The Private Equity Review: India

i General overview

Despite the uncertainty of the global pandemic and its ensuing disruptions in the global economy, private equity investment in India in 2020 maintained the momentum of the previous year. In fact, the investments by private equity and venture capital investors stood at US$47.5 billion for the period from January to December 2020,2 against US$47.3 billion during the same period last year. While the aggregate value of private equity (PE) deals seems largely unchanged, this belies the fact that US$17.298 billion, that is approximately 36 per cent of the aggregate capital raised by companies in India, was raised by Reliance Industries Limited group entities, especially in its technology, retailing and fibre arms. Moreover, PE exits fared much worse. In fact, exits by PE and venture capital firms fell to a six-year low in the first 11 months of 20203 with an estimated decline of 56 per cent compared to 2019.

India started the year by recording the slowest GDP growth rate in six years. In the wake of the pandemic, India's economy shrank by 7.5 per cent in the second quarter of the fiscal year 2020–2021 after seeing a record contraction of 23.9 per cent in the first quarter.4 With the worst of the pandemic behind us, Moody's has raised its forecast for India's growth to –8.9 per cent for the calendar year 2020.5

Despite this slowdown, certain trends from 2019 continued into 2020. For instance, global PE and M&A investors continued to gravitate towards India and with ever-increasing investment values. The interest shown by sovereign wealth funds (SWFs) in India has continued on an upward trajectory, with SWFs from Abu Dhabi and Saudi Arabia having made some of the largest PE investments. Investors' focus remained fixed on control and corporate governance. During the first 11 months of 2020, almost all sectors recorded a significant decline in deal values with telecom, retail, education and pharma being the only sectors to record increase in value invested.6 With respect to investments in the financial services sector, 2019's continuing crisis with non-performing assets (NPAs) had an adverse impact on investments in the financial services sector, which recorded a 43 per cent decline in investment values as compared to 2019.7 In addition, the Reliance Group attracted investments from PE investors and SWFs, especially in its technology and retailing arms, namely: Jio Platforms Limited and Reliance Retail Ventures Limited, of an aggregate amount of US$17.3 billion representing approximately 36 per cent of all PE/venture capital (VC) investments in 2020.8 Lastly, several new India-focused funds were set up in 2020 despite the slowdown. SAIF Partners (rebranded as Elevation Capital) has created a new fund, SAIF Partners India VII Ltd, valued at approximately US$400 million.9 In September 2020, Lightspeed India Partners raised US$275 million for its new fund.10 Meanwhile, Blume Ventures, a home-grown VC firm, raised US$102 million, the first Indian fund to exceed the US$100 million milestone.11

i 2020 versus 2019

The year 2020 started on a grim note with news of the global outbreak of covid-19 followed by the stipulation of lockdowns and restrictions on travel and usual business activities resulting in a severe disruption in the investment landscape in India. Nevertheless, Indian companies managed to raise an aggregate sum of US$47.5 billion from PE investors during 2020.12

However, of the above-mentioned figure, nearly US$17.298 billion (i.e., almost 36 per cent of the aggregate investment value) was because of investments in Reliance group entities.13 This sluggishness in PE fundraising is in stark contrast to the trend in the VC sector, where global and domestic limited partners (LPs) pumped a substantial amount of money into India-focused VC funds in 2019.14

ii Industry sector trends

In 2020, investments in the education-technology and pharmaceuticals space dominated fundraising activity in India. In this context, the top three deals in terms of valuation (excluding Reliance) are in the pharmaceuticals space. On the other hand, investment in the real estate and infrastructure sector lagged behind with an aggregate investment of US$10.17 billion across 61 deals, compared to US$19.88 billion across 121 deals.15 However, a key highlight of the telecom infrastructure in 2020 was the aggregate investment of US$1.01 billion by the Abu Dhabi Investment Authority and the Public Investment Fund of Saudi Arabia, for acquiring a majority stake in Digital Fibre Infrastructure Trust, a registered infrastructure investment fund in India, that operates an optic fibre cable network of nearly 17.37 million fibre pairs per kilometre across India, through its special purpose vehicle.16

