After a record-breaking 2018, global geopolitical tensions, trade wars, a rise in crude oil prices, general elections in India, public market woes, a sluggish capital market, liquidity crisis, slowing consumption growth in core sectors and stress in the banking and lending space made 2019 a challenging year for investments in India. Where all previous records were surpassed in 2018 with deal activity in India crossing the US$120 billion mark,2 deal activity slipped back to more normal levels in 2019 with deals worth US$73 billion.3 One of the key reasons for the slide was lack of big-ticket billion-dollar bets. However, despite the challenges, 2019 was the second-best year for deal activity in India, surpassing years prior to 2018.4

2019 saw a watershed divide in the contours of dealmaking in India, with private equity (PE) and venture capital (VC) funding showing an increase compared to 2018 and mergers and acquisitions (M&A) activity showing a major decline.5 According to provisional data from VCCEdge, the M&A space recorded deals worth US$34 billion in 2019, dropping from an all-time high of US$82 billion in 2018.6 However, the total value would have been higher had a US$15 billion deal been completed between Reliance Industries Limited and Saudi Aramco. On the other hand, PE dealmaking carried its buoyancy from 2018 into 2019 and saw investments worth US$37 billion across 861 deals.7

Sustained business reforms over the past several years have helped India in further improving its ranking by 14 points to reach 63rd position in the World Bank's 'Doing Business 2020' report. Further, India earned a place among the world's top 10 improvers for the third consecutive year.8 The government continued the trend of long-due legal and policy reforms in 2019. In September 2019, to spur economic growth, attract foreign investment, encourage job creation and support the domestic manufacturing sector, the government announced the single largest reduction in India's tax rate in almost three decades.9

Despite the challenges faced by the Indian economy in 2019, 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 2019

With fewer billion-dollar mega deals, slowing consumption growth, a cautious approach of investors and distress in the banking and financial sectors led to a decline in overall deal activity in India in 2019. However, despite these factors, India appears to be resilient and has demonstrated signs of a stable deals landscape.10

Similar to 2018, consolidation and deleveraging, the race for dominance in industry, 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, continued to act as key drivers for dealmaking in India in 2019. 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.

In terms of sectors, the technology sector continued to attract investors and there was an increased interest in the infrastructure sector.11 Due to the introduction of the amended Insolvency and Bankruptcy Code and the continuing banking sector and non-banking financial company (NBFC) crisis, the Indian stressed assets market continued to present prime assets at attractive valuations across a number of core areas for PE investors, SWFs and strategic buyers with an appetite for control deals, co-investment deals and platform deals.12

Buyouts remained on an upward trajectory due to increase in investor appetite for control deals. The success story of the Blackstone-backed first real estate investment trust (REIT)13 in India, Embassy Office Parks REIT, paved the way for investors to access a new source of capital in the country. Platform deals based on the build-and-buy approach of funds to channel their expertise into specific sectors or focus areas continued as one of the key themes of dealmaking in 2019. PE funds such as Warburg Pincus, Goldman Sachs, Everstone, Blackstone and KKR, along with SWFs such as GIC, CPPIB, the Abu Dhabi Investment Authority and the Qatar Investment Authority, continued to demonstrate appetite for creating new platforms.

2019 saw global PE and M&A investors continuing to gravitate towards India and the investment values continued to surge.

M&A dealmaking in India

The M&A space saw a major decline and, as per provisional data from VCCEdge, M&A dealmaking activity recorded deals worth US$34 billion from an all-time high of US$82 billion in 2018.14 Further, 2019 saw a sharp decline in billion-dollar-plus mega deals and the number of such big-ticket deals fell to only five compared to 19 in 2018.

Sectoral spread for M&A investments in 2019 also narrowed compared with 2018, with top deals ranging across materials (metal and mining), finance, industrials and technology compared with the internet, telecoms, petrochemicals, metals, renewable energy, IT, consumer goods and engineering sectors in 2018.15 The top six M&A deals struck during 2019 were as follows.16

Target Buyer Deal type

Deal value (US$ billions)

Essar Steel ArcelorMittal, Nippon Steel Inbound


Gruh Finance Bandhan Bank Domestic (merger)


Bhushan Power & Steel JSW Steel Domestic (deal yet to be completed)


Adani Gas Ltd Total Holding SAS Inbound


Mindtree Larsen & Toubro Domestic


Sadbhav Infrastructure Road Projects IndInfravit Trust Domestic (deal backed by CPPIB)


In addition, another mega deal, the merger of Indiabulls Housing Finance Limited with Lakshmi Vilas Bank Ltd for US$4.1 billion, was not completed due to the Reserve Bank of India (RBI) not granting permission.

However, the total value would have been higher had a US$15 billion deal between Reliance Industries Limited and Saudi Aramco been completed, which has not happened yet due to lack of government permissions. Domestic buyers and sellers continued to dominate the M&A dealmaking space, accounting for more than half of the deals. Inbound deals remained flat in 2019 and saw total value plunge to US$12 billion from US$22.5 billion in 2018. Overseas acquisitions by Indian companies also declined by half to nearly US$2 billion in 2019.17

PE dealmaking in India

2019 saw record PE dealmaking activity in India with investments worth US$37 billion across 861 deals.18 Consolidation to achieve size, scalability, new product portfolios and better operating models catapulted deal activity upward in the PE space, accounting for around nearly 50 per cent of total deal value in India in 2019.

The downward trend in deal volume continued in 2019; however, deal values surged upward in 2019 indicating an increase in the average ticket size. PE dealmaking saw a minor decline from seven big-ticket deals in 2018 to five in 2019.

