sale of distressed assets was noted in 2017. Global and Indian players have increasingly been coming together to invest in distressed assets looking to leverage global expertise and knowledge of local market. 2017 has seen global PE players looking to set up investment platforms with Indian companies (Apollo, Bain) as well as investing in or setting up financial services companies with a focus on distressed assets, including asset reconstruction companies (Blackstone, KKR and Lone Star, following on from CDPQ’s entry in this space in 2016).

ii Operation of the market
Management equity incentive arrangements

Management equity incentive arrangements in India are most commonly structured through employee stock option plans (ESOP), where the Indian company typically sets up an employee trust to administer the ESOP scheme. Employees are given the option to purchase shares, and the option can be exercised after vesting in the employees. Usually, such options are exercisable in tranches over a staggered period (which may be over a period covering the anticipated duration of the PE investment). The ability of an employee to exercise options in these tranches may also be linked to the satisfaction of performance-based criteria.

The law also allows for other mechanisms such as employee stock purchase schemes, where employees can directly purchase shares at a discount; and sweat equity shares, which are issued at a discount or for consideration other than cash to management or employees for their know how, intellectual property or other value additions to the company. There are also a number of other methods through which management incentives can be structured – for example, through issuing different classes of shares or other capital appreciation rights – although these continue to remain at a relatively nascent stage in the Indian context.

Standard sales process

There is no uniform ‘process’ for PE investments in India. That said, the last few years have witnessed a noticeable increase in bid situations, which in some ways is similar to the Western model of auction sales. However, PE investments continue to remain primarily relationship-driven, and about evaluating the correct target companies and promoters, establishing a relationship with the promoters and management, and then evaluating any investment proposal on the merits.

Deal cycles and sales processes can vary significantly depending on the sector, the deal size, the parties and regulatory complexity, but there are a few common factors. Finding an appropriate regulatory and tax structure for the deal or sale is among the first discussion points. Thereafter (or often in parallel), one would expect a detailed financial, legal and technical due diligence. As Indian companies as well as investors evolve, other methods of analysis such as environmental, social and governance diligence or background checks on Indian partners and counterparties are assuming a more significant role in deal evaluation. After the investment proposal receives in-principle approvals from the PE investor or credit committee, the definitive documentation for the deal (such as share purchase agreements or shareholders’ agreements) are negotiated and finalised. A typical deal cycle can last between three and six months from the first non-binding indication of interest to the execution of definitive documentation. Depending on sector and deal complexity it is possible for the deal cycle to extend up to one year.

After definitive documents are executed, deals may require regulatory approvals (typically these approvals may be from the central government, the Reserve Bank of India, the Securities and Exchange Board of India, the capital markets regulator, or the Competition Commission of India. In other sectors (such as insurance or commodities exchanges), there may be other sectoral regulators that may need to approve the transaction). After these regulatory approvals are obtained and other conditions precedent are satisfied, closing can take place. Closings typically occur anywhere between a few weeks (where no regulatory approvals are required) to three months (where regulatory approvals are required) after the execution of definitive documents.

ii LEGAL FRAMEWORK

i Acquisition of control and minority interests
Legal framework and structuring considerations

Although the legal framework is permissive, there are several regulations around the entry route, types of securities purchased and pricing guidelines applicable to international PE investors. Consequently, many PE investments require appropriate structuring to achieve the desired economics and alignment of incentives.

Foreign PE investors can invest in India under the following entry routes:

  • a the foreign direct investment (FDI) route: through which investors can acquire equity shares issued by Indian companies or other permitted instruments fully and mandatorily convertible into equity shares in accordance with pricing guidelines described in the table below;
  • b the portfolio investment scheme (PIS): pursuant to which registered foreign portfolio investors (RFPIs) (erstwhile FIIs) can invest in listed securities and other instruments specifically permitted by the PIS regime – in particular, the PIS route is used by foreign investors holding listed equity positions or corporate bonds (such as listed non-convertible debentures (NCDs)) in Indian companies. RFPIs are also allowed to acquire listed and unlisted corporate debt and other fixed return instruments, which are increasingly forming part of an international PE player’s Indian investment basket; or
  • c the foreign venture capital investment (FVCI) scheme.

Recent amendments to the foreign exchange control regime has also introduced the foreign portfolio investment (FPI) route. Any investment in listed companies which is less than 10 per cent of their fully diluted equity is classified as an FPI investment. These investments receive certain regulatory relaxations in relation to sectoral conditions and reporting requirements.