iii Consumer, technology and financial services

The telecom sector attracted investments worth US$11.2 billion, with the retail sector attracting investments worth US$6.5 billion. Meanwhile, the technology sector recorded a total investment value of just under US$6 billion. Online service aggregators accounted for the majority of the investments in the technology space. In the education-technology sector, Byju's secured funding of over US$1.25 billion from a slew of VC funds, hedge funds and asset management firms, including Silver Lake Partners, Owl Ventures and Tiger Global.17

iv Early stage

PE and VC investors have invested approximately US$10.6 billion into Indian start-ups in 2020 across 60 deals despite the slow-down caused by covid-19.18 In fact, in December, more than US$1.5 billion was invested across companies including food delivery app Zomato (US$660 million from 10 investors) and InMobi's mobile-content platform Glance (US$145 million from Google).19

These figures pale in comparison to 2019 where domestic start-ups had raised a total of US$14.2 billion across 1,482 investment rounds. However, the amount raised in 2020 was higher than 2016 and 2017.20 In addition, nearly a year after announcing that the Indian government was working on a seed fund for start-ups, Prime Minister Narendra Modi announced the launch of a 10 billion rupees 'Startup India Seed Fund' for fuelling the creation of new start-ups and early stage ventures. He also announced that the government would assist start-ups in raising debt capital, without revealing additional details.21

v Real estate and infrastructure

Real estate investments in India slowed down in 2020, with a total deal value of US$4.06 billion. However, more than half of the investment value comes from Brookfield and Mitsui's investments in RMZ Corporation.22 Excluding these deals, the real estate and infrastructure sector fared poorly compared to 2019. In 2020, this sector recorded an aggregate investment value of $10.17 billion across 61 deals, compared to only US$19.88 billion in 2019, showcasing a drop of almost 49 per cent.23 Towards the end of the year, the momentum picked up as global investors like Blackstone Group and Brookfield Asset Management acquired commercial assets in India as developers sold some key properties to deleverage their balance sheets. For instance, Brookfield acquired Bengaluru-based RMZ Corp's 12.5 million square feet assets for nearly US$2 billion.24

vi Healthcare

The healthcare sector has arguably received the most attention from PE investors in 2020. In this context, the top three deals in terms of valuation (excluding Reliance) are in the pharmaceuticals space. This includes New Mountain Capital's acquisition of Aurobindo Pharma's US unit for US$550 million, KKR's acquisition of 65 per cent in the listed API manufacturing firm JB Chemicals for US$496 million and Carlyle Investment Management's investment of US$490 million in Piramal Pharma for acquiring a 20 per cent stake.25 In the hospital sector, two major transactions were the acquisition of majority stake in HealthCare Global Enterprises by CVC Capital Partners for US$140 million26 and the acquisition of Columbia Asia Hospitals by Manipal Hospitals for an estimated US$240 million to 280 million.27

vii Exits

Exits were the most affected by the slowdown in PE/VC deal activity. The first 11 months of 2020 recorded 35 buyouts valued at approximately US$8.7 billion as compared to 58 buyouts valued at US$16 billion for the corresponding period in 2019, being the lowest value in six years for the period under consideration. The same trend was reflected in open market exits as well. During this period, exits via open market accounted for 59 deals valued at approximately US$2.3 billion recording a 47 per cent decline compared to same period in 2019.28 That being said, approximately 55 per cent of the money raised via initial public offerings (IPOs) in 2020 (approximately US$2.3 billion) were meant for PE or VC exits.29 As the primary markets recouped after a three-month lull due to covid-led disruptions and volatile stocks, public listing of companies received huge participation in 2020. However, most of the money raised through IPOs was used to provide an exit to private equity players or existing shareholders.

Around 55 per cent of the money raised via IPOs in 2020 was meant for private equity or venture capital exits, which is at least at a five-year high compared to 24.36 per cent, 29.09 per cent and 26.72 per cent in 2019, 2018 and 2017, respectively, according to data from Prime database.