2019 continued to report an increase 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. Control became a key element in most transactions on account of concerns around transparency and governance-related issues. Control transactions eliminated trust deficit among investors and provided them with better control over operational and governance issues and the ability to maximise returns. Buyout activities broke all records in 2019 and surpassed 2018 by 30 per cent in value. Consolidation, secondaries and deleveraging also contributed towards buyouts and remain key drivers for PE activity.19

PE investments in 2019 by stage

As per a PricewaterhouseCoopers (PwC) report, buyouts and control deals were the major contributors to PE dealmaking in India and accounted for 35 per cent of total PE deals, followed by late-stage investments, which accounted for 26 per cent, growth stage investment, which accounted for 23 per cent, public investment in private equity (PIPE) deals, which accounted for 9 per cent, and early and other deals, which accounted for 7 per cent. Keeping up with the trend of 2018, buyouts and control deals remained the mantra of PE investors in 2019.20


Compared with 2018, 2019 saw a sharp decline in PE exits in terms of value and volume, recording 185 exits worth a little over US$9.5 billion. This was a 63 per cent decline in terms of value compared with 2018. As per the PwC report, public market sales accounted for the largest share of the exit value in 2019, up 45 per cent compared with 2018.21

Indian investment market debuts

In addition to record investment in the start-up sector, 2019 also saw debuts by the following international investors in India (mostly making bets on the Indian start-up ecosystem):

  1. Danone Manifesto Ventures, the venture investment arm of Danone Manifesto located in New York and Paris made its debut in India in 2019 with investments in the Mumbai-based fresh fast-moving consumer goods products company Drums Food International;
  2. private equity firm Apis Partners entered the Indian market with the commitment to invest in Indian NBFC, L&T Infra Debt Fund Ltd;
  3. Hatcher+, a data-driven VC firm that uses artificial intelligence and machine learning-based technologies to identify early stage opportunities in partnership with leading accelerators and investors worldwide invested an undisclosed amount of funding in Thane-based NapNap, creators of portable vibrating mats for children; and
  4. Ping's Global Voyager Fund marked its venture into India by leading a Series D funding round of US$70 million in Indian automobile classifieds platform CarDekho.22

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.23 A company can award shares subject to performance or time-based conditions.

An EY survey shows that Indian organisations still prefer the conventional ESOP,24 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. 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.25

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.26

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.27 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.28

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.29

In October 2016, the Securities and Exchange Board of India (SEBI), 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. In January 2017, SEBI 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.30

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.31

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 happened through strategic sales, which grew sevenfold from 2017, while open-market transactions fell by more than half in 2018.32

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 mark-ups 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 Insolvency Code. 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 International Chamber of Commerce, the London Court of International Arbitration and the Singapore International Arbitration Centre) 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 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 VC fund, alternative investment fund (AIF), REIT or infrastructure investment trust (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 FDI consolidated policy (the FDI Policy), which is issued every year by the DPIIT of the Ministry of Commerce and Industry, and the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (the Non-Debt Rules). The Non-Debt Rules supersede the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations 2017. While the changes introduced in the Non-Debt Rules were originally not substantial, many changes have been pushed through individual amendments since its notification. Under the Non-Debt Rules, in line with the erstwhile regulations, any investment of 10 per cent or more of the post-issue paid-up equity capital on a fully diluted basis of a listed company will be reclassified as an FDI. In addition, the Non-Debt Rules stipulate that the pricing of convertible equity instruments is to be determined upfront and the price at the time of conversion should not be lower than the fair value at the time of issue of such instruments.

The Non-Debt Rules have been aligned with the SEBI (Foreign Portfolio Investors) Regulations 2019 (the FPI Regulations) to provide that a foreign portfolio investor (FPI) may purchase or sell equity instruments of an Indian company that is listed or to be listed subject to the individual limit of 10 per cent (for each FPI or an investor group) of the total paid-up equity capital on a fully diluted basis or the paid-up value of each series of debentures, preference shares or share warrants issued by an Indian company. The aggregate holdings of all FPIs put together (including any other permitted direct and indirect foreign investments in the Indian company) are subject to a cap of 24 per cent of the paid-up equity capital on a fully diluted basis or the paid-up value of each series of debentures, preference shares or share warrants. Such aggregate limit of 24 per cent can be increased by the concerned Indian company to up to the sectoral cap or statutory ceiling (as applicable) by way of a board resolution and a shareholders' resolution (passed by 75 per cent of the shareholders).

Previously, any investment in excess of the sectoral caps or not in compliance with the sectoral conditions required prior approval of 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 that would previously have been taken 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 (SOP) to be followed by investors and various government departments to approve foreign investment proposals. As a part of its initiative to ease business further, the SOP also sets out a time limit of four to six weeks within which different government departments are required to respond to a proposal. More than two years on, there is very little information in the public domain about the proposals processed by the SOP.

FPI 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 prior registration with a designated depository participant (DDP) as an FPI under the FPI Regulations. The FPI Regulations supersede the erstwhile SEBI (Foreign Portfolio Investors) Regulations 2014 (the 2014 Regulations). The process of registration is fairly simple and ordinarily it does not take more than 30 days to obtain the certificate.

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, SEBI, the security watchdog, introduced the regulations on FPIs. In December 2017, SEBI, with the intention of providing ease of access to FPIs, approved certain changes to the FPI Regulations, which included: (1) rationalisation of fit-and-proper criteria for FPIs; (2) simplification of the broad-based requirement for FPIs; (3) discontinuation of requirements for seeking prior approval from SEBI in the event of a change of local custodian or FPI DDP; and (4) permitting reliance on due diligence carried out by the erstwhile DDP at the time of the change of custodian or FPI DDP. In addition, with a view to improve ease of doing business in India, a common application form has been introduced for registration, the opening of a demat account and the issue of a permanent account number for the FPIs.

