All previous records were surpassed in 2018 with the crossing of the US$100 billion mark in terms of deal value across both private equity (PE) and strategic (M&A) transactions.2 Incubated by several big ticket structural and regulatory reforms – including overhaul of the indirect tax regime through the new Goods and Services Tax (GST), the liberalisation of foreign direct investment, the introduction of the Real Estate Regulatory Authority (RERA) as a real estate sector regulator, receipt of approvals from regulators for the first real estate investment trust (REIT), government stimulus to address non-performing assets (NPAs), an effective push for the 'Make in India' scheme, and time-bound enforcement of the Insolvency and Bankruptcy Code 2016 (IBC) – investors' confidence in India's growth story was reinforced and this was highlighted in the record-breaking deal activity in 2018. It was also a year in which the Indian economy appeared to have shrugged off the after-effects of demonetisation in 2016 and implementation of GST in 2017.

India improved its ranking by 23 points and reached 77th position in the World Bank's 'Doing Business 2019' report. India improved its rank in six out of 10 parameters relating to starting and doing business in the country.3 The investor community is still looking at India positively and deriving strength from policy decision-making that is targeted at either cleaning up the economy or making it easier to do business.

i Deal activity

General dealmaking trends in India in 2018

Long-due legal and policy reforms coupled with factors such as record levels of dry powder at the disposal of Asia-focused private equity funds; the race for dominance in the e-commerce industry, renewed interest from very deep-pocketed long-term institutional investors, sovereign wealth funds (SWFs) and strategic buyers who have placed significant bets on India's growth story; and the availability of high-quality assets on the block, all acted as catalysts to make 2018 a blockbuster year for deal activity in India. Consolidation to strengthen market position remained the primary trigger, driven by financial deleveraging, monetising non-core assets, entering new geographies and the faster pace of insolvency proceedings.

The great Indian distressed-asset sale, supplying assets at attractive valuations across a number of core areas, along with increased appetite of investors, SWFs and strategic buyers for control deals, co-investment deals and platform deals, resulted in the highest number of big-billion bets on India's growth story. Technology, real estate, financial services, energy, telecoms and manufacturing were among the top sectors driving dealmaking activity in 2018.

The second half of the year witnessed choppiness in the markets. Uncertainty and volatility triggered by major political events (including defeats suffered by the ruling central government in assembly elections in key states, and the United States–China trade war), approaching general election, corporate governance lapses in IL&FS triggering bubble bursts in the non-banking financial company (NBFC) sector and creating liquidity concerns, a flurry of bank scams, implementation of long-term capital gains tax, resignation by the governor of the Reserve Bank of India (RBI), an increase in oil prices and depreciation of the rupee, among other factors, led to a sharp market correction in the second half of the year.

Indian stock markets and foreign portfolio investor and institutional investor sentiment

As expected, in 2018 equity markets were volatile. India's macroeconomic variables deteriorated marginally from the unsustainable good levels they enjoyed in 2017.4 Data from South Korea, Taiwan, India, Thailand, Philippines, Indonesia and Vietnamese stock exchanges showed foreigners sold a net $33.6 billion worth of equities in 2018, which was the biggest outflow from Asian equities in the past seven years.5 Foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) have been among the biggest drivers of India's financial markets and invested around 12.51 trillion Indian rupees in India between the financial years 2002 and 2018.6 In 2018 (up to 31 December 2018), FIIs and FPIs pulled approximately 940.7 billion rupees from the Indian financial markets.7

The constant raising of rates by the central banking system of the United States, the US Federal Reserve System (1.25 per cent from 0.75 per cent in 2017, and further raised to 2.5 per cent in 2018),8 coupled with factors such as tariff wars, a spike in crude prices, the dollar stronger against other currencies (especially the rupee), Brexit, IL&FS issues leading to liquidity concerns for NBFCs, state elections and upcoming general election, were all contributors to India losing its sheen as an investment destination for hot FPI/FII money.9 The US Federal Reserve is also expected to raise the rate to 3 per cent in 2019 and 3.5 per cent in 2020, which could make FPIs pull more money out from India.10

However, despite heavy volatility, coupled with foreign fund outflows and a weak rupee, the Indian equities market emerged as one of the best performers globally in 2018.11 Barring India, almost all major markets closed 2018 having lost ground compared with a year ago.12 Although the 2018 gains were marginal, both the Sensex and Nifty 50 indices emerged as among the best in attaining the highest growth rates globally.13

Impact of outflow of foreign funds was cushioned to a large extent by huge participation by domestic institutional investors (DIIs), either directly or through mutual funds.14 Investments by DIIs reached approximately US$14 billion in 2018. The total number of investor accounts with 41 active mutual fund houses rose to a record 79.03 million at the end of October 2018, as against 71.35 million in March 2018, according to the data from the Association of Mutual Funds in India (AMFI). AMFI is targeting nearly five-fold growth in assets under management (AUM) to US$1.30 trillion and more than three times growth in investor accounts to 130 million by 2025.15 India has witnessed investments of approximately US$1 billion in systematic investment plans alone, and markets have reached a stage where DIIs have been injecting approximately US$10 billion to US$12 billion each year merely from mutual funds.16

Dealmaking in India

The year 2018 saw record deal-making activity in India and as at December 2018 the amount in value of India's M&A and PE activity had crossed the US$100 billion mark, in 1,640 transactions.17 Strategic deals were the fulcrum of this landmark year for M&A activity in India, with recorded investments worth US$71.3 billion, compared to US$34.6 billion in 2017.18 Walmart and Schneider were among the key global contributors to M&A deal value. Inbound activity accounted for 30 per cent (approximately US$21.7 billion) of M&A deal value this year, which was six times the deal value of 2017.19 Consolidation to achieve size, scalability, new product portfolios and better operating models catapulted deal activity upward in the M&A space, accounting for around 50 per cent of total transaction value in 2018.20

The downward trend in deal volume continued with 2018 recording 1,640 transactions compared to 1,824 in 2017 and 2,030 in 2016. However, deal values surged upward in 2018, with 21 billion-dollar deals across both PE and strategic deals combined, which is double the number recorded in 2017.

According to the PwC report 'Deals in India: Annual review and outlook for 2019', an increase in value of nearly 25 per cent compared to 2017 was witnessed in buyout deals, showcasing willingness on the part of investors to acquire greater control, and a paradigm shift in the thought process of promoters, who are proving open to ceding control over operational aspects in an effort to boost growth.21

PE dealmaking

There was a sharp unprecedented uptick in the value of PE and venture capital (VC) investments in India in 2018 on account of some very large deals (12 deals of US$500 million in value or greater, including eight US$1 billion plus deals).22 According to the EY report 'PE/VC Annual Roundup – 2018', investments increased by 35 per cent in value terms compared to 2017 (US$35.1 billion compared to US$26.1 billion in 2017) and deal volume increased by 28 per cent (761 deals compared to 594 deals in 2017).23

Continuing the trend of the past years, in terms of numbers (by value and volume) large deals saw an increase in 2018. Totalling US$25.9 billion in aggregate, there were 76 deals of value greater than US$100 million in 2018, which accounted for 74 per cent of total PE/VC investments made in 2018 compared to 54 deals, aggregating US$18.7 billion, of value greater than US$100 million in 2017.24


The growth was led by a strong pickup in buyouts and start-up investments. After a minor decline in 2017, 2018 witnessed a record 48 buyouts worth US$9.8 billion in aggregate, equal to the value of buyouts in the previous three years combined.

Start-up investments

On the back of some mega deals, start-up investments gained momentum in 2018 after subdued investments in 2016 and 2017. The comeback was on account of large VC investors such as Softbank, Tencent and Naspers deploying significant amounts of capital, making 2018 the best year for start-ups, and eclipsing 2015. Investment in start-ups increased 83 per cent in 2018 to US$6.4 billion compared to US$3.5 billion in 2017.25

Growth investments and public investment in private equity deals

An increase of 3 per cent in terms value was recorded in public investment in private equity (PIPE) deals, at US$3.9 billion in 2018, whereas, growth investments recorded a decline of 5 per cent and saw their share of the total investment pie decline to 36 per cent (compared to over 50 per cent in prior years, at US$12.7 billion).26


The year 2018 was a record one for exits, with PE/VC exits reaching US$26 billion, nearly doubling from the year before, and almost equal to the value of exits in the previous three years combined.27 Walmart's big-billion bet on India's growth story in its acquisition of a controlling stake in Flipkart for US$16 billion from its exiting investor group, including Softbank, Tiger Global and others, contributed significantly to the value of exits in 2018. According to EY, both open market exits and PE-backed initial public offerings (IPOs) saw a decline because of choppiness in stock markets.