A high-level overview of each of these schemes is summarised in the table below.

Entry route

FDI

PIS

FVCI

Overview

For investment in Indian companies by way of equity shares and mandatorily convertible equity securities (both listed and unlisted)

For acquiring listed and unlisted debt, and equity securities (including NCDs) listed on recognised Indian stock exchanges and other securities specified under the PIS scheme

For venture capital investment in sectors identified by the Reserve Bank of India (RBI) (permissible sectors)*

Types of securities and eligible instruments

Listed and unlisted equity securities as set out below:

a equity shares;

b fully, compulsorily and mandatorily convertible debentures;

c fully, compulsorily and mandatorily convertible preference shares;

d partly paid-up shares; and

e warrants

For partly paid-up shares and warrants, there are detailed conditions applicable to upfront amounts, time periods for investing the remainder of funds, and conversion and strike prices

Listed and unlisted debt instruments, equity instruments listed on a recognised stock exchange and other specified instruments†

a Equity or equity-linked instruments of companies in the permissible sectors;

b debt or debt-linked instruments of companies in the permissible sectors; and

c units of venture capital funds or alternate investment funds

Key investment caps

a In most sectors, investment up to 100 per cent of the paid-up equity capital of a company is permitted under the automatic route (i.e., without government approval); and

b In certain sensitive sectors (inter alia, aviation, banking, defence, insurance), investment is subject to prescribed sectoral caps or may require prior government approval, or both.

A single RFPI can hold up to 10 per cent of the paid-up equity capital of a company or 10 per cent of the paid-up value of each series of convertible debentures (this will be calculated on an aggregate basis for a single investor group if the investments are beneficially held by the same entity) under the PIS route.

Up to 100 per cent of the paid-up equity capital of a company that is involved in a permitted sector

Registration requirements

No registration required under FDI scheme

RFPI registration with a designated depository participant authorised by the Securities and Exchange Board of India (SEBI) (subject to the satisfaction of specified eligibility criteria)

FVCI registration with SEBI (subject to the satisfaction of specified eligibility criteria)

Pricing and valuation

Pricing guidelines under the FDI scheme are applicable as follows:

For listed companies:

a transfer of shares from a resident to a non-resident by private arrangement must take place at a price greater than or equal to the higher of the average weekly high and low closing share prices over the preceding 26 weeks, and two weeks from the relevant date (Listco FMV);

b transfer of shares from a non-resident to a resident by private arrangement must take place at a price less than or equal to the Listco FMV; and

c preferential allotment of shares must take place at a price not less than the Listco FMV

RFPIs are allowed to sell and purchase securities at the stock exchanges at the prevailing market prices

No pricing guidelines are prescribed under the FVCI scheme – parties can mutually agree pricing without regard to exchange control regulations

For unlisted companies:

a issue of shares must take place at a price not less than fair market value calculated by a merchant banker or a chartered accountant through any internationally accepted valuation methodology (FMV);

b transfer of shares from a resident to non-resident must take place at a price greater than or equal to the FMV; and

c transfer of shares from a non-resident to a resident must take place at a price less than or equal to the FMV

* The permissible sectors for investment by FVCIs are infrastructure; hotel-cum-convention centres; biotechnology; nanotechnology; seed research and development (R&D); R&D for new chemicals in the pharma sector; dairy industry; poultry industry; production of biofuels; and IT related to hardware and software development.

† RFPIs are also permitted to invest in mutual fund units (except liquid and money market mutual funds); collective investment scheme units; derivatives on recognised stock exchanges; dated government securities; securitised debt instruments; rupee-denominated credit enhanced bonds; security receipts from asset reconstruction companies; debt instruments specified by the RBI; listed and unlisted bonds and non-convertible debentures issued by infrastructure companies and infrastructure finance companies; rupee bonds by infrastructure debt funds; Indian depository receipts; and any other instrument specified by SEBI from time to time.

ii Fiduciary duties and liabilities

Under the Companies Act of 2013, directors of companies (including nominee directors appointed by PE investors) have the following duties:

  1. to act in accordance with the articles of the company;
  2. to act in good faith, and to promote the objects of the company for the benefit of its members as a whole and in the interests of the company, employees, shareholders, community and the environment;
  3. to act with due and reasonable skill, care and diligence;
  4. to exercise independent judgement;
  5. not to be involved in a situation that may lead to a direct or indirect conflict or possible conflict of interest with the company;
  6. not to achieve or attempt to achieve any undue gain or advantage either for themselves or for their relatives, partners or associates. A director who is found guilty of making undue gains shall be liable to compensate the company; and
  7. not to assign their office to any other person (such assignment, if made, shall be void).