In 2019, SEBI introduced the FPI Regulations, with certain important changes from the 2014 Regulations, including:

  1. the re-categorisation of FPIs into two FPI categories (rather than the three FPI categories under the 2014 Regulations). This will be done by the National Securities Depository Limited in consultation with the respective FPI DDPs;
  2. for investment in securities in India by offshore funds floated by an asset management company that has received a no-objection certificate under the SEBI (Mutual Funds) Regulations 1996, registration as an FPI will have to be obtained within 180 days of the date of the FPI Regulations;
  3. the broad-based requirement (where the fund was required to be established by at least 20 investors) for certain categories of FPIs has been done away with;
  4. the concept of opaque structure has now been removed from the FPI Regulations such that the entities that are incorporated as protected cell companies, segregated cell companies or equivalent structures, for ring-fencing of assets and liabilities, can now seek registration as FPIs under the FPI Regulations. Having said that, under the 2014 Regulations, where the identity of the ultimate beneficial owner was accessible, such entities could fall outside the scope of opaque structures and, hence, obtain registration as an FPI. Similarly, while the concept of opaque structures has been removed under the FPI Regulations, FPIs need to mandatorily comply with the requirement of disclosure of beneficial owners to the SEBI; and
  5. the total investment by a single FPI, including its investor group, must be below 10 per cent of a company's paid-up equity capital on a fully diluted basis. If this threshold is exceeded, the FPI needs to divest the excess holding within five trading days of the date of settlement of trades resulting in the breach. The window of five trading days allows FPIs to avoid any change in the nature of their investments. However, upon failure to divest the excess holding, the entire investment in the company by the FPI (including its investor group) will be treated as an FDI, and the FPI (including its investor group) will be restricted from making further portfolio investments in terms of the FPI Regulations.

The clubbing of investment limits for FPIs is done on the basis of common ownership of more than 50 per cent or on common control. As regards the common-control criteria, clubbing shall not be done for FPIs that are: (1) appropriately regulated public retail funds; (2) public retail funds that are majority owned by appropriately regulated public retail funds on a look-through basis; or (3) public retail funds whose investment managers are appropriately regulated. The term 'control' is understood to include the right to appoint a majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of shareholding or management rights, by shareholders' or voting agreements, or in any other manner.

Under the original FPI regime, Category I FPIs were restricted to those who were residents of a country whose securities market regulator was either a signatory to the International Organization of Securities Commission's Multilateral Memorandum or had a bilateral memorandum of understanding with SEBI. Hence, Category I FPIs were essentially governments and related entities or multilateral agencies and were perceived to be the highest-quality and lowest-risk investors.

Pursuant to the reclassification of FPIs, the entities that have been added to Category I, inter alia, are:

  1. pension funds and university funds;
  2. appropriately regulated entities, such as insurance or reinsurance entities, banks, asset management companies, investment managers, investment advisers, portfolio managers, broker dealers and swap dealers;
  3. appropriately regulated funds from Financial Action Task Force member countries;
  4. unregulated funds whose investment manager is appropriately regulated and registered as a Category I FPI; and
  5. university-related endowments of universities that have been in existence for more than five years.

In addition, the Category II FPI is the new residual category, which includes all the investors not eligible under Category I, such as individuals, appropriately regulated funds not eligible as Category I FPIs and unregulated funds in the form of limited partnerships and trusts. An applicant incorporated or established in an international financial services centre (IFSC) is deemed to be appropriately regulated under the FPI Regulations.

Market participants have welcomed all these changes as pragmatic steps by SEBI to enhance the flow of institutional capital into India.

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 such entities into listed Indian companies is also permitted subject to certain limits or conditions. Investment through the FVCI route requires prior registration with SEBI under SEBI (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 or the lock-in period prescribed by the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018.

Pursuant to the FVCI Regulations, FVCIs must register with SEBI before making investments. The process typically takes 20 to 30 days from the date of application. To promote job creation and innovation, the RBI allowed for 100 per cent FVCI investment in start-ups. In this regard, the Non-Debt Rules also allow FVCIs to purchase equity or equity-linked instruments or debt instruments issued by an Indian start-up, irrespective of the sector in which it is engaged subject to compliance with the sector-specific conditions (as applicable). Previously, only investment in the following sectors did not require prior approval of the securities regulator:

  1. biotechnology;
  2. information technology;
  3. nanotechnology;
  4. seed research and development;
  5. pharmaceuticals (specifically in terms of discovery of new chemical entities);
  6. dairy;
  7. poultry;
  8. biofuel production;
  9. hotels and convention centres with a seating capacity of over 3,000; and
  10. infrastructure.

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 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.

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.


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. The 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 the 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.

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,33 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'.34 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 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

In 2019, PE investments retained their momentum from 2018 and recorded deals worth US$36 billion as at 30 November 2019, an 11 per cent decline compared with 2018.35 GIC, Brookfield, Blackstone, Baring PE and SoftBank were the key PE investors by deal value in 2019. As per a VCCircle report, each of these firms committed at least US$1 billion for investment in India in 2019.36 The deal volume continued its downward trend in 2019, with fewer billion-dollar deals. PE witnessed a minor decline from seven mega billion-dollar deals in 2018 to five billion-dollar deals in 2019. Despite the slowdown in deal volume, deal value saw an upward trajectory, indicating an increase in the average ticket size.37

Infrastructure-related industries accounted for 40 per cent of PE investments in 2019, attracting US$14.7 billion across 74 deals compared with a 20 per cent share in 2018, attracting US$7.8 billion across 83 deals. Energy sector deals, led by Brookfield's US$1.9 billion investment in Reliance Pipeline Infra, accounted for 26 investments worth US$4.9 billion in 2019, compared with 31 transactions worth US$3.2 billion in 2018. The telecoms sector witnessed India's biggest ever PE deal with Brookfield agreeing to invest almost US$3.7 billion in a special purpose vehicle (SPV) that will acquire a controlling stake in Reliance Jio's tower infrastructure company.38 In another notable deal, GIC invested US$715 million in telecoms giant Bharti Airtel Limited. 2019 also witnessed investment of more than US$1 billion each in the airport development arms of the Hyderabad-based GMR and GVK groups.

Driven by a clean-up of the sector on account of the implementation of the Real Estate (Regulation and Development) Act 2016 and demonetisation, the successful listing of India's first REIT, Embassy Office Parks REIT, by Blackstone and the Embassy group, and the availability of attractive yield-generating commercial assets due to the liquidity crunch faced by real estate developers, the real estate sector witnessed increased PE interest from domestic and foreign funds. Blackstone, Brookfield and GIC continued acquisition of real estate projects, including new commercial projects.

Notable deals included Brookfield acquiring Hotel Leela Venture Limited for US$556 million; GIC setting up a portfolio of US$600 million with Indian Hotel Company Limited to acquire hotels in India; and Blackstone's acquisitions of Coffee Day's tech park for approximately US$400 million, Indiabull's office properties for approximately US$624 million and Radius Group's One BKC for US$357 million.