Indian investment market debuts

In addition to record investment in the start-up sector, 2018 also saw debuts by the following international investors in India (mostly making bets on the Indian start-up ecosystem):28

  1. Morningside Venture Capital, one of China's oldest early-stage venture investors, and with around US$1.7 billion under management, made its debut in India this year with investments in Dreamplug Technologies, Sharechat and Cashify.
  2. Composite Capital Management, a Hong Kong-based investment firm, made its first investment in India in Cleartax.in.
  3. RDGlocal, a fund led by former top executives of Chinese internet giant Alibaba, opened its account in India by investing in Welike.
  4. Sailing Capital, a Hong Kong-based private equity fund, marked its entry into India when it co-invested US$50 million in cab aggregator Ola. Sailing Capital and the China-Eurasia Economic Cooperation Fund, a Chinese state-backed investment fund, took a combined stake of more than 1 per cent in Ola.
  5. Dentsu Ventures, a Japanese corporate VC fund, made its first investment in India in bus shuttle service provider Shuttl.
  6. Berkshire Hathaway, one of the biggest names in the investment world, opened its India account by investing US$300 million in One97 Communications Ltd.
  7. Mithril Capital Management made its first bet in India by leading a US$140 million funding round in GreyOrange, which handles warehousing for companies such as Flipkart, Jabong, Myntra and PepperFry.
  8. Northpond Ventures, a US-based VC firm, led a US$40 million Series C funding round in Bengaluru-based oncology solutions company Mitra Biotech.
  9. Think Investments, a US-based private investment firm, took its first plunge in India by participating as a lead in the US$50 million Series C round of funding in Mumbai-based health-tech startup PharmEasy.
  10. Insight Venture Partners, a global VC firm based in the United States, made its maiden investment in India in Chargebee, a software-as a-service subscription management company based in Chennai.

ii Operation of the market

Equity incentive arrangements

The structure and terms of equity incentives are key considerations for private equity sponsors to ensure maximum alignment of interests and, ideally, value creation for all participants. In buyout transactions, a private equity firm often involves future management in the due diligence process and the financial modelling.

In India, common themes for equity incentive arrangements include the employee stock-option plan (ESOP), the employee stock-purchase plan (ESPP) (including sweet equity shares), stock appreciation right plans (SARs) or earn-out agreements. Allotment of shares under an ESOP or ESPP results in dilution of share capital, whereas SAR plans are non-dilutive in nature and are generally settled in cash.29 A company can award shares subject to performance or time-based conditions.

An EY survey shows that Indian organisations still prefer the conventional ESOP,30 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, the share option plan is structured in such a way that shares will vest in tranches,31 which may be arranged to align with a period covering the anticipated duration of the PE investment. Typically, a stock-based incentive plan runs from five to 10 years. The EY survey revealed that 88 per cent of respondents have a vesting period of one to five years and to exercise this right an employee normally gets one to five years.32 Generally, the share options are non-transferable and cannot be pledged, hypothecated or encumbered in any way. A company can prescribe a mandatory lock-in period with respect to shares issued pursuant to the exercise of the share option. On termination of employment, the employee typically must exercise the vested options by the date of termination and any unvested options will generally be cancelled.33

Under an ESPP, shares of the company are allotted up front to an employee, either at discount or at par, without any vesting schedule. In addition, the law also permits issuance of sweet 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 added to the company.

SARs entitle an employee to receive the appreciation (increase of value) for a specific number of shares of a company where the settlement of the appreciation may be made either by way of cash payment or shares of the company. SARs settled by way of shares of a company are referred to as equity-settled SARs. 'Phantom stock options' or 'shadow stock options' (phantom stock options), a popular nomenclature derived from usage for SARs, is a performance-based incentive plan that entitles an employee to receive cash payments after a specific period or upon fulfilment of specific criteria, and is directly linked to the valuation and the appreciated value of the share price of the company.34

Since an ESOP has a vesting period, it is used as a means of retention, whereas an ESPP is mostly used to reward performance. Unlike an ESOP or ESPP, a SAR does not involve cash outflow from employees and is of advantage to an organisation by not diluting equity while, simultaneously, offering the economic value of equity to employees.35 However, for employees seeking an equity stake in the company, phantom stock options may not be an attractive option. Prominent exit strategies for stock-based incentive plans typically entail employees selling shares on a stock exchange in the case of listed entities, and promoter buy-backs in the case of unlisted companies.36

Management equity incentives may also be structured through issuances of different classes of shares or management upside agreements (also called earn-out structures or incentive fee arrangements). Earn-out agreements are typically cash-settled or equity-settled agreements entered into between an investor and promoters or founders or key employees of a company, with the understanding that if the investor makes a profit on its investment at the time of its exit, a certain portion of the profit will be shared with those individuals. While giving investors a measure of control regarding the terms of an exit, earn-out agreements are also devised to incentivise and retain employees over a determined period. Typically, as the company is not a party to the agreement, the compensation is not charged to or recoverable from the company itself and these transactions are not reported within the ambit of related-party transactions entered into by the company. The policy argument against upside-sharing agreements is rooted in the possible conflict of interest between promoters and the management team in relation to the company and its other shareholders.37

The Securities and Exchange Board of India (SEBI), in October 2016, through its consultation paper on corporate governance issues in compensation agreements, observed that upside-sharing arrangements are 'not unusual', but 'give rise to concerns' and 'potentially lead to unfair practices', so it was felt that such agreements are 'not desirable' and hence it was 'necessary to regulate' these. SEBI in January 2017 amended the Securities and Exchange Board of India (Listing Obligation and Disclosure Requirements) Regulations (the SEBI Listing Regulations) in January 2017, to regulate upside-sharing arrangements to insert a new Regulation 26(6) under which prior approval would be required from the board of directors and shareholders of the listed company through an ordinary resolution for new upside-sharing agreements between an employee, including key managerial personnel or a director or promoter, and a shareholder or third party, provided that existing upside-sharing agreements would remain valid and enforceable, if disclosed to Indian stock exchanges for public dissemination, approved at the next board meeting and, thereafter, by non-interested public shareholders of the listed company.38

Increased regulation on upside-sharing may also dampen enthusiasm for PIPE deals, where secondary transfers occur between significant shareholders and investors through the block window of an Indian stock exchange or off-market transactions. Pending policy review, Indian companies and other stakeholders can continue to explore upside-sharing structures subject to appropriate corporate disclosure norms, or explore alternative capital raising and exit options.39

Standard sales process

According to the 2018 EY 'Global Private Equity Divestment Study', almost 61 per cent of PE executives now determine the right time to sell as being 12 months before the exit; up from 35 per cent in the 2017 study. The percentage of PE funds relying on opportunistic buyers has fallen from 54 per cent to 21 per cent. PE funds are spending more time positioning the business for exit, with a sale strategy established well in advance. A similar trend is also being witnessed in India with PE investors getting more pragmatic and less opportunistic in selling assets. The PE/VC space witnessed record-high exits in 2018, and almost 85 per cent of these exits happened through strategic sales, which grew sevenfold from 2017, while open-market transactions fell by more than half in 2018.40

Dealmaking in India traditionally has remained relationship-driven, involving identifying the target with high-quality assets from a shallow pool of assets in market; winning deals; establishing synergy with the founders, promoter groups or management; agreeing on indicative valuation; and entering into a term sheet. The term sheet has to be prepared in sufficient detail to cover the major terms and conditions of the potential transaction, indicative timelines for negotiation, finalisation and execution of definitive documents and completion of legal, technical and financial due diligence, and exclusivity and no-shop obligations.

However, in the past few years there has been a paradigm shift towards a controlled competitive bid model run by investment bankers or similar intermediaries. A seller-led trade sale process by way of a controlled auction has the following distinct advantages: (1) bringing more potential buyers into the sale process; (2) creating competition among bidders, thereby encouraging higher prices and more favourable terms for the seller (including diluted warranty and indemnity packages); (3) satisfaction of corporate governance concerns by maintaining transparency of process and superior control over flow of information, and securing the highest reasonably attainable price for stockholders; (4) ability to shorten the timelines by creating deadlines for submission of bids and completing various phases of the sale process; (5) a greater degree of confidentiality; and (6) greater control over the process. Given the lack in depth of quality assets in the Indian market, controlled bid processes have potential to unlock value and have fetched astronomically high valuations for highly desirable assets that were put on the block, thus making an auction sale an attractive option for the selling stakeholders.

A typical bid sale process usually entails the following stages.