The most important change to directors’ duties from the pre-2013 regime is that directors must act in the ‘best interests of the employees, shareholders, the community and for protection of the environment’. Previously, all duties of directors were owed to the company and not to other stakeholders. Directors must now take into account a much broader range of factors and stakeholders in their decision-making process.

To mitigate the risk of nominee director liability arising out of any statutory or operational issues in target companies, PE investors should ensure that the investee company specifies one of the directors or any other person to be responsible for ensuring compliance with all operational compliance requirements. Additionally, since liability will be attracted in cases where the nominee director receives proceedings of the board or participates in the meeting of the board without raising an objection, investors should ensure that its nominee directors record their objections in writing or ensure that their objection is recorded in the minutes of the meeting.

The PE firm, as a shareholder in a target company, does not have any additional fiduciary duties or any restrictions on exit or consideration payable for a fund domiciled in a different jurisdiction (from a fiduciary duty or liability standpoint). There are no fiduciary duties or liabilities owed to other constituencies in the capacity of a shareholder.

iii YEAR IN REVIEW

i Recent deal activity

PE investment in India continued to be strong despite issues arising from a fluctuating currency, high valuations, and global uncertainties including volatility in crude oil prices. Overall, the technology and the financial sector attracted PE investments of reportedly around US$16 billion, of which approximately US$11.4 billion were investments in the information technology sector.

Within the financial services sector, insurance was a central theme and attracted interest from sovereign wealth funds in the pre-IPO and anchor allotment stages. SBI Life Insurance raised a large anchor round from the sovereign wealth funds of Singapore, Norway, Abu Dhabi and Kuwait. Warburg Pincus’ pre-IPO investment in ICICI Lombard is featured among the top 10 PE investments in 2017. Several sovereign and pension funds also came in as anchor investors in HDFC Standard Life Insurance ahead of its initial public offering. With recent amendments by the Insurance Regulatory and Development Authority of India, allowing PE investors to become promoters of insurance companies, the sector is likely to continue to be lucrative sector for PE investors in 2018.

The most high-value PE investments in 2017 included an investment of US$2.5 billion in Indian e-commerce company Flipkart by Japan’s SoftBank Group Corp, followed by another investment of US$1.4 billion in Flipkart by Tencent Holdings Ltd, eBay Inc and Microsoft Corp, as Flipkart replenished its war-chest to take on Amazon in India.

The other top deals in 2017 included a US$1.4 billion investment by SoftBank in One97 Communications Ltd, which runs Paytm, a payment instrument provider and which became a payment bank in 2017; a US$1.1 billion investment in India’s largest cab-hailing service Ola (ANI Technologies Pvt Ltd) by Tencent and SoftBank; and Bain Capital’s US$1.1 billion investment in Axis Bank Ltd. The top-five deals together accounted for US$7.5 billion, or 31 per cent of total PE investments in 2017.

Public investment in private equity deals (PIPE) saw a gain in momentum in 2017. Major PIPE deals included Bain Capital’s US$1.1 billion investment in Axis Bank Ltd, a US$338 million investment in Kotak Mahindra Bank Ltd by Caisse de Depot Quebec (CDPQ) and Canadian Pension Plan Investment Board (CPPIB), and a US$260-million investment in RBL Bank Ltd by CDC Group and Multiples Alternate Asset Management Pvt Ltd.

Abu Dhabi Investment Authority was another active investor, having backed a number of companies ahead of their IPOs. The Gulf based sovereign fund also agreed to invest US$1 billion in the National Investment and Infrastructure Fund, India’s sovereign fund, this year.

Some of the other significant private equity investments in the year under review included the following:

Sr. No.