Topped by a new US$1 billion investment in Alibaba-backed fintech leader PayTM, IT and IT-enabled companies accounted for 32 per cent of PE investments in 2019, attracting US$11.8 billion across 493 deals compared with US$10.9 billion across 482 deals in 2018.39 2019 witnessed the advent of nine new 'unicorns', namely Delhivery, Dream11, BigBasket, Rivigo, Druva Software, Icertis, Citius Tech, Ola Electric and Lenskart.

PwC report that buyout activity in 2019 broke all previous records and surpassed deals by 30 per cent in terms of value. Control transactions have become a key driver for dealmaking by PE investors in India to extract maximum value. Blackstone PE continued with its strategy of focusing on acquiring control in prime assets and acquired controlling stakes in Aadhar Housing and Essel Propack, while Carlyle invested US$653 million in SBI Life Insurance. Keeping up with the trend, Baring PE Asia sealed three technology deals in 2019, acquiring NIIT Technologies for US$872 million, CitiusTech for US$800 million and AGS Health for US$339 million. Advent sealed six deals, largely in the consumer, financial services and healthcare segments, and acquired DFM Foods Ltd, Enamor, Dixcy Textiles Pvt Ltd and Bharat Serums and Vaccines Ltd. General Atlantic put money into Rubicon Research and NoBroker, and topped up its investments in PNB Housing and BYJU'S.40

The top five PE transactions of 2019 by deal value are as follows.41

Company Investor Industry Deal value (US$ billions) Stake (%)
Reliance Tower Infrastructure Trust Brookfield Telecoms 3.7 N/A
Reliance Pipeline Infrastructure India Brookfield Energy 1.9 100
GMR Airports Holding SSG Capital, GIC, others Travel and transport 1.1 44.4
GVK Airport Holdings NIIF, ADIA, PSP Investments Travel and transport 1.1 N/A
PayTM Alibaba, SoftBank Corp and others Technology 1 6.25

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

India continued to attract 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 2019, with involvement in around 24 per cent of PE deals in 2019.42 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, demonstrating their growing risk appetite and possibly spurring competition with the VC community.43

LPs that were traditionally 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 (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 Bank Ltd 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. Continuing the trend in 2019, GIC retained its position as the most active private equity style investor in India and committed between US$2.5 billion and US$3 billion in the infrastructure and real estate sectors.44 GIC invested money in GMR Airports, Bajaj Finance, SBI Life Insurance, Godrej Properties and Endurance Technologies and Greenko Energy Holdings in 2019 and also set up a joint venture with Tata Group's Indian Hotels Company Ltd to acquire hotels in India. GIC also came in as a co-investor alongside Brookfield to acquire Reliance Jio Infocomm Ltd's telecoms towers for US$3.7 billion in India's largest ever PE deal. GIC was also a co-investor with KKR to acquire IndiGrid Trust sponsor Sterlite Investment Managers for US$400 million.45 In one of the biggest PIPE deals, GIC acquired an approximate 4 per cent stake in Bharti Airtel Limited for US$726 million.

Other notable PIPE and SWF deals of 2019 included co-investment of US$817 million by CPPIB and Carlyle in SBI Life Insurance; CDPQ acquiring three road assets of Essel Infraprojects Limited for US$500 million and investing US$247 million in Piramal Enterprises Limited; CPPIB investing US$200 million in L&T IndInfravit Trust; and Invesco Oppenheimer Developing Markets Fund investing US$613 million in Zee Entertainment Enterprises Limited.46

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 GIC, CPPIB, Abu Dhabi Investment Authority and Qatar Investment Authority, have demonstrated tremendous appetite for creating new platforms.47

The investor-friendly modifications to REIT regulations have resulted in global investors such as Blackstone and Brookfield, and SWFs such as GIC Singapore picking up large quality office assets to build up their REIT portfolios. 2019 saw the launch of India's first REIT, Embassy Office Parks REIT, by Blackstone and the Embassy group. 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.48

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, National Investments and Infrastructure 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'.49

In 2019, Singapore's Temasek and Sweden's EQT set up a renewable energy platform, O2 Power, in India, with an equity capital commitment of US$500, which will build solar and wind farms with total capacity of 4 gigawatts.50 Other investments saw CPPIB committing US$600 million in NIIF and Blackstone setting up a warehousing platform with Hiranandani Group.

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 and InvITs.51

Distressed-asset space – the Insolvency and Bankruptcy Code 2016

The Insolvency and Bankruptcy Code 2016 (the Insolvency Code) 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 Insolvency Code 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 non-performing assets (NPAs). The Insolvency Code 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 CDPQ, 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.52 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. In January 2019, Edelweiss Financial Services Ltd closed its distressed-assets-focused fund EISAF II, raising a corpus of US$1.3 billion,53 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 Insolvency Code mechanism) belonged to strategic participants, which emerged on top because of their ability to bid higher, and with a longer time horizon, than PE investors. As at December 2019, seven of the infamous dirty dozen cases amounting to US$45 billion have already been resolved.54

In the three years to November 2019, the Insolvency Code recorded resolution of an aggregate 167 cases out of which 81 cases were resolved during 2019 itself. In terms of recovery, the Insolvency Code helped recover 1.57 trillion rupees of unpaid bank loans and money due to vendors, amounting to 42 per cent of the total amount due. These figures comprise cases that were actually brought before the adjudicating authorities. Considering the number of successful resolutions under the Insolvency Code prior to their admission by the adjudicating authority, the Insolvency Code might have helped the recovery of about 5 trillion rupees of unpaid dues. In 2019, the Insolvency Code saw one of the biggest resolutions, and one of the largest FDI inflows, involving an amount of 420 billion rupees for the acquisition of Essar Steel by ArcelorMittal.55

With debt-laden groups being forced to sell their prized assets to deleverage their books and to avoid being dragged to insolvency courts by their creditors, Blackstone Group Inc, Warburg Pincus and several other PE firms in India took advantage of the situation and snapped up some attractive assets. While Blackstone acquired assets such as Aadhar Housing, Essel Propack and Coffee Day technology office park, Warburg Pincus acquired an 80 per cent stake in the education loan arm of financial services group Wadhawan Global Capital Ltd.