Phase I

Phase I can be broken down into the following steps:

  1. an approach is made by the seller's investment banker to potential buyers;
  2. a non-disclosure agreement is executed;
  3. a process letter is circulated setting out in detail bid process rules, timelines and parameters for indicative proposals;
  4. an information memorandum is circulated to potential bidders setting out meaningful information about the target (i.e., business model, strategy for growth, principal assets and limited financial information) to generate interest and elicit meaningful bids; and
  5. on the basis of the information memorandum, the bidders submit an indicative proposal to the seller.
Phase II

On the basis of a review of indicative proposals, bidders who are shortlisted to progress to the next phase of the sale process will be allowed access to the data room to conduct legal, financial environmental, technical and anti-corruption and anti-money laundering diligences. Preparation of vendor due diligence reports, by the target or the seller, for bidders is typically a standard feature in bid situations, so that the bidder's own legal due diligence process can be conducted more effectively and in a timely manner. It is not unusual to see buyers in these situations conducting limited top-up due diligence checks to verify findings in the vendor due diligence reports.

Shortlisted bidders are also provided access to management presentations, interviews with the management and participation in site visits.

Templates of definitive agreements prepared by the seller are also provided to the shortlisted bidders for submission of their proposed markups along with a final proposal by the end of this phase.

Phase III

Upon evaluating the final bids, and after taking into consideration the price offered and the terms bidders are seeking under the definitive documents, the process concludes with the selection of the winning bidder.

Phase IV

The final phase of an auction process is similar to a standard sale process where parties negotiate, finalise and execute definitive agreements.

One of the key drivers in negotiations is zeroing in on the structure that minimises tax leakage and is in compliance with the regulatory framework governing the transaction. After definitive documents are executed, deals may require regulatory approvals (typically these approvals may be from the governmental bodies, the RBI, SEBI or the Competition Commission of India (CCI), or any sector-specific regulator (such as insurance, telecoms or commodities exchanges). The parties can proceed to closing upon satisfaction or waiver, to the extent permissible, of all conditions precedent (including obtaining any third-party consents). 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. Depending on the management of the process, complexity of the sale assets, sector, the deal size, the parties and regulatory complexity a deal cycle may take anywhere between three months and one year from the signing of indicative offers of interest or longer where substantial restructuring of assets under a court-approved process has to be undertaken or where regulatory approvals are required.

In recent years, emerging trends in sale processes in India have included: (1) institutional sellers not providing any business warranties except in buyouts or control deals; (2) parties utilising escrow mechanisms and deferred consideration for post-closing valuation adjustments and indemnities; (3) target management facilitating trade sales and providing business warranties under contractual obligations under shareholders' agreements or on account of receiving management upside-sharing incentives; (4) use of locked-box mechanisms; and (5) buyers arranging warranty and indemnity insurance to top up the diluted warranty and indemnity package obtained in competitive bid situations to ensure that meaningful protection is obtained.


i Acquisition of control and minority interests

Primary targets

Unlisted public companies or private limited companies are the most frequent investment targets for PE in India. The inefficiencies of India's delisting regulations, the inability to squeeze out minority shareholders and the inability of PE investors to obtain acquisition finance are the primary reasons that make completion of 'going-private' deals unattractive for PE investors in India.

Key deal structures

Acquisition in India can be structured: (1) by way of merger or demerger; (2) in the form of an asset or business transfer; (3) in the form of a share acquisition; or (4) as a joint venture. Commercial and tax advantages are key considerations for investors when determining the structure for the transaction.

Legal framework

The principal legislation governing share purchases, slump sales, asset and business transfers, joint ventures and liquidation and insolvency in India comprises the Companies Act 2013 (the Companies Act), the Indian Contract Act 1872 (the Contract Act), the Specific Relief Act 1963 (the Specific Relief Act), the (Indian) Income Tax Act 1961 (the Income Tax Act), the Competition Act 2002 (the Competition Act) and the IBC. The Companies Act is the primary piece of legislation and governs substantive formation and operational aspects of companies, the manner in which securities of companies can be issued and transferred, mergers and demergers, and approval and effectuation of slump sales.

Matters of taxation in connection with acquisitions and disposals are governed by the provisions of the Income Tax Act. Under the Indian tax regime, a non-resident investor is subject to tax in India if it receives or is deemed to receive income in India; or income accrues or arises or is deemed to accrue or arise in India. A classical amalgamation and demerger is a tax-neutral transaction under the Income Tax Act, subject to the satisfaction of other specified conditions.

The inter se rights of the contracting parties are governed by the Contract Act and the Specific Relief Act. To achieve greater certainty on the enforceability of shareholders' rights, the transaction documents of a significant number of transactions are governed by Indian law. However, transaction documents governed by foreign law and subject to the jurisdiction of foreign courts are also common. Arbitration governed by rules of major international arbitration institutions (including the ICC, LCIA and SIAC) with a foreign seat and venue is the most preferred dispute resolution mechanism for PE investors in deals in India.

The CCI is the competition regulator and has to pre-approve all PE transactions that fall above the thresholds prescribed in the Competition Act. While evaluating an acquisition, the CCI would mainly scrutinise whether the acquisition would lead to a dominant market position, affecting competition in the relevant market.

Transactions involving listed entities or public money are also governed by various regulations promulgated by the securities market regulator, namely SEBI. Direct and indirect acquisitions of listed targets that meet predefined thresholds trigger voluntary or mandatory open offers, in accordance with the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations 2011. In addition, parties have to careful about price-sensitive information that may be disclosed in conducting due diligence on targets, as any sloppiness may have implications under the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations 2015. Clearances from SEBI are also required in transactions involving mergers or demergers of listed entities. Listing of securities is governed by the SEBI Listing Regulations.

The Banking Regulation Act 1949 specifically governs the functioning of banks and non-banking financial companies (NBFCs) under the supervision of the RBI in India. Relevant foreign exchange laws (including the Foreign Exchange Management Act 1999 and the rules and regulations framed under it (FEMA)) will apply in any cross-border investment involving a non-resident entity. Investments involving residents and non-residents are permissible subject to RBI pricing guidelines and permissible sectoral caps. PE investors typically invest in equity or preferred capital, or a combination of both via primary or secondary infusion. FEMA recognises only equity and equity-linked instruments (compulsorily convertible to equity) as permitted capital instruments. All other instruments that are optionally or not convertible into equity or equity-like instruments are considered debt, and are governed by separate regulations.

FEMA pricing guidelines prohibit foreign investors from seeking guaranteed returns on equity instruments in exits. However, with the advent of newer instruments such as rupee-denominated debt instruments (also known as masala bonds) and listed non-convertible debentures (NCDs), PE investors are utilising combination deals with hybrid structures to limit their equity exposure and protect the downside risk, by investing through a combination of equity or preferred capital and NCDs.

Furthermore, there are several pieces of sector-specific federal-level legislation, environmental legislation, intellectual property legislation, employment and labour legislation, and a plethora of state and local laws. One piece of legislation that is key in finalising deal dynamics is the Indian Stamp Act 1899, which provides for stamp duty on transfer or issue of shares, definitive documents, court schemes and the conveyance of immovable property.

ii Structuring and entry routes for offshore investors

Foreign investment is permitted in a company and limited liability partnership (LLP) subject to compliance with sectoral caps and conditions. However, foreign investment is not permitted in a trust, unless the trust is registered with SEBI as a venture capital fund (VCF), alternative investment fund (AIF), REIT or infrastructure investment trust (or InvIT). Foreign PE investors can invest in India through the following entry routes.

Foreign direct investment route

Investors typically route their investments in an Indian portfolio company through a foreign direct investment (FDI) vehicle if the strategy is to play an active part in the business of the company. FDI investments are made by way of subscription or purchase of securities, subject to compliance with the pricing guidelines, sectoral caps and certain industry-specific conditions. Such investments are governed by the rules and regulations set out under the consolidated FDI policy (the FDI Policy) dated 4 January 2018, issued by the Department of Industrial Policy and Promotion (DIPP), and the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2017 (FEMA20R). Previously, any investment in excess of the sectoral caps or not in compliance with the sectoral conditions required prior approval from the Foreign Investment Promotion Board (FIPB). In furtherance of its announcement in 2017, the government abolished the FIPB in 2017. In place of the FIPB, the government has introduced an online single-point interface for facilitating decisions taken previously by the FIPB. Upon receipt of an FDI application, the administrative ministry or department concerned will process the application in accordance with a standard operating procedure to be followed by investors and various government departments to approve foreign investment proposals.