Target company

Investor company (buyer)

Sector

1

DLF Cyber City Developers Ltd

GIC Pvt Ltd

Real estate development

2

Bharti Infratel Ltd

KKR India Advisors Pvt Ltd, CPP Investment Board

Integrated telecommunication services

3

Hindustan Powerprojects Pvt Ltd, 18 Solar Portfolios

Macquarie Infrastructure and Real Assets

Electric utilities

4

SBI Cards and Payment Services Pvt Ltd

State Bank of India, Carlyle Asia Partners IV LP

Consumer finance

5

Tata Technologies Ltd

Warburg Pincus LLC

Construction and engineering

ii Financing

In India, options for leveraged buyouts and acquisition financing have historically been limited because Indian banks are not allowed to lend for the purposes of the acquisition of shares. Non-banking financial companies (NBFCs) are financial institutions operating in the financial services sector and also provide financing. NBFCs are also regulated by the RBI. NBFCs are subject to much less stringent prudential regulation than banks, but have higher capital requirements (15 per cent capital to risk-weighted assets ratio). Therefore, the ability of NBFCs to provide financing for the acquisition of shares is limited. In 2014, the RBI imposed more restrictions on NBFCs lending against shares by requiring a loan-to-value ratio of 2:1 for all funds advanced for share financing with shares as collateral, which restriction continues to exist in 2017. Further, Indian entities are not allowed to raise external commercial borrowings (loans from offshore lenders) for the purposes of the acquisition of shares. India’s FDI policy also prohibits foreign-owned or controlled companies incorporated in India from leveraging funds from the domestic market for acquiring the shares of another Indian company. Since traditional financing may result in regulatory scrutiny, PE investors are now increasingly using innovative methods to structure around these restrictions. These include fundraising and security creation overseas, and use of less stringently regulated debt instruments such as non-convertible debentures (which are outside the external commercial borrowing regime) to finance the deal and investing through SEBI-registered alternative investment funds.

Unlike in Western markets, PE investors do not really have access to Indian banks or financial institutions to finance a transaction. For Indian transactions, international PE investors will normally deploy their own funds raised from their investors or through funds leveraged offshore and subsequently brought into India as equity. However, using leverage financing in Indian PE deals has become much more of a reality in recent years with evolving innovative and bankable transaction structures and the previous couple of years have seen an increasing number of acquisition finance and leverage buyout deals.

iii Key terms of recent control transactions

Unlike the Western model, where public-to-private transactions or leveraged buyout transactions will involve management buyouts or taking control of the target company, the significant majority of PE investments in India had previously involved the acquisition of minority stakes.

In control transactions where PE investors acquire 100 per cent or a majority stake of the target company, there are two models: the PE investor will either hire a fresh management team with a buyout of the whole or majority stake in the company from the existing shareholders, or the PE investor will acquire the whole or majority stake with the pre-existing management team staying on. In the latter case, the Indian shareholders or promoters may actually be responsible for running the day-to-day operations of the company and formulating the long-term business strategy, and may often have the right to repurchase the PE investor’s stake or to provide an exit to the PE investor.

A trend becoming increasingly popular among PE investors in India is engaging operating professionals who are proven leaders in the relevant sector with the ability to accelerate value creation. Considering the increased focus on control acquisitions, we expect engagement of operating partners to continue to be a trend over the next few years.

Among the major control acquisition deals of 2017 are the General Atlantic TPG Capital Inc led consortium’s acquisition of a controlling stake in Fortis Healthcare Ltd and its subsidiary SRL Diagnostics Pvt Ltd and General Atlantic’s acquisition of a majority stake in Karvy Computershare. Shanghai Fosun Pharmaceutical Group Co Ltd, a unit of China’s Fosun Group also acquired a nearly 75 per cent stake in the Indian drug company Gland Pharma.

iv Exits

In 2017, PE investors exited investments worth approximately US$12 billion to US$13.5 billion, increasing the cumulative value by almost 50 per cent from 2016, despite drop in volume of deals. This was led largely by two big-ticket exits:

  1. KKR selling its entire stake in Aircent Inc to French technology consulting firm Altran for €1.7 billion in the biggest exit of the year; and
  2. Qatar Foundation’s exiting from India’s largest telecom service provider, Bharti Airtel, for 96.2 billion rupees.

The Indian start-ups ecosystem also saw some major exits with Tiger Global Management’s partial stake sale in Flipkart to Soft-Bank for US$800 million.

Some of the other major exits of 2017 were as follows:

  1. Apax Partners’ exit from offshore software R&D services provider Global Logic Inc by sale of a 48 per cent stake in the company to CPPIB for an estimated US$720 million;
  2. KKR’s sale of its entire stake in Gland Pharma to China’s Shanghai Fosun Pharmaceuticals (Group) Co for US$500 million; and
  3. Goldman Sachs’ exit of around US$470 million from the Max Financial Services, with a 15 per cent stake sale across three tranches in the company, besides selling shares in the two demerged units of the group flagship, Max Ventures and Max India.