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.56 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.57

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; and
  5. in exits by way of an initial public offering (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 2019

Control has become a key element and deal driver in most transactions. Continuing with the trend of 2018, dealmaking in 2019 also saw a fair share of control deals and buyouts, which constituted 35 per cent of PE investments (excluding real estate).58 One of the largest control deals was Brookfield's acquisition of 90 per cent of RIL's East West Pipeline for approximately US$1.888 billion. Certain other buyouts included Brookfield acquiring a 100 per cent stake in Hotel Leela Venture Limited for US$572 million; CDPQ acquiring a 100 per cent stake in Essel Infraprojects Limited (three road assets) for US$500 million; Baring Asia Private Equity acquiring a controlling stake in AGS Health Private Limited for US$339 million and an 80 per cent stake in Citius tech Healthcare Technology Private Limited for US$800 million; and Blackstone acquiring a controlling stake in Indiabulls Real Estate's commercial properties for approximately US$624 million, Coffee Day's Global Village Tech Park for approximately US$400 million and a 51 per cent stake in Essel Propack Limited for US$310 million.59

iv Exits

2018 marked an inflection point for the PE/VC industry in India, with exits at US$26 billion, which approached the value of investments, demonstrating that the industry is moving towards mature market standards.60 However, this was on account of a single large strategic sale when Walmart bought a controlling stake in Flipkart for US$16 billion from a clutch of investors, including SoftBank Group Corp and Tiger Global.

Compared with 2018, 2019 saw a sharp decline in PE exits in terms of value and volume, recording 185 exits worth a little over US$9.5 billion. This was a 63 per cent decline in terms of value compared to 2018.61

Public market sales accounted for the largest share of the exit value in 2019, up 45 per cent compared to 2018. Open market transactions accounted for the highest share of the exit value within public market sales, while IPOs witnessed a 67 per cent drop in comparison to 2018. Secondary sales and buy-backs amounted to nearly US$2 billion each.62 The year also saw Lightspeed Venture Partners and Sequoia Capital India allegedly complete their transaction to sell about a 15 per cent stake in Gurugram-based hospitality unicorn OYO to founder Ritesh Agarwal for US$1.5 billion.63 The buy-backs highlight the potential of India entrepreneurs and also help relax concerns around profitable exits within the start-up space.64

2019 saw nearly 150 exit transactions compared with 170 exits in 2018, which included nearly five dozen deals where investors made a complete exit. According to VCCEdge, the following were the top exit deals by PE and VC firms on total deal value and annualised return in 2019.65

Top PE/VC exits by value
Target company Investor Exit amount (US$ millions) Investment amount (US$ millions) Investment year
ICICI Lombard Warburg Pincus 508 260 2017
Cancer Treatment Services International Asia Healthcare Holdings (TPG) 277 79 2016
HDFC KKR 263 224 2018
DLF GIC 243 182 2011
Mindtree Nalanda Capital* 240 28 2009
* Estimates
Top PE/VC exits by internal rate of return (IRR)
Target company Investor Exit amount (US$ millions) IRR (%)** Investment year
Hindustan Foods Sixth Sense Ventures 7.8 220 2016
Rubicon Research Everstone Capital 126 92 2016
Future Supply Chain SSG Capital 35 55 2014
Cancer Treatment Services International Asia Healthcare Holdings (TPG) 277 50 2016
Spinny Indian Angel Network 750 45 2016
** VCCircle estimates are based on disclosures and market sources

However, as per the preliminary EY data available on deals up to 30 November 2019, the following were the top 10 exits in 2019.

Company Sector Seller Buyer Exit type Deal value (US$ millions) Stake (%)
Oravel Stays Private Limited E-commerce Lightspeed, Sequoia Ritesh Agarwal Buy-back 1,500 23.7
ICICI Lombard General Insurance Company Limited Financial services Fairfax N/A Open market 732 9.9
Genpact Limited Technology Bain Capital, GIC N/A Open market 625 14.6
SBI Life Insurance Company Limited Financial services Carlyle N/A Open Market 393 3
CitiusTech Healthcare Technology Private Limited Healthcare General Atlantic Baring PE Asia Secondary 389 32
Global Health Private Limited (Medanta) Healthcare Carlyle, Temasek Manipal Hospitals Strategic 377 46
ICICI Lombard General health Insurance Company Limited Financial services Fairfax N/A Open market 362 5
Genpact Limited Technology Bain Capital, GIC N/A Open market 324 5
Cancer Treatment Services International Inc Healthcare TPG Varian Medical Systems Inc. Strategic 283 N/A
Housing Development Finance Corporation Limited Financial services KKR N/A Open market 270 1


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 Ministry of Corporate Affairs (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

Amendments to the FDI Policy

The DPIIT made certain noteworthy changes to the FDI Policy during 2019 in its attempt to make India an attractive destination for FDI flows. Such changes include the following:

  1. 100 per cent FDI is now permitted under an automatic route in entities that are engaged in the sale of coal and coal mining activities including coal washing, crushing, handling and separation (magnetic and non-magnetic);
  2. 100 per cent FDI is now permitted under an automatic route for contract manufacturing and, accordingly, the entity with the FDI can undertake the manufacturing activities itself or through contract manufacturing, on either a principal-to-principal basis or a principal-to-agent basis. It has been clarified by the DPIIT that the investee entity will be deemed to be a manufacturing entity itself even if the manufacturing is done by a third-party contractor, provided that it is done under a legally tenable contract. In addition, the entity that has outsourced the manufacturing to the third-party contractor will be eligible to sell the manufactured product through wholesale, retail or e-commerce on the same footing as an entity that manufactures directly; and
  3. 26 per cent FDI has been permitted under the approval route in entities that are engaged in uploading or streaming news and current affairs through digital media.