Foreign portfolio investor route

Foreign investors who have a short investment horizon and are not keen on engaging in the day-to-day operations of the target may opt for this route after obtaining prior registration as a foreign portfolio investor (FPI) from a Designated Depository Participant (DDP) pursuant to the SEBI (Foreign Portfolio Investors) Regulations 2014 (the FPI Regulations). In 2014, to rationalise different routes for foreign portfolio investments and create a unified and single window framework for foreign institutional investors, qualified institutional investors and sub-accounts, the securities watchdog, namely SEBI, introduced the FPI Regulations. FPIs must be registered with a DDP before dealing with securities as an FPI.

Foreign venture capital investor route

The foreign venture capital investor (FVCI) route was introduced with the objective of allowing foreign investors to make investments in VC undertakings. Investment by these entities into listed Indian companies is also permitted subject to certain limits or conditions. Investment by the FVCI route requires prior registration with SEBI under the Securities and Exchange Board of India (Foreign Venture Capital Investors) Regulations 2000 (the FVCI Regulations). Investment companies, investment trusts, investment partnerships, pension funds, mutual funds, endowment funds, university funds, charitable institutions, asset management companies, investment managers and other entities incorporated outside India are eligible for registration as FVCIs. One of the primary benefits of investing through the FVCI route is that FVCI investments are not subject to the RBI's pricing regulations. FVCIs should obtain a registration from SEBI before making investments pursuant to the FVCI Regulations. The process typically takes 20 to 30 days from the date of application. To promote job creation and innovation, the RBI has allowed for 100 per cent FVCI investment in start-ups. Previously, it was restricted to biotechnology, information technology (IT), nanotechnology, seed research and development, the discovery of new chemical entities in the pharmaceutical sector, the dairy industry, poultry industry, production of biofuels, hotels and convention centres with a seating capacity of over 3,000, and the infrastructure sector; the approval of the securities regulator was not needed for investment in these sectors.

iii Tax structuring for offshore investors

Double-taxation avoidance treaty

The tax treatment accorded to non-residents under the Income Tax Act is subject to relief as available under the relevant tax treaty between India and the country of residence of the investor. If the non-resident is based in a jurisdiction that has entered into a double-taxation avoidance treaty (or double-taxation agreement (DTA)) with India, the double-taxation implications are nullified and the Indian income tax laws apply only to the extent they are more beneficial than the terms of the DTA, subject to certain conditions. PE investors structure investment through an offshore parent company with one or more Indian operating assets. Understandably, the primary driver that determines the choice of jurisdiction for offshore investing vehicle is a jurisdiction that has executed a DTA with India. Hence, the Income Tax Act is a major consideration in the structuring of a transaction. India has a comprehensive tax-treaty network with over 90 countries, providing relief from double taxation.41

Historically, non-resident sellers whose investments were structured through jurisdictions having a favourable DTA with India were exempt from paying capital gains tax. Because capital gains and dividends are non-taxable, and because of their low income tax rates, Mauritius, Singapore, Cyprus and the Netherlands were the most preferred jurisdictions of investors planning to invest into Indian companies.

The government renegotiated the DTAs with Mauritius, Singapore and Cyprus to provide India with the right to tax capital gains arising from transfer of shares acquired on or after 1 April 2017, with the benefit of grandfathering provided to investments made up until 31 March 2017. Equity shares acquired by investors based in Mauritius and Singapore on or after 1 April 2017 but transferred prior to 1 April 2019 will be taxed in India at 50 per cent of the applicable rate of domestic Indian capital gains tax; and shares acquired on or after 1 April 2017 but transferred on or after 1 April 2019 will be taxed at the full applicable rate of domestic Indian capital gains tax. Equity shares acquired by PE investors based in Cyprus on or after 1 April 2017 will be taxed at the applicable rate of domestic Indian capital gains tax. Compulsory convertible debentures and non-convertible debentures are exempt from capital gains tax for investors based in Mauritius, Singapore and Cyprus.

At present, except for a few DTAs (such as the Netherlands and France, subject to conditions), India has the taxing rights on capital gains derived from sales of shares. Having said that, in most Indian tax treaties, with limited exceptions (such as the United States and the United Kingdom ), capital gains derived from hybrid, debt and other instruments (excluding shares in an Indian resident company) continue to be exempt from tax in India.42


To curb tax avoidance, the Indian government introduced the General Anti-Avoidance Rule (GAAR) with effect from 1 April 2017, with provision for any income from transfer of investments made before 1 April 2017 to be grandfathered. GAAR has been introduced with the objective of dealing with aggressive tax planning through the use of sophisticated structures and codifying the doctrine of 'substance over form'. It is now imperative to demonstrate that there is a commercial reason, other than to obtain a tax advantage, for structuring investments out of tax havens. Once a transaction falls foul of GAAR, the Indian tax authorities have been given wide powers to disregard entities in a structure, reallocate income and expenditure between parties to the arrangement, alter the tax residence of the entities and the legal situs of assets involved, treat debt as equity and vice versa, and deny DTA benefits.43

Place-of-effective-management risk

Under the Income Tax Act tax residence forms the basis of determination of tax liability in India, and foreign company is to be treated as tax resident in India if its place of effective management (POEM) is in India. Pursuant to the POEM Guidelines,44 POEM is 'a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are in substance made'.45 Where a foreign company is regarded to have a POEM in India, its global income is taxable in India at the rates applicable to a foreign company in India (at an approximate effective rate of 41.2 per cent to 43.26 per cent). Accordingly, PE investors must exercise caution when setting up their fund management structures, and in some cases their investments, in Indian companies.

iv Fiduciary duties and liabilities

The Companies Act has for the first time laid down the duties of directors of companies in unequivocal terms in Section 166, and these include:

  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, diligence, and exercise independent judgement;
  4. not to be involved in a situation that may lead to a direct or indirect conflict or possible conflict of interest with the company;
  5. 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
  6. not to assign their office to any other person (such an assignment, if made, shall be void).

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. To safeguard their interest and avoid undue liability, it is advisable that directors attend meetings regularly and adopt a precautionary approach, including taking the following steps:

  1. be inquisitive, peruse agendas for unusual items and seek additional information in writing, if necessary;
  2. ensure that disagreements or dissenting views are recorded in the minutes;
  3. act honestly (with reasonable justifications) and report concerns about unethical behaviour, actual or suspected fraud or violation of the company's code of conduct or ethics policy;
  4. seek professional advice, engage external agencies, if the situation demands it;
  5. regularly provide requisite disclosures of interests or conflicts, consider excusing oneself from participation in proceedings in cases of conflict; and
  6. include indemnity provisions in the letter of appointment and seek directors and officers liability insurance from the company to protect against malicious actions.

PE investors, as shareholders in target companies, do 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). The inter se contractual rights between shareholders and the company shall be governed by the respective shareholders' agreements. However, in a control deal, for certain regulatory purposes a majority investor may be viewed as a promoter.


i Recent deal activity

With M&A and PE activity crossing the US$100 billion mark in 1,640 transactions, 2018 was a watershed year for dealmaking in India.

According to EY, most of the sectors recorded significant increases in value invested, with 11 sectors recording over US$1 billion in investments, compared to seven such sectors in 2017. Financial services remained the most busy, with 141 deals receiving US$7.5 billion (a 6 per cent increase over 2017), followed by the real estate sector receiving US$4.5 billion across 49 deals (a 10 per cent decline compared to 2017) and e-commerce witnessing 83 deals, worth US$4.3 billion (a 9 per cent decline compared to 2017).46 Other key sectors seeing investments included industrial products (US$1.6 billion across 21 deals compared to US$62 million across six deals in 2017), food and agriculture (US$1.8 billion in 45 deals compared to US$364 million across 47 deals in 2017), retail and consumer products (US$1.9 billion across 41 deals against US$678 million across 36 deals in 2017) and education (US$843 million across 38 deals in 2018 versus US$253 million across 20 deals in 2017).47

PE investments (other than real estate and infrastructure)

The largest PE investment deal during the year saw Singapore's sovereign fund GIC, private equity giant KKR, PremjiInvest and Canadian pension fund OMERS investing US$1.7 billion in HDFC Ltd for a 3 per cent stake.48 In another staggering PE deal, PE giant Warburg Pincus along with five major global investors, including Temasek, Singtel and SoftBank, invested US$1.25 billion in Bharti Airtel's Africa unit.