The top-four PE exits accounted for almost one-third of the cumulated value in 2017. Besides, the year also saw a surge in the number of exit deals worth US$100 million or more, with the value of 21 such deals at US$7.67 billion, compared to 17 worth US$4.8 million in 2016.

The IT sector was the most active in terms of PE exits in 2017, followed by telecommunications and banking and financial services.

The most preferred route for exits in 2017 was through the open market with 111 deals, followed by mergers and acquisitions and secondary sales clocking 76 and 31 deals, respectively. PE funds sold shares worth US$1.17 billion in 2017 as their portfolio companies went public, nearly 26 per cent more than in 2017.

Several PE investors such as Warburg Pincus, ChrysCapital, Kedaara Capital and others reaped successful exits or part-exits through IPOs of firms such as Au Small Finance Bank and Eris Lifesciences. The share sale of AU Small Finance Bank saw PE investors sell shares worth almost US$247 million, while those of Eris Lifesciences and Indian Energy Exchange Ltd saw PE investors selling shares worth US$209 million and US$102 million, respectively.

iv REGULATORY DEVELOPMENTS

i Relevant regulatory bodies

In the context of PE investments, the relevant regulatory bodies in India are as follows:

  1. the RBI, which is the central bank and monetary policy authority of India, and also the foreign exchange regulator. The RBI is the executive authority under the Foreign Exchange Management Act 1999, the key exchange control law in India, and is responsible for notifying regulations on various aspects of foreign exchange and investment transactions from time to time;
  2. SEBI, India’s capital markets regulator, regulates stock market activity. Therefore, SEBI regulations are applicable when PE firms invest in publicly listed securities; and
  3. the Competition Commission of India, the competition regulator, which is required to pre-approve all PE transactions that fall above the thresholds prescribed in the Competition Act 2002.

The Companies Act 2013, the Companies Act 1956 (to the extent applicable) and the rules made thereunder by the Ministry of Corporate Affairs form the basic corporate regulatory framework in India.

Depending on the sector where the PE investor makes an investment, there may be sectoral regulators who will also oversee the investment – for example, the RBI oversees banks and financial services companies, the Insurance Regulatory Development Authority oversees the insurance sector and the Directorate General of Civil Aviation oversees the aviation sector.

ii Key regulatory developments

As previously mentioned, over the past year the government has relaxed several conditions under the FDI regime.

The government has dismantled the Foreign Investment Promotion Board (FIPB) as a significant move towards easing control of foreign investment and liberalising the regime. The government has either liberalised or abolished foreign investment restrictions in the following sectors.

  1. Manufacturing: to further liberalise the manufacturing sector (which allowed 100 per cent FDI under the automatic route), 100 per cent FDI under government approval route was allowed for retail trading, including through e-commerce, in respect of food products manufactured or produced in India.
  2. Civil aviation: the threshold for FDI in existing projects under the automatic route was increased from 74 per cent to 100 per cent.
  3. Single brand retailing: sourcing norms applicable for FDI were relaxed and will not be applicable up to three years from commencement of the business (i.e., opening of the first store for entities undertaking single brand retail trading of products having ‘state-of-art’ and ‘cutting-edge’ technology and where local sourcing is not possible).
  4. Commodities spot exchanges: sectoral cap of 49 per cent under automatic route has been specified for investments in commodities spot exchanges, where such sector was not previously recognised in the policy.

v OUTLOOK

Although the International Monetary Fund (IMF) cut its growth forecast for the Indian economy to 7.4 per cent for financial year 2018, on account of the structural impact of GST as business get accustomed to new processes, as well as the lingering effects of the demonetisation exercise undertaken by the government in the last months of 2016, the overall outlook remains positive with both the OECD and IMF predicting stable growth during 2018. In this section, we set out a few of the key themes that we expect will be significant factors in 2018.

i Distressed assets

Investments in distressed assets is expected to continue to be in focus in 2018. The government and the central bank have been pulling out all stops to tackle the non-performing assets (NPA) that have accumulated over the past years. The focus is on resolution of NPAs through insolvency proceedings under the new insolvency laws and by the end of 2017, the central bank has required banks to commence insolvency proceedings against almost 50 of the biggest NPA accounts. As these assets, primarily in the core sectors, are made subject to insolvency resolution through early and mid-2018, there is expected to be a flurry of activity in evaluating and bidding for these assets as part of the resolution process.