National Guidelines on Responsible Business Conduct 2019

The MCA has revised and updated the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business of 2011 and issued the National Guidelines on Responsible Business Conduct 2019 (NGRBC). The revised guidelines have been aligned with the United Nations (UN) Sustainable Development Goals, the UN Guiding Principles for Business and Human Rights, the Paris Agreement on Climate Change, International Labour Organization core conventions Nos. 138 and 182 on child labour, and annual business responsibility reports mandated by SEBI and the Companies Act 2013, including recent amendments with respect to corporate social responsibility.

As with the earlier guidelines, the NGRBC is designed to assist businesses to perform above and beyond the requirements of regulatory compliance. The NGRBC applies to all businesses irrespective of their ownership, size, structure or location, including foreign multinational corporations investing or operating in India. They are also a guide for Indian multinational companies in their overseas operations. They encourage businesses to not only follow these guidelines in the context of business over which they have direct control and influence but also for their suppliers, vendors, distributors and collaborators. A committee on business responsibility reporting constituted by the MCA will develop formats for listed and unlisted companies to report on their business responsibilities. This is expected to boost investor confidence and increase their creditworthiness.

REITs and InvITs

The MCA has amended the Companies (Acceptance of Deposits) Rules 2014 (the Deposit Rules) to exclude any amount received by a company from a REIT from the purview of 'deposit' under Rule 2(1)(c)(xviii) of the Deposit Rules. This follows the previous amendments, which excluded amounts received from AIFs, domestic VCFs, InvITs and mutual funds registered with SEBI.

In April 2019, SEBI notified amendments to the REIT Regulations and the Infrastructure Regulations. Some of the key changes include a reduction in the minimum subscription from any investor in any publicly issued InvIT from 1 million rupees to 100,000 rupees. In the case of a publicly listed REIT, the minimum subscription amount has been reduced from 200,000 rupees to 50,000 rupees. In addition, the minimum trading lot has been reduced from 500,000 rupees to 100,000 rupees. This is expected to increase the reach of retail investors to real estate and infrastructure projects, which was earlier limited due to high minimum investment requirements involved in investments through AIFs. Prior to the 2019 amendments, the aggregate consolidated borrowings and deferred payments of a listed InvIT, its holding company and SPVs were capped at 49 per cent of the value of InvIT assets, which restricted the ability of InvITs to make further acquisitions and provided for limited returns as compared to AIFs. Such limit has now been increased to 70 per cent of the value of InvIT assets subject to certain conditions such as obtaining a prior approval of 75 per cent of the unitholders and utilisation of funds only for the purpose of acquisition or development of the infrastructure projects or real estate projects. Unlisted private InvITs have received a much-anticipated relaxation of the rules in terms of the minimum number of investors, which is now at the discretion of the InvITs (capped at 20 members). The leverage limit of these private InvITs is to be specified under the trust deed (in consultation with the investors).

SEBI has also issued certain clarifications in relation to InvITs that issue units on a private placement basis, which are proposed to be listed. With effect from 15 January 2020, a draft placement memorandum is to be filed with SEBI and recognised stock exchanges through a SEBI-registered merchant banker, at least 30 days prior to the opening of the issue. The memorandum must contain disclosures as specified in the Infrastructure Regulations and should be submitted along with a due diligence certificate issued by the merchant banker. Upon perusal of the placement memorandum, SEBI may issue observations (if any) on such placement memorandum within 15 days of the later of: (1) receipt of the draft memorandum, (2) receipt of additional information or clarification from the issuer or the regulatory authority, or (3) receipt of an in-principle approval from the stock exchanges. It will be the merchant banker's responsibility to ensure that all such comments are suitably incorporated in the draft placement memorandum and provide a due diligence certificate as per the prescribed format.

Further in a major boost to InvITs, the RBI has permitted banks to lend to InvITs subject to the following conditions:

  1. the bank has put in place a board-approved policy on exposures to InvITs that shall, inter alia, cover the appraisal mechanism, sanctioning conditions, internal limits and monitoring mechanism;
  2. the bank undertakes assessment of all critical parameters including sufficiency of cash flows at InvIT level to ensure timely debt servicing. The overall leverage of the InvITs and the underlying SPVs put together shall be within the permissible leverage as per the bank's board-approved policy. Banks must also monitor the performance of the underlying SPVs on an ongoing basis as the ability of InvITs to meet their debt obligation will largely depend on the performance of these SPVs. As InvITs are trusts, banks should keep in mind the legal provisions in respect of these entities, especially those regarding enforcement of security;
  3. the bank may only lend to InvITs where none of the underlying SPVs, which have existing bank loans, are facing 'financial difficulty', as defined in Paragraph 2 of Annex-I to Circular DBR No.BP.BC.45/21.04.048/2018-19 dated 7 June 2019;
  4. the bank financing InvITs for acquiring equity of other entities shall be subject to the conditions given in Paragraph of the Master Circular on Loans & Advances – Statutory & Other Restrictions dated 1 July 2015; and
  5. the audit committee of the bank's board must review the bank's compliance with the above conditions on a half-yearly basis.

Harmonisation of IFSC-incorporated AIF investment provisions

In August 2019, SEBI harmonised the provisions governing investments by AIFs incorporated in IFSCs with the provisions governing investments applicable to domestic AIFs such that the AIFs incorporated in IFSCs are permitted to make investments in accordance with the provisions of the AIF Regulations. This is in furtherance of SEBI's endeavour to encourage fund managers to incorporate AIFs in an IFSC. In November 2018, SEBI prescribed detailed operating guidelines to regulate AIFs in India's first IFSC set up under Section 18(1) of the Special Economic Zones Act 2005 in Gujarat International Finance Tec-City. These actions are in furtherance of the guidelines prescribed in 2015 to facilitate and regulate the securities market at the IFSC. The operating guidelines allow AIFs in the IFSC to invest through the FVCI, FDI or FPI route. Previously, AIFs in the IFSC were allowed to invest only through the FPI route. In addition, the caps applicable to AIFs (see Section II.iv) will not be applicable to an AIF set up in the IFSC. The guidelines provide global investors a more viable option to set up global funds in the IFSC in the form of an AIF.