UPL Corporation's US$4.2 billion acquisition of US-based Arysta LifeScience was in turn given a shot in the arm by a US$1.2 billion investment by Abu Dhabi Investment Group and TPG in UPL Corporation. Japanese investment giant Softbank remained bullish on the growth story of India's IT and IT enabled services sector and reinforced this belief by leading a US$1 billion investment in budget hospitality chain Oyo. South Africa's Naspers also placed big bets on Indian tech start-ups, and in back-to-back deals led a US$1 billion investment in food-tech 'unicorn' Swiggy and, along with CPPIB and General Atlantic, a US$450 million funding round in edtech firm Byju's.

On the basis of EY's 'PE/VC Annual Roundup – 2018', the following were the top PE investments (excluding infrastructure and real estate) in the past year.49

Company PE investor Sector Stage US$ (millions) Stake
HDFC GIC, KKR, Premjiinvest, OMERS and others Financial services PIPE 1,731 3%
Airtel Africa Ltd Warburg Pincus, Temasek, SingTel Innov8, SoftBank Telecom Growth capital 1,250 28%
UPL Corporation Ltd Abu Dhabi Investment Council, TPG Food and agriculture Growth capital 1,200 22%
Oravel Stays Pvt Ltd Lightspeed Venture, Sequoia Capital, SoftBank and others E-commerce Start-up or early stage 1,000 N/A
Bundl Technologies Pvt Ltd DST Global, Naspers, Tencent Hillhouse Capital and others E-commerce Start-up or early stage 1,000 N/A
Star Health and Allied Insurance Co. Ltd Madison India, Westbridge Capital Financial services Buyout 1,000 94%
Vivtera Global Business Services LLP Warburg Pincus Technology Start-up or early stage 1,000 N/A
Larsen & Toubro's Electrical and Automation business Temasek (balance stake with Schneider Electric) Industrial products Growth capital 760 35%
Vishal Mega Mart Partners Group, Kedaara Retail and consumer products Buyout 734 100%
Think and Learn Pvt Ltd (Byju) General Atlantic, Naspers and CPPIB Education Growth Capital 540 N/A

Infrastructure and real estate

Driven by a clean-up of the sector on account of the implementation of RERA and demonetisation, the successful receipt of SEBI clearance for a US$600 million REIT by Blackstone-backed Embassy Group, and availability of attractive yield-generating commercial assets, the real estate sector witnessed increased PE interest from domestic and foreign funds. The infrastructure sector made a comeback in 2018, on account of big global SWFs and strategic investors such as Macquarie, CPPID, Brookfield and PSP showing an appetite to acquire good quality assets.

Macquarie bought toll-operate-transfer road assets auctioned by the National Highways Authority of India (NHAI) for US$1.4 billion in one of the largest PE deals of 2018. According to the EY report, the following were the top infrastructure and real estate investments in 2018.50

Company PE investor Stage US$ (millions) Stake
NHAI road assets Macquarie Buyout 1461 N/A
Equinox Business Park Brookfield Buyout 384 N/A
SP Infocity, IT Park Temasek Buyout 353 N/A
Phoenix's Hyderabad office project Xander Buyout 350 100%
Indiabulls Properties Pvt Ltd Blackstone Buyout 346 50%
Hamstede Living Pvt Ltd, a joint venture with Lemontree Warburg Pincus Buyout 291 68%
The Wadhwa Group Piramal Fund Management Credit investment 235 N/A
Three developers' projects Piramal Capital Credit investment 214 N/A
Azure Power India Pvt Ltd CDPQ, IFC, Helion Growth capital 185 N/A
Island Star Mall Developers Pvt Ltd (Phoenix Mills joint venture) CPPIB Growth capital 185 N/A

Limited partners, SWFs, pension funds, PIPE deals and platform plays

India attracted the interest of very deep-pocketed SWFs, traditional limited partners (LPs) and pension funds, and all stepped up their investments in India. SWFs have been a part of over 18 per cent (in terms of value) of the PE investments made in the country between 2014 and 2018. SWFs from across the globe, particularly Canada, Singapore and Abu Dhabi, were a part of some of the largest PE transactions in 2018, contributing around US$6.5 billion to PE deal value for the year. This is over double the value of transactions five years ago. SWFs have been relatively active in the renewables space, having been a part of some of the largest deals in this segment. These funds have not only demonstrated interest in energy, financial services, real estate and infrastructure, but have also jumped on the tech start-up bandwagon, possibly spurring competition with the VC community.51

LPs who traditionally were funds of funds and used to funnel money to PE and VC funds, are increasingly investing directly in companies, often co-investing with the general partners (GPs) backed by them. The key reasons behind the paradigm shift over the past five years include: (1) additional flexibility and choice in investment decisions; (2) the healthy growth potential of the Indian market on account of improvement in ease of doing business and the reform agenda; (3) co-investments help in improving returns, as LPs do not pay any incremental management fee to the GPs; and (4) availability of significant funds for direct investment in India. Direct investment by LPs in the Indian market over the past 10 years adds up to in excess of US$20 billion. GIC, Temasek, International Finance Corporation, Abu Dhabi Investment Authority, CPPIB, Caisse de Dépôt et Placement du Québec (or CDPQ) and PSP are a few of the very deep-pocketed LPs who have invested in Indian markets. The number of PIPE deals has seen strong growth on account of large LPs investing directly in India. The US$1.7 billion investment by GIC, KKR, Premjiinvest, OMERS and others in HDFC in 2018 was one of the biggest PIPE deals backed by LPs. GIC's investment of US$1.4 billion for a 33 per cent stake in the rental arm of DLF is the largest investment in the Indian real estate sector.52

Platform deals allow funds to channel their expertise into specific sectors or focus areas. Consolidation, through platforms to establish dominance in select sectors by merging portfolio companies or through leading sectoral consolidation, has not remained limited to strategic investors but become a dominant theme for PE players. PE funds and SWFs have already entered into agreements with domestic participants to cater to segments such as infrastructure, real estate, renewables, healthcare and, most importantly, stressed assets. Consolidation is key to improving size, scalability and operating models. PE funds such as Warburg Pincus, Goldman Sachs, Everstone, Blackstone and KKR, along with SWFs such as CPPIB, Abu Dhabi Investment Authority and Qatar Investment Authority, have demonstrated tremendous appetite for creating new platforms.53

The investor-friendly modifications to REIT regulations have resulted in global investors like Blackstone, Brookfield and SWFs like GIC Singapore picking up large quality office assets to build up their REIT portfolios. SWFs are investing as anchor investors in platform funds, as well as entering into joint ventures with developers. Phoenix Mills Ltd and CPPIB formed an investment platform of around US$250 million in 2016, while APG-Xander Group has been co-investing US$450 million in the retail segment since 2017. Other selective platform deals across the segment were Abu Dhabi Investment Authority and HDFC Capital platforms in the affordable housing segment for US$450 million and US$550 million respectively, Qatar Investment Authority's co-investment with RMZ Corp Ltd in the commercial segment for US$300 million, and the CPPIB platform with Indospace Ltd in the industrial segment with US$500 million.54

Platforms seem to be the winning PE formula, as demonstrated by KKR backing Radiant Life Care Private Limited's acquisition of Max Healthcare; Warburg Pincus LLP's joint venture with Lemon Tree Hotels Limited to develop student housing and co-living space in India; TPG's belief in Vishal Bali's healthcare venture Asia Healthcare Holdings; Everstone's foods platform following its acquisitions of Modern Foods, through which it snapped up Cookie Man; and Goldman Sachs backing up Sumant Sinha to grow ReNew. Even India's very own sovereign fund, NIIF, has joined forces with DP World for a US$3 billion infrastructure platform for ports, terminals and logistics. Platform play is a symbiotic relationship allowing funds to enter into cherry-picked sectors, to drip-feed capital into platforms as they grow and providing the ability to ride the momentum by scaling up through bolt-on acquisitions or 'roll-ups'.55

PE-backed platforms make a lot of sense in fragmented and capital-heavy sectors such as warehousing, logistics and financial services. Platform plays allow PE firms greater flexibility during deployment and when investing in scattered assets, while also allowing them to club all the investment into a bigger pool, which can be sold to a large PE or strategic investor or flipped into investment trusts such as REITs.56

Distressed-asset space – the IBC and ARCs

The IBC proved to be not only a major factor in improving India's ranking by the World Bank for ease of doing business, but also one of India's most important economic and corporate regulatory reforms. The IBC came at a time when the asset bubble had all but burst and the Indian banking system was collapsing on account of unprecedented amounts of NPAs. The IBC gave teeth to the efforts to reform the banking and financial sector. Stressed assets have spiked the interest of global and domestic players, and the opportunity to strategically capitalise on a supply of NPAs across a number of core sectors at steep discounts has created fierce competition and a dealmaking frenzy in the distressed-asset sector.