Beating covid-led business uncertainties, 15 IPOs raised an aggregate amount of 266.11 billion rupees this year, up 115 per cent compared to the 123.62 billion rupees raised via 16 IPOs in 2019.

This downturn is unsurprising given the disruptive impact of covid-19 on the global economy. In 2020, PE investors have been reluctant to exit given the likelihood of sub-optimal returns on their investments and the promise of a better economic outlook in 2021.

One of the most significant exits of 2020 is the US$1billion partial exit by Carlyle through the IPO of SBI Cards, where it sold 10 per cent of its stake.30 Other notable exits by PE firms included Blackstone's partial stake sale in the Embassy REIT31 and in packaging firm Essel Propack Ltd.32 In the technology sector, two notable exits included Nexus India Capital, Jungle Ventures and Naspers selling their stake in Paysense Services India for US$293 million33 and Warburg Pincus's secondary deal in Ecom Express for US$250 million.34 However, generally speaking exits were adversely affected in light of the reduced valuations of investee companies on account of the uncertainty of covid-19.

viii Reception by LPs and fund managers

According to a market survey conducted by the Emerging Markets Private Equity Association in 2020, India was ranked third in the category of 'perceived attractiveness of emerging markets for private capital'. India, after China, leads other emerging markets in the share of commercial institutions currently investing or planning to invest in venture capital opportunities, at 70 per cent, which is reflective of India's massive customer base. In terms of disadvantages, investors have cited high entry valuations, weak exit environments, currency risks and historical performance as some of the deterrents to investments in India. However, concern around oversupply of funds or an over-competitive environment appears to have been reduced drastically compared to 2019, possibly as a consequence of the global pandemic.35

II Legal framework for fundraising

i Offshore structures

Foreign investors have always opted for a jurisdiction that provided tax neutrality to them with respect to their investments in India. 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. However, if the non-resident is based out of a jurisdiction that has entered into a double-taxation avoidance treaty (DTA) with India, the taxation implications are nullified and the Indian income tax laws apply only to the extent they are more beneficial than the tax treaties. Accordingly, most India-focused funds are based out of either Singapore or Mauritius as a limited liability partnership (LLP) or a corporate entity. Further, the general partner (GP) and the investment manager, who set up and operate the investment vehicle, are located outside India.

ii Tax risks re offshore structures

To curb tax avoidance, the government introduced the General Anti-Avoidance Rule (GAAR), with effect from the financial year beginning on 1 April 2017. The introduction of the GAAR has provided the tax authorities with the ammunition to re-characterise a transaction or an arrangement such that it gets taxed on the basis of substance, rather than on its form. The consequences include investment vehicles being denied DTA benefits or reclassification of capital gains as any other income, or a combination of these. In addition, the government amended the criteria for determining the tax residence of offshore companies by introducing the place-of-effective-management (POEM) guidelines, with effect from 1 April 2017. According to the POEM guidelines, if the key management and commercial decisions that are necessary to conduct the business of any entity as a whole are, in substance, made in India, an offshore entity could be construed as being tax resident in India.

The past years also witnessed India renegotiating its DTA agreements with Singapore and Mauritius, making these less attractive as fund jurisdictions. The details of these changes along with an analysis on the future of these countries as viable fund jurisdictions is set out in detail in Section

India has also ratified the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), pursuant to which several of its DTA agreements now include anti treaty abuse rules.

iii Rise of unified structures with direct investment by LPs

The fear of tax exposure owing to the various changes set out above has led to investors exploring unified structures or co-investment structures. Under the unified structure, both domestic and foreign investors make their investments into a domestic pooling vehicle. These unified structures received a huge impetus in 2015.