Clarification on the appointed date

In view of differing judgements on whether the 'appointed date' in schemes of mergers and amalgamations filed under Section 232 of the Companies Act 2013 should be a specified date preceding the sanctioning of the scheme or filing of the certified copy with the registrar of companies (RoC), or thereafter, once the MCA has issued a clarification on the interpretation of appointed date clarifying that companies may choose the appointed date of the merger or amalgamation based on occurrence of an event, which allows such companies to function independently until such event actually materialises. However, in the case of an event-based date being a date subsequent to the date of filing the order with the RoC under Section 232(5), the company shall file an intimation of the same with the Registrar within 30 days of such scheme coming into force. Such appointed date identified under the scheme shall also be deemed to be the acquisition date and date of transfer of control for the purpose of conforming to accounting standards (including Indian Accounting Standard 103, Business Combinations).

Integrated online reporting of foreign investments and filing of annual returns

To simplify the reporting process of foreign investments, the RBI released the single master form (SMF) with effect from 1 September 2018. With the implementation of the SMF, the reporting of FDI (which is presently a two-step procedure, namely the submission of an advance remittance form (ARF) and a foreign collaboration – general permission route (FC-GPR) form), has been merged into a single revised FC-GPR. Five forms (FC-GPR, FC-TRS, LLP-I, LLP-II and CN) were available for filing using the SMF. Since 1 September 2018, all new filings for these five form categories must be done using the SMF only. In addition, the RBI has introduced the Foreign Liabilities and Assets Information Reporting System, a web-based reporting portal, via a circular dated 28 June 2019, for the purpose of replacing email-based reporting of foreign liabilities and assets of Indian companies, FDI received by Indian companies, and inward and outward foreign affiliate trade statistics.

Draft National e-Commerce Policy

In February 2019, the DPIIT issued the Draft National e-Commerce Policy, which primarily aims to create a conducive regulatory framework for development of the e-commerce sector, empowering domestic entrepreneurs, leveraging access to data, ensuring infrastructure development and stimulating the participation of micro, small and medium-sized enterprises, start-ups and traders in the digital economy. It provides for regulating cross-border data flows while enabling sharing of anonymised community data. Any data not collected in India, any business-to-business data shared between business entities, data flow through software having no personal or community implications and data (excluding data generated by users in India from e-commerce, social media activities or search engines) shared internally by multinational corporations are exempted from cross-border data flow restrictions. In addition, it recognises the 'network effect' (greater access to data sources resulting in greater likelihoods of success) in M&A transactions by which e-commerce players such as social medial platforms take over potential competitors early and avoid emergence of competition later. An inter-ministerial panel under the DPIIT will be constituted to address stakeholders' concerns and provide necessary clarifications on issues related to FDI in e-commerce. The policy is expected to come into effect during 2020 and sufficient time will be provided to stakeholders to adapt the policy prospectively.66

SEBI framework for issue of depository receipts

In October 2019, SEBI introduced a framework for the issue of depository receipts (DRs) pursuant to Section 41 of the Companies Act 2013, the Companies (Global Depository Receipt) Rules 2014 and the Depository Receipts Scheme 2014. In light of the recent RBI and central government notifications amending the definition of permissible jurisdiction and amendments to the Prevention of Money Laundering Act (Maintenance of Records) Rules 2005, it has been clarified that only a company incorporated in India and listed on a recognised stock exchange in India may issue permissible securities and their holders may transfer such securities for the purpose of issuing DRs subject to the compliance of the requirements in relation to the eligibility, permissible jurisdictions and international exchanges, compliance with extant laws, permissible holder requirements, voting rights and pricing and obligations of the Indian depository, foreign depository and the domestic custodian.

Insolvency Code

Following the trend for changes and clarifications, 2019 also witnessed a number of amendments to the Insolvency Code and the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (the CIRP Regulations) thereunder. One of the key amendments to the Insolvency Code included the grant of immunity to an insolvent company and its assets from prosecution for offences committed prior to the insolvency process, provided that such insolvent company has been acquired by a person who is not connected with the management or such offences. In addition, the time period for resolution of cases under the Insolvency Code, including litigations and other judicial process, has been increased from 270 days to 330 days. One of the amendments also provides that a resolution plan could distinguish between financial creditors on the basis of their priority and value of security interest.

Key amendments to the CIRP Regulations in 2019 include:

  1. the resolution applicant must furnish the CoC with a performance security pertaining to the nature of the resolution plan and the business of the corporate debtor;
  2. an authorised representative of a financial creditor will be entitled to cast his or her vote in respect of all financial creditors represented by him or her. Accordingly, the waterfall for payments under the resolution plan has been modified to the effect that the dissenting financial creditors will be paid in priority to the financial creditors who voted in favour of the resolution plan;
  3. corporate restructuring of the corporate debtor (by way of merger, amalgamation and demerger) can now be included in the resolution plan; and
  4. the insolvency professionals and insolvency professional agencies must electronically furnish certain forms to ensure transparency in the corporate insolvency resolution process. Any failure, delay or furnishing of incomplete or incorrect information or records with the form by the insolvency professionals will make them liable for an action under the Insolvency Code by the IBBI.

In addition, the IBBI has notified separate regulations for insolvency resolution processes and bankruptcy proceedings for personal guarantors to the corporate debtors, with effect from 1 December 2019. The regulations on the insolvency resolution process, inter alia, set out the eligibility criteria of the resolution professional, the manner of receipt and verification of claims of creditors, the contents of the repayment plan and the procedure for filing an application for the issuance of a discharge order. Akin to the regulations on the insolvency process, the regulations on the bankruptcy process provide for, inter alia, the eligibility to act as a bankruptcy trustee for the bankruptcy process, the manner of preparation of reports and timeline for submission by the bankruptcy trustee and the manner of realisation of assets of the bankrupt and its distribution. In March 2019, the IBBI also issued an indicative charter of responsibilities of the CoC and resolution professionals for the purpose of clarifying the roles and responsibilities to be discharged by them respectively during the insolvency process.