With banks stepping up their efforts to clean out their balance sheets of NPAs and bad loans, providing unprecedented supply to asset reconstruction companies (ARCs), PE funds and SWFs are tying up with ARCs and setting up distressed funds to establish their footprint in the distressed space. According to PwC, the number of ARCs in India has increased to 29 from 16 in 2016. After government allowed foreign institutions to have 100 per cent ownership in ARCs, the RBI further sweetened the deal for PE participants by permitting listing of security receipts in December 2017.

Major global PE funds such as Blackstone, KKR, Apollo Global Management and Baring Private Equity Asia have either already set up or announced private credit platforms in India. Blackstone has acquired a controlling stake in distressed-asset buyer International Asset Reconstruction Company Private Limited, investing about US$150 million. KKR has been one of the early movers to tap private credit opportunities in India, acquiring a licence to operate an asset reconstruction company in India in December 2017. AION Capital, which is a joint venture between ICICI Bank and Apollo Global Management, also received the RBI's nod to start an ARC in 2018. Among domestic private credit funds, the Edelweiss group has tied up with CPDQ, and Piramal Enterprises has teamed up with Bain Capital Credit to form India Resurgence Fund, to acquire distressed assets.

According to experts, the size of the market in opportunities in the NPA space is pegged at US$150 billion.57 According to EY data, in anticipation of opportunities to invest at the right valuations, in 2016 and 2017, PE funds launched several dedicated stressed-asset funds, of approximately US$4 billion in aggregate.58 Edelweiss Financial Services Ltd in January 2019 closed its distressed-assets-focused fund EISAF II, raising a corpus of US$1.3 billion,59 clearly demonstrating not only the firepower of PE-backed ARCs, but also the bullish view of PE funds and SWFs in the stressed-asset sector.

The stressed-asset space is in a very nascent stage in India and the first round of the great Indian distressed-asset sale (centred primarily around 12 large cases referred by the RBI under the IBC mechanism) belonged to strategic participants, who emerged on top because of their ability to bid higher, and with a longer time horizon, than PE investors. The US$7.5 billion acquisition of bankrupt Bhushan Steel Ltd by Tata Steel Ltd was not only the second-largest M&A deal of 2018 in India,60 but also the first, and most important, deal that stemmed out of the new IBC. PE-backed ARCs also saw the first action in the IBC space, when AION Capital-backed JSW Steel emerged as successful bidder and clinched bankrupt Monnet Ispat and Energy Limited at 28.75 billion rupees. It is expected that the next cycle of IBC resolutions will see greater participation from PE investors on account of factors such as: (1) PE investors picking up important tricks of the trade in the first phase of stressed-asset sales; (b2) banks being expected to take bigger haircuts; and (3) the stressed-asset market in India maturing after rectification of loopholes and teething problems in the IBC space.

ii Financing

Any form of acquisition financing is limited to offshore sources, which can be problematic given restrictions on the creation of security on Indian assets in favour of non-resident lenders. Indian exchange control regulations prohibit Indian parties from pledging their shares in favour of overseas lenders if end use of the borrowing is for any investment purposes directly or indirectly in India. Indian companies that are foreign owned or controlled are prohibited from raising any debt from the Indian market to make any further downstream investments. In addition, Indian entities are not permitted to raise external commercial borrowings for the purposes of acquisition of shares. In addition, the Companies Act restricts public companies (including those deemed public companies) from providing any direct or indirect security or financial assistance for the acquisition of their own securities.

The less stringently regulated privately placed NCDs (which are outside the purview of the external commercial borrowing regime), which can be secured by Indian assets, have emerged as a form of debt financing for foreign PE investors. NCDs issued to FPIs are no longer mandatorily required to be listed. Indian masala bonds, which may be issued to overseas lenders, have emerged as another option for debt financing. However, PE investors are reluctant to use masala bonds to finance domestic acquisitions, since there is prevailing view that proceeds raised through the issuance of masala bonds cannot be used for capital markets and domestic equity investments.

Given that acquisition financing is virtually non-existent in India, PE investors, for Indian transactions, traditionally deploy their own funds or funds leveraged offshore, which are subsequently brought as equity into India. In auction processes and large transactions, it is common for the seller to request equity commitment letters or financing arrangements to demonstrate the purchaser's ability to perform its obligations.

iii Key terms of control transactions

Control deals and a paradigm shift in India

Investors are showing greater appetite for control deals in India. According to PwC, buyout deals have witnessed an increase in value of nearly 25 per cent compared to 2017. From 2015 onwards there have been several notable control transactions completed by PE investors, showcasing a shift towards acquiring a majority stake in target companies. Over the years, PE investors have garnered considerable insight about the challenges of working with Indian promoters, which include information asymmetry, insufficient middle management talent, limited exposure to best practices, and inadequate reporting and governance structures.61 The the investors are the key driving factors behind this paradigm shift: (1) they want to achieve better corporate governance; (2) there has been a significant increase in the expertise and in capability of PE investors to add value to their portfolio companies operationally; (3) they want better operational control; (4) they want to generate better returns on their investments; (5) they want more control over exit opportunities and processes; (6) there has been an increase in platform deals; (7) there are larger amounts of capital available to invest; and (8) there has been an increase in the number of co-investors with whom to share risk.

Control deals in India are based on two models: (1) the PE investor will either hire a fresh management team with a buyout of a majority stake or the whole company from the existing shareholders; or (2) the PE investor will acquire a majority stake or the whole company, with the pre-existing management team staying on.

According to a report by Alvarez & Marsal, in a typical control deal PE firms utilise the following structure with interventions in the deal cycle in India:

  1. pre-deal: in-depth pre-deal due diligence checks of a target, with a focus on ensuring the presence of a good management team and identification of revenue enhancement opportunities;
  2. early holding period (the initial six to 12 months): setting the direction by acquisition of 'senior talent' and 'aligning objectives with management' and launching value creation initiatives;
  3. middle holding period: performance, execution, monitoring of value creation initiatives and selective intervention on key issues; and
  4. pre-exit: preparing for a successful exit by ensuring alignment with the promoter and company management.62

As an emerging trend, PE firms use the following models for value creation: (1) using a dedicated operating team; (2) hiring industry or functional experts who are proven leaders in the relevant sector with the ability to accelerate value creation; or (3) engaging external consultants.

Key terms and conditions

Key terms in recent control transaction in India include: (1) robust pre-deal due diligence to identify any legal, operational or financial issue; (2) robust business warranties backed by an indemnity from an entity of substance (which can include parent guarantees); (3) use of an escrow mechanism and deferred consideration for post-closing valuation adjustments and indemnities; (4) provision of management upside-sharing incentives to retain and incentivise management; and (5) use of a locked-box mechanism to protect value.


Control transactions suffer from their own challenges in India, including the following:

  1. Restrictions on account of regulations relating to tender offers in listed company acquisitions, and exchange control regulations relating to FDI in sectors having investment caps. Under Indian exchange control regulations, FDI in certain regulated sectors is not permitted beyond a specified limit.
  2. Limited availability of acquisition finance in India.
  3. Provisions involving a non-resident with respect to earn-outs, deposits and escrows must comply with the criteria set out by the RBI. In India, in the case of a transfer of shares between a resident buyer and a non-resident seller, or vice versa, up to 25 per cent of the total consideration can be paid by the buyer on a deferred basis from the date of the agreement or 25 per cent of the total consideration can be furnished as an indemnity for a period not exceeding 18 months from the date of payment of the full consideration.
  4. In exits by way of a secondary sale, the acquirer is likely to seek business warranties and indemnities (backed by an entity of substance) from existing PE investors.
  5. In exits by way of an IPO on the Indian stock exchanges, the controlling PE investor is likely to be classified as a promoter under applicable securities regulations and may be subject to lock-in and other restrictions.