Until 2015, these investment vehicles were heavily funded by domestic investors because prior permission from the Foreign Investment Promotion Board was required if the overseas funds intended to directly invest in a privately pooled vehicle in India. To increase the participation of offshore funds in these investment vehicles, since November 2015, the Reserve Bank of India (RBI) has permitted such investment vehicles to receive investments from non-resident Indian investors and foreign investors through the automatic route, as long as control of the investment vehicles vests in the hands of sponsors and managers, or investment managers, that are considered Indian-owned and controlled under the extant foreign regulations; investments by Indian-controlled alternative investment funds (AIFs) with foreign investment are thus deemed to be domestic investments.

iv Legal framework of domestic funds

Alternative investment funds

Prior to private equity capital gaining popularity, entrepreneurs relied heavily on loan capital raised from banks and financial institutions, public issuances and private placements. Realising the potential role of PE funds and the value addition they would contribute to the growth of corporate entities, the Securities and Exchange Board of India (SEBI) introduced a set of regulations governing investments by VC investors. This was followed by an overhaul in the regulations in 2012 with the introduction of the SEBI (Alternative Investment Funds) Regulations 2012 (the AIF Regulations) to regulate privately pooled investment vehicles that collect funds from investors on a private placement basis. The AIF Regulations replace the earlier regulatory framework of the SEBI (Venture Capital Funds) Regulations 1996, which covered funds that primarily invested in unlisted VC undertakings.

Under the AIF Regulations, an AIF is a privately pooled investment vehicle incorporated in the form of an LLP, trust or body corporate, which collects funds from Indian and foreign investors for investments in accordance with a defined investment policy for the benefit of its investors.

Based on the nature of the funds and their investment focus, the AIF Regulations categorise funds into Category I AIF,36 Category II AIF37 and Category III AIF.38 These categories of funds must also comply with distinct investment conditions and restrictions during their life.

The AIF Regulations prescribe, inter alia, a cap of 1,000 on the number of investors pooling into the AIF, conditionality on the minimum corpus for the fund and a minimum amount to be invested by an investor. To align the interests of the investors and the promoters or sponsors of the fund, the sponsor or manager of the AIF is required to have a continuing interest in the AIF throughout the life of the AIF. Further, investment by the sponsor or manager of a Category I AIF or Category II AIF has to be at least 2.5 per cent of the corpus (at any given point) of the AIF or 50 million rupees, whichever is lower. The continuing interest in the case of a Category III AIF has to be at least 5 per cent of the corpus or 100 million rupees, whichever is lower.

Before commencing operations, AIFs should register with SEBI, which takes about four to six weeks. An AIF can be set up in the form of a trust, a company, an LLP or a body corporate. Most funds in India opt for the trust structure. The entities involved in the structure are a settlor, a trustee and a contributor. The settlor settles the trust with a small amount as an initial settlement. The trustee is appointed to administer the trust and is paid a fee in lieu of such services. The investor signs up to a contribution agreement or a subscription agreement to make a capital commitment to the fund.

Sector-focused fund structures

Real estate investment trusts and infrastructure investment trusts

In 2014, SEBI notified the Securities and Exchange Board of India (Real Estate Investment Trusts) Regulations 2014 (the REIT Regulations) and the SEBI (Infrastructure Investment Trusts) Regulations 2014 (the Infrastructure Regulations) to regulate investments in the real estate and infrastructure sectors respectively. An infrastructure investment trust (InvIT) and a real estate investment trust (REIT) must register with SEBI to conduct their business.

A REIT is a trust formed under the Indian Trust Act 1882 (the Trust Act) and registered under the Registration Act 1908 with the primary objective of undertaking the business of real estate investment in accordance with the REIT Regulations and has separate persons designated as sponsor,39 manager and trustee. The REIT is created by the sponsor of the trust, the trustee oversees the entire REIT and ensures all rules are complied with, and the beneficiaries are the unitholders of the REIT. The parties involved in the establishment of the REIT are: (1) the sponsor; (2) the trustee; (3) the investment manager and (4) the valuer. Each sponsor of a REIT is required to have a net worth of not less than 250 million rupees and a collective net worth of not less than 1 billion rupees. The sponsor should have not less than five years' experience in the development of the real estate sector. The trustee is the owner of the REIT assets, which it holds for the benefit of the unitholders, and it oversees the activities of the manager. The investment manager enters into an investment management agreement with the trustee and makes the investment decisions for the REIT. The responsibility of the valuer is to conduct half-yearly and annual valuations of the REIT's assets. The REIT Regulations impose a restriction on a REIT to invest only in its holding company, special purpose vehicles (SPV) or properties or transfer development rights in India or mortgage-backed securities. A REIT is allowed to make an initial offer of its units only through a public issue. No such offer can be made unless the offer size is at least 2.5 billion rupees and the value of the assets is not less than 5 billion rupees.