Apart from the legislative amendments, the Insolvency Code was significantly shaped by verdicts passed by the Supreme Court of India. One of the key developments in the Insolvency Code is the Supreme Court's decision to uphold the constitutional validity of the Insolvency Code. The Insolvency Code has faced challenges of unconstitutionality on the basis that it, inter alia, provides primacy to financial creditors over operational creditors. In this context, operational creditors will need to calculate ways in which to secure themselves in the eventuality of default of payments by corporate debtors.

Key tax proposals under the Finance Bill 2020

The Finance Bill 2020, presented on 1 February 2020, seeks to give effect to the financial proposals of the central government for the financial year 2020–2021. Some of the key tax proposals announced in the Finance Bill are summarised below.

Any income of a sovereign wealth fund in the nature of dividend, interest or long-term capital gains arising from an investment made by it in India on or before 31 March 2024 and held for at least three years, whether in the form of debt or equity in a company or enterprise carrying on the business of developing or operating and maintaining, or developing, operating and maintaining any infrastructure facility or any other notified business, are proposed to be exempted from tax under the Finance Bill. Such exemption is granted to sovereign wealth funds that fulfil certain conditions, inter alia: (1) the fund is wholly owned and controlled (directly or indirectly) by the government of a foreign country; (2) the fund does not undertake any commercial activity whether within or outside India; (3) the fund is set up and regulated under the law of such foreign country; and (4) assets of the fund vest in the government of such foreign country upon dissolution.

To incentivise offshore funds to set-up their management arm in India, these have been granted exemption from the purview of business connection (so as to avail exemption from income tax in India), subject to fulfilment of certain conditions, inter alia: (1) the aggregate participation or investment in the fund, directly or indirectly, by persons resident in India should not exceed 5 per cent of the corpus of the fund; and (2) if the fund has been established or incorporated in the financial year under review, the corpus of the fund should not be less than 1 billion rupees at the end of a six-month period from the last day of the month of its establishment or incorporation, or at the end of such financial year, whichever is later. Following certain practical difficulties in achieving the objective of such exemptions, the Finance Bill relaxes the aforesaid conditions to the extent that any contribution by an eligible fund manager during the first three years, up to 250 million rupees, will not be included for calculation of aggregate participation or investment in the fund. In addition, if the offshore fund has been established or incorporated in the previous year, the corpus of the fund should not be less than 1 billion rupees at the end of a 12-month period from the last day of the month of its establishment or incorporation.

Another important development proposed by the Finance Bill is to abolish the levy of dividend distribution tax (currently at the rate of 20.56 per cent) on the distribution of dividend. It is proposed to shift the tax burden from the company, mutual fund or business trust to the shareholders or unitholders, through tax deduction at source. To remove the cascading effect on taxation of dividend, income from dividends received from a domestic company by another domestic company will be deducted from the total income of such recipient company, to the extent of dividend distributed by such recipient company one month prior to the return filing date. However, business trusts will continue to enjoy tax-free receipt of dividend from investee companies. Moreover, the Finance Bill proposes to do away with the requirement of listing units of business trusts (i.e., InvITs and REITs) on a recognised stock exchange for the purpose of availing tax incentives.

In an attempt to adopt the principal purpose test67 outlined in the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI),68 the Finance Bill proposes to amend the Income Tax Act to empower the Indian government to enter into a double taxation avoidance agreement (DTAA) with another country (for, inter alia, avoidance of double taxation) without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in a DTAA for the indirect benefit of residents of any third country or territory). Upon such amendment, the benefits that can be availed by a taxpayer under a DTAA will be subject to the principle purpose test.


It would appear that 2019 was a blockbuster year for PE dealmaking in India. Legal and policy reforms towards ease of doing business in India reinforced the belief in India of PE/VC investors, SWFs and deep-pocketed strategic investors. However, 2020 will test the maturity and resilience of Indian markets, and the following factors will have a major impact on investing in India throughout the coming year.

  1. Global environment: uncertainty and volatility triggered by major political events (United States–China trade war, Brexit, US–Iran ties, the impact of the coronavirus on China's economy), 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.
  2. 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 distressed assets on the auction block.
  3. 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 driving dealmaking activity in India in 2020. Technology, e-commerce, real estate, infrastructure, stressed assets, healthcare, financial services, energy and manufacturing are sectors that are expected to continue receiving interest from investors in 2020.
  4. The government of India has set a target to raise nearly US$30 billion for financial year 2020–2021 from divestment of nearly 24 central public sector enterprises. This will provide an unparalleled opportunity to strategic buyers and consortiums of PE funds and SWFs to snap up some of the crown jewels of the Indian public sector. Not only will divestments provide access to the untapped potential of public sector enterprises but they will also lead to mega billion-dollar deals due to the size and valuation of these heavy-weight assets.

Overall, the deal triggers seen in 2019 are expected to continue to drive both deal values and volumes in 2020.


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

4 ibid.

7 See footnote 5.

10 See footnote 3.

11 See footnote 2.

13 An investment vehicle that owns and operates real estate-related assets and allows individual investors to earn income produced through ownership of commercial real estate without actually having to buy any assets.

14 See footnote 6.

15 ibid.

16 ibid.

17 ibid.

18 See footnote 5.

19 See footnote 3.

20 ibid.

21 ibid.

25 ibid.

27 See footnote 23.

28 ibid.

30 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).

31 See footnote 29.

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

34 ibid.

35 See footnote 3.

37 See footnote 3.

39 ibid.

40 ibid.

41 See footnote 3.

42 See footnote 3.

43 See footnote 2.

44 See footnote 36.

45 ibid.

51 See footnote 47.

54 See footnote 3.

57 ibid.

58 See footnote 3.

59 See footnote 46.

61 See footnote 3.

62 ibid.

64 See footnote 3.

67 The principal purpose test is a test to be used by tax authorities to determine if the primary purpose of making an investment through a jurisdiction has been to obtain a tax benefit, and, if so, establishes that a taxpayer would be denied the benefit of the DTA.

68 India has signed and ratified the MLI, which came into force in India on 1 October 2019. The provisions of the MLI will be applicable to more than 30 of the covered DTAs and will be applied alongside the existing DTAs, thereby modifying their application to implement the anti-base erosion regime.