Control deals in 2018

One of the largest control acquisition transactions in 2018 was Walmart Inc agreeing to acquire 77 per cent of Flipkart Pvt Ltd for approximately US$16 billion. Other notable control acquisition transactions in 2018 were Teleperformance SA's 100 per cent buyout of Intelenet Global Services Pvt Ltd from Blackstone for US$1 billion, and Macquarie acquiring tolling rights to selected NHAI road assets for US$1.4 billion.

iv Exits

The year 2018 is expected to mark an inflection point for the PE/VC industry in India, as exits approach the value of investments, demonstrating that the industry is moving towards mature market standards.63 In 2018, PE/VC exits, at US$26 billion, increased by almost 100 per cent compared to 2017, and are almost equal to the value of exits in the previous three years combined, according to the EY report. Compared to open-market exits worth US$6.2 billion across 128 deals in 2017, 2018 saw US$1.7 billion in open-market exits across 56 deals (a 70 per cent drop in terms of value and a drop of over 56 per cent in terms of volume). Similarly, 11 PE-backed IPOs worth US$760 million were witnessed in 2017 compared to 21 PE-backed IPOs worth US$1.8 billion in 2017 (a drop of more than 50 per cent, both in terms of value and volume).64 Buy-backs too were down in 2018, at US$997 million, as against US$1.487 billion in 2017.65

Despite obtaining SEBI's approval to float initial share sales worth over 600 billion rupees in 2018, the year saw only 24 IPOs raising only 309.59 billion rupees. The choppiness in the market is expected to continue until the general election in the first half of 2019. Market experts are of the view that markets may pick up significantly in the second half of 2019 if a stable government is formed following the general election.66

According to PwC, strategic sales accounted for the biggest slice of the exits pie. Secondary sales also gained importance within the PE community, with a 37 per cent spike in value compared to 2017.67

According to EY, strategic exits worth US$18.4 billion across 50 deals in 2018 were the highest in terms of value, and considerably more than the value recorded in 2017. Similarly, US$4 billion worth of secondary exits across 41 deals in 2018 recorded a growth of 21 per cent compared to 2017 figures.

The e-commerce sector, with 10 exits worth US$16.4 billion, led from the front in 2018, followed by technology with 24 exits worth US$1.8 billion, and the financial services sector with 34 exits amounting to US$1.5 billion.

The largest strategic sale in the year was that of Walmart buying a controlling stake in Flipkart for US$16 billion from a clutch of investors, including SoftBank Group Corp and Tiger Global, among others. It was the largest-ever deal in the Indian PE/VC market.

According to EY,68 the following were the top 10 PE/VC exits seen in 2018.

Company Sector Sellers Buyer Exit type US$ (millions) Stake
Flipkart Pvt Ltd E-commerce Softbank, Tiger, Naspers, Accel, IDG and others Walmart Inc Strategic 16,000 77%
Intelenet Global Services Pvt Ltd Technology Blackstone Teleperformance SA Strategic 1,000 100%
Vishal Mega Mart Pvt Ltd Retail and consumer products TPG Capital and others Partners Group, Kedaara Capital Secondary 769 N/A
Star Health and Allied Insurance Co Ltd Healthcare Motilal Oswal, Apis Growth, Sequoia and others Madison India, Westbridge Capital and others Secondary 745 70%
Ostro Energy Pvt Ltd Power and utilities Actis ReNew Power Ventures Strategic 692 N/A
Flipkart Pvt Ltd Ecommerce IDG ventures, employees and others Buyback 350 -
Healthium Medtech Healthcare TPG Growth, CX Partners Apax Partners Secondary 298 100%
SP Infocity, IT Park Real estate, hospitality and construction CPPIB and Shapoorji Pallonji Investment Advisors Temasek Secondary 282 80%
ICICI Lombard General Insurance Company Ltd Financial services Warburg Pincus N/A Open market 282 3%
E-Infochips Ltd Technology GVFL Arrow Electronics Inc Strategic 281 100%


i Relevant regulatory bodies

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

  1. The RBI: the central bank and monetary policy authority of India. It is also the foreign exchange regulator and executive authority for FEMA, responsible for notifying regulations on various aspects of foreign exchange and investment transactions from time to time.
  2. SEBI: India's capital markets regulator, which regulates all stock market activity. SEBI regulations are applicable when PE firms deal with listed securities.
  3. CCI: the competition regulator, which is required to pre-approve all PE transactions that fall above the thresholds prescribed in the Competition Act.
  4. Other sectoral regulators: 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 MCA oversees corporate affairs, the RBI oversees banks and financial services companies, the Insurance Regulatory Development Authority oversees the insurance sector, the Telecom Regulatory Authority of India oversees the telecommunications sector and the Directorate General of Civil Aviation oversees the aviation sector.

ii Key regulatory developments

Press Note 2 of 2018

The DIPP has released Press Note 2 of 2018, which amends Paragraph of the 2017 FDI policy circular regarding e-commerce activities, and will directly impact revenue and business operations of e-commerce giants (including Amazon and Flipkart) in the following manner:

  1. An e-commerce entity providing a market place cannot exercise ownership or control over the inventory. If it does do so, it will transform the business into an inventory-based model.
  2. The inventory of a vendor will be deemed to be controlled by an e-commerce market place entity if more than 25 per cent of purchases of the vendor are from the market place entity or its group companies.
  3. An entity having either an equity participation or control of its inventory by an e-commerce marketplace entity or its group companies will not be permitted to sell its products on the platform run by the market place entity.
  4. Services such as logistics, warehousing, advertising or marketing, payments and financing should be provided by e-commerce market place entities or entities in which the e-commerce marketplace entity has direct or indirect equity participation or common control, to vendors on the platform on an arm's-length basis and in a fair and non-discriminatory manner.
  5. The cashback provided by the group companies of the marketplace entity to buyers should also be fair and non-discriminatory.
  6. The e-commerce entity shall not mandate any seller to sell any product exclusively on its platform.
  7. The e-commerce entity shall furnish, by 30 September of every year, a certificate, along with the statutory auditor's report to the RBI, confirming compliance with the above-mentioned guidelines for the preceding financial year.

The changes came into force with effect from 1 February 2019. The RBI has issued a notification amending FEMA20R to incorporate Press Note 2 of 2018.

Given that e-commerce entities have been at the forefront of driving big-billion investment bets in India by strategic investors, SWFs and PE/VC players, disruptions in business and loss of revenue arising from the Press Note 2 amendments will dampen the view of investors as regards ease of doing business in India.

Revamping of external commercial borrowing structure

The RBI has formulated a new instrument-neutral framework for external commercial borrowings (ECBs) and rupee-denominated bonds to improve the ease of doing business and to strengthen the anti-money laundering and counter-terrorism financing framework. The key changes are as follows:

  1. Merger of tracks: Track I (medium-term ECBs of three to five years) and Track II (long-term ECBs of up to 10 years) have been merged as foreign currency-denominated ECBs. Track III, consisting of NBFCs and microfinance institutions as eligible borrowers, has been merged with rupee-denominated borrowings as Indian rupee-denominated ECBs. Thus, the extant four-tier structure has been replaced by a two-tier structure.
  2. Eligible borrowers: the list of eligible borrowers has been expanded to include all entities that are eligible to receive FDI, including port trusts, units in SEZs, SIDBI, EXIM Bank, registered entities engaged in microfinance activities, societies or trusts or cooperatives; non-governmental organisations can also borrow under the new framework.
  3. Recognised lenders: thhese have been expanded to include any entity that is a resident of a country that is Financial Action Task Force or International Organisation of Securities Commissions compliant, multilateral and regional financial institutions, and individuals and foreign branches or subsidiaries of Indian banks.
  4. The minimum average maturity period has been kept at three years for all ECBs irrespective of the amount of borrowing, unless the ECB is raised from a foreign equity holder and utilised for working capital, general corporate purposes or repayment of rupee loans for which the maturity period will be five years. Manufacturing companies have been given a special dispensation to raise up to US$50 million per financial year with a maturity period of one year.
  5. ECBs up to US$750 million or equivalent per financial year are permitted under the automatic route.

Amendment to deposit rules

The Ministry of Corporate Affairs (MCA) has amended the Companies (Acceptance of Deposits) Rules 2014 to exclude any amount received by a company from REITs, AIFs, domestic VCFs, infrastructure investment funds and mutual funds registered with SEBI from the purview of 'deposit' under Rule 2(1)(c)(xviii) of these rules.

SEBI (Prohibition of Insider Trading) (Amendment) Regulations 2018

The SEBI (Prohibition of Insider Trading) (Amendment) Regulations 2018 (the Insider Trading Amendment Regulations) will come into effect on 1 April 2019. The Insider Trading Amendment Regulations will have a significant impact on the manner in which listed companies and intermediaries navigate the legal framework for market conduct. The key changes include: (1) the definition of an insider has been widened; (2) immediate relatives will be presumed to be connected persons, with provision for a right to challenge this presumption; (3) the definition of unpublished price-sensitive information (UPSI) has been strengthened by providing a test to identify price-sensitive information, aligning it with listing agreements and providing a platform of disclosure; and (4) the intention to permit access to UPSI though due-diligence processes, with appropriate safeguards (this provision will make it easier for private equity and strategic investors to access UPSI during their due diligence checks), with UPSI having to be disclosed at least two days before trading.