ii Availability of capital

In the past years, with the rising NPA problem and the Reserve Bank ramping up the capital adequacy and provisioning norms for banks, the bank financing activity had shown signs of a slowdown. This was particularly true of public sector banks, which constitute a substantial majority of banks operating in India. However, to stimulate growth the government now proposes to recapitalise public sector to the extent of almost US$33.1 billion. This is widely expected to spur bank lending to corporates, particularly in the infrastructure sector, which has suffered the most during the lending slowdown.

iii Valuations

In 2014 and for large part of 2015, a common complaint among fund managers was the expectation mismatch (with Indian promoters) on valuations of Indian assets. 2016 and to an extent, 2017 saw a valuation correction in the start-up sector. However, from an overall perspective, valuations especially in the technology sector have continued to ride high. As Indian companies come to terms with structural changes in the domestic market as well as emerging global trends, valuations are only expected to stabilise in the later part of the year.

iv Spotlight sectors

The IT, industrial and financial sectors saw significant investor interest in 2017. The year also saw various PE funds express interest in entering the distressed assets market in India in collaboration with established Indian players to tap into their ability to navigate Indian deal making. Distressed asset platforms such as between JC Flowers and Ambit Holdings, the IL&FS and Lone Star collaboration, Piramal and Bain Capital are reported to be looking at significant Indian investments in 2018.

The realty sector has witnessed a high level of growth over the past few years. It is expected that the sector will continue to grow in the next year on account of recent liberalisation in the sector, including the much-awaited debut of real estate investment trusts (REITs) in the Indian market. The implementation of the RERA appears to have a short-term impact on the sector, but this churn appears to have settled since then.

v Last mile capital

PE firms are increasingly looking at hybrid deal structures to either provide high-cost (and mezzanine) debt financing for last-mile funding in projects that are nearing completion (with existing equity investors agreeing to high-cost debt in the interest of project completion), or through combination deals with debt and equity to protect the downside risks. As a result, the market for corporate bonds (and innovative structures involving debt instruments) has been booming, and we expect this trend to continue in 2018. This is a win-win situation for both PE investors and target companies, as debt financing allows for easier repatriation of funds for PE investors and relatively quick cash for companies in need of funding.

vi Regulatory enablers

As discussed elsewhere in this chapter, we expect the government to continue liberalising foreign investment regulations and take steps to improve the ease of doing business in 2018. This trend has continued in the first days of 2018 with the government having taken policy decisions for further liberalisation in sectoral norms for foreign direct investments as well as introducing amendments to companies and insolvency related legislations taking into account feedback from stakeholders. In addition, to give teeth to courts in enforcing contracts, amendments have been proposed to statutory provisions governing specific performance of contracts.

vii Sophisticated deal-making

We witnessed increasing levels of sophistication in 2016 and 2017 in structuring PE investments, and we expect this trend to continue in 2018. We also saw PE investors learn from the experiences of the past few years, and an increased focus on viable exit options for all new investments, including using IPOs as viable exit options as there is a resurgence in capital market activity.

In 2018, we can continue to expect PE firms to focus on background checks and business diligence of potential counterparties, effective post-investment monitoring (through information rights and annual third-party-conducted audits), higher corporate governance standards, greater attention to standards of documentation and a realistic risk assessment based on evaluation of local markets. From a deal-structuring standpoint, PE firms will apply significantly more thought to entry and exit structures (i.e., using the most appropriate capital instrument or combination of instruments with terms attaching to them (such as sliding scale conversion rights or control)) to align investor incentives with the Indian counterparty’s incentives.

viii Exit strategies

With capital markets continuing to remain bullish, we expect more companies will be able to provide exits to their investors through the IPO route. We also expect PE investors to employ structured exits to extract greater value as many PE funds near the end of their investment cycle.

With the government making the right noises on the regulatory front and with a focus on skill development, our long-term view on India remains that of robust growth. However, in the medium term the state of the global markets and the ability of the government to present a credible vision of progress will determine whether India continues to attract global PE investors.

1 Nishant Parikh is a partner at Trilegal. The author gratefully acknowledges the contributions of Arpan Chowdhury, Harsh Jain and Akshaya Venkataraman to this chapter.