Long-term capital gains tax

Exemption from long-term capital gains (LTCG) tax has been disallowed for any income arising from transfer of long-term capital assets, including an equity share in a company or a unit of an equity oriented fund or a unit of a business trust, on or after 1 April 2018. This means that any transfer carried out after 1 April 2018 resulting in LTCG in excess of 100,000 rupees will attract tax at the rate of 10 per cent.

Revamping of stressed-asset resolution

On 12 February 2018, the RBI completely refurbished the guidelines on the resolution of stressed assets, including discontinuation of the framework for the joint lender's forum; the RBI has also withdrawn, with immediate effect, all its existing instructions in relation to the resolution of stressed assets, including the 'Corporate Debt Restructuring' and 'Strategic Debt Restructuring' schemes and the 'Scheme for Sustainable Structuring of Stressed Assets'. Under the new framework, the lenders shall formulate a resolution plan as soon as there is a default in a borrower entity's account with any lender. Strict timelines have been introduced, with low default thresholds, resulting in an increase in cases going under the IBC, as banks and promoters will have limited time to find a sustainable solution. The threat of the IBC will act as a deterrent for all stakeholders to find the right solution within the stipulated time.

Cross-border merger regulations

The RBI notified the Foreign Exchange Management (Cross-Border Merger) Regulations, 2018 (the Merger Regulations) on 20 March 2018, permitting both outbound and inbound mergers with foreign companies. The Merger Regulations prohibit any person resident in India from acquiring or transferring any security or debt or asset outside India and any person resident outside India from acquiring or transferring any security or debt or asset in India on account of cross-border mergers, except in accordance with the FEMA, or rules or regulations thereunder or with the general or special permission of the RBI.

Amendment to SEBI delisting regulations

Despite global trends, delisting transactions were rarely initiated in India. This is largely because of the prohibitive pricing involved, given that the reverse book building (RBB) process is so susceptible to manipulation. To address some of these concerns, SEBI notified the SEBI (Delisting of Equity Shares) (Second Amendment) Regulations 2018 on 14 November 2018. The aim of the amendment is to plug loopholes in the delisting process considering the interests of the promoters or acquirers and public shareholders by including key changes, such as: (1) inclusion of a provision for the acquirer or promoter to make a counter-offer if the price discovered under the RBB process is not acceptable to the acquirer or promoter; and (2) clarification as to the reference date for computing the floor price.

SEBI guidelines on fundraising by listed (large) entities from debt markets

To put into operation the Union budget announcement for 2018–2019 that large corporate entities (LCs) are to be mandated to meet one quarter of their financing needs from the debt market, SEBI has issued detailed guidelines on 'Fund raising by issuance of Debt Securities by Large Entities'. An LC shall raise not less than 25 per cent of its incremental borrowings, during the financial year subsequent to the financial year in which it is identified as an LC, by way of issuance of debt securities.

Establishment of the National Financial Reporting Authority

The National Financial Reporting Authority (NFRA), an independent regulator for the auditing profession under Section 132 of the Companies Act, has been established. The jurisdiction of the NFRA will extend to listed companies and large unlisted public companies, with predetermined thresholds. The central government may also refer other entities for investigation where public interest is involved. The MCA has also notified the National Financial Reporting Authority Rules 2018.

Master directions on fit-and-proper criteria for sponsors of ARCs

The RBI issued the Fit and Proper Criteria for Sponsors – Asset Reconstruction Companies (Reserve Bank) Directions 2018, which shall apply to existing and proposed sponsors of ARCs. In determining whether the sponsor is fit and proper, the RBI is required to take into account all relevant factors, including the sponsor's integrity, reputation, track record for compliance with law and for operating a business in a manner consistent with good governance, and similar assessments of individuals and entities associated with the sponsor, sources of funds for acquisitions and the ability to access financial markets, and shareholding agreements and their impact on the control and management of the ARC.

Amendments to the IBC

To make the IBC process more robust and effective, the following key amendments were made to the IBC in 2018:

  1. Homebuyers have been recognised as financial creditors, enabling them to invoke Section 7 of the IBC.
  2. Promoters of micro, small and medium-sized enterprises are not disqualified from bidding for their enterprises under the corporate insolvency resolution process, unless they are wilful defaulters.
  3. An application under the IBC may be withdrawn only with the approval of the committee of creditors with 90 per cent of the voting share, and only before the publication of notice inviting expressions of interest.
  4. The voting threshold has been reduced from 75 per cent to 66 per cent for all major decisions. The voting threshold for routine decisions has been reduced to 51 per cent.


It would appear that 2018 was a blockbuster year for deal-making in India, with M&A value exceeding an unprecedented US$100 billion mark. Strong and stable government pushed legal and policy reforms towards ease of doing business in India, reinforcing the belief in India of PE/VC investors, SWFs and deep-pocketed strategic investors. India will be entering 2019 with the benefit of strong tailwinds, and the following factors will have a major impact on investing in India throughout the coming year:

  1. General election 2019: markets saw extreme volatility and cautiousness in the final quarter of 2018, which is expected to continue until the conclusion of the general election in the first half of 2019. Transactions are expected to be assessed aggressively with execution possibly being pushed to the second half of 2019. A stable government with a full majority may go a long way in driving up the confidence of investors in Indian markets.
  2. Global environment: uncertainty and volatility triggered by major political events (United States–China trade war, Brexit, meltdown of economies such as Turkey's), hikes in interest rates by the US Federal Reserve, increases in oil prices, a strong dollar against other currencies and the imposition of new sanctions and trade barriers by nations may keep global investors away from emerging markets in general.
  3. Investor outlook: fundamentals for investment in India will remain strong in the long run, with key drivers such as major reforms aimed at cleaning up the economy and improving ease of doing business in India; record levels of dry powder at the disposal of Asia-focused private equity funds; the race for dominance in the e-commerce industry; renewed interest in India's growth story from very deep-pocketed long-term institutional investors, SWFs and strategic buyers; and the availability of high-quality assets on the auction block.
  4. Primary triggers: triggers such as consolidation to strengthen market position; financial deleveraging; monetising of non-core assets; entering new geographies; the faster pace of insolvency proceedings; the great Indian distressed-asset sale supplying assets at attractive valuations across a number of core areas; the increased appetite of investors, SWFs and strategic buyers for control deals, co-investment deals and platform deals are all expected to keep on driving dealmaking activity in India in 2019. Technology, e-commerce, real estate, infrastructure, stressed assets, healthcare, financial services, energy, telecoms and manufacturing are sectors that are expected to continue receiving interest from investors in 2019.

Overall, the deal triggers seen in 2018 are expected to continue to drive both deal values and volumes in 2019.


1 Raghubir Menon is a partner and Taranjeet Singh is a senior associate at Shardul Amarchand Mangaldas & Co.

7 Ibid.

11 See footnote 8.

13 Index-wise, the barometer 30-scrip Sensitive Index (Sensex) of the S&P BSE augmented by 2,019.89 points, or 5.93 per cent, to close at 36,068.33 points, up from last year's close at 34,056.83 points. On the National Stock Exchange (NSE), the broader Nifty 50 surged by 329.2 points, or 3.2 per cent, to 10,862.55 points, up from its 2017 close of 10,530.70 points. See footnote 8.

14 See footnote 8.

17 See footnote 2.

18 Ibid.

19 Ibid.

20 Ibid.

21 Ibid.

23 Ibid.

24 Ibid.

25 Ibid.

26 Ibid.

33 See footnote 31.

35 See footnote 29.

36 Ibid.

38 SEBI has been proactive in dealing with management incentive agreement issues by either issuing: (1) show-cause notices to listed entities for violations of corporate governance and disclosure-related norms for failing to report incentive fee agreements (as in the case of PVR Limited in November 2016); or (2) informal guidance on a variety of issues, including applicability of amendment to the SEBI Listing Regulations to management incentive agreements entered into with eligible employees of unlisted subsidiaries of listed entities (as in the case of Mphasis), and requirement of approval in cases of revival of a dormant incentive plan upon listing of an entity (as in the case of PNB Housing Finance Limited).

39 See footnote 37.

42 Ibid.

43 Ibid.

44 Circular No. 6 of 2017 dated 24 January 2017 issued by the Central Board of Direct Taxes.

45 Ibid.

46 See footnote 22.

47 Ibid.

48 See footnote 27.

49 See footnote 22.

50 Ibid.

51 See footnote 2.

56 See footnote 53.

60 See footnote 2.

62 Ibid.

64 See footnote 22.

67 See footnote 2.

68 See footnote 22.