Akin to a REIT, an InvIT is a trust formed under the Trust Act and registered under the Registration Act. The InvIT is created by the sponsor of the trust, the ownership of the property vests in the trustee and the beneficiaries are the unitholders of the InvIT. It should be ensured that no unitholder of an InvIT enjoys superior voting rights or any other rights over another unitholder. Further, the Infrastructure Regulations prohibit multiple classes of units of InvITs. The Infrastructure Regulations require that an InvIT must hold not less than 51 per cent of the equity share capital or interest in the holding company or project SPVs. The parties involved in the establishment of the InvIT are: (1) the sponsor; (2) the trustee; (3) the investment manager; and (4) the project manager. The sponsor is responsible for the creation of the trust. The trustee is the owner of the InvIT assets, which it holds for the benefit of the unitholders. While the investment manager makes the investment decisions for the InvIT, the project manager is responsible for achieving the execution or management of the project in accordance with the Infrastructure Regulations. The Infrastructure Regulations further require that the investment manager, in consultation with the trustee, is required to appoint the majority of the board of directors or governing board of the holding company and SPVs.

Both Infrastructure Regulations and the REIT Regulations include conditions on investment and borrowing powers, the process for listing and trading of units, net worth and experience requirements, rights and obligations of different entities involved and the valuation of assets and the distribution policy.

In 2017, the RBI permitted banks to participate in REITs and InvITs within the overall ceiling of 20 per cent of their net owned funds for direct investments in shares, convertible bonds or debentures, units of equity-oriented mutual funds and exposure to venture capital funds (VCFs) both registered and unregistered, subject to the following conditions: (1) the banks must have put in place a board-approved policy on exposure to REITs or InvITs specifying the internal limit on such investments within the overall exposure limits in respect of the real estate sector and infrastructure sector; (2) not more than 10 per cent of the unit capital of a REIT or InvIT can be invested by the banks; and (3) the banks must adhere to the prudential guidelines of the RBI, as applicable.

In October 2019, the RBI further permitted banks to lend funds and extend credit facilities to InvITs subject to certain conditions, including: (1) the banks must have adopted a board-approved policy on exposures to InvITs specifying, inter alia, the appraisal mechanism, sanctioning conditions, internal limits and monitoring mechanism; (2) the banks can only lend to such InvITs where none of the underlying SPVs, having existing bank loans, is facing a 'financial difficulty'; (3) bank finance to InvITs for acquiring equity in other entities will be subject to the RBI guidelines, as applicable; and (4) the banks must undertake an assessment of all critical parameters to ensure timely debt servicing. Such availability of credit to InvITs is a welcome move as it will encourage investments into and by InvITs.

In November 2018, SEBI amended the guidelines for public issues of REIT and InvIT units with a view to further rationalising and easing the issue process. 2019 witnessed further amendments to the REIT Regulations and 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. 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 received a 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 needs to be specified under the trust deed (in consultation with the investors). In 2020, certain amendments were introduced to the REIT Regulations and Infrastructure Regulations, details of which are set out in Section VII.iii.

Currently, there are two public InvITs, six privately placed InvITs and two listed REITs. In March 2020, SEBI granted temporary relaxations in compliance requirements for REITs and InvITs owning to the impact of the covid-19 pandemic, details of which are set out in Section VII.iii.

v Steps to popularise domestic funds as fund structures

Over the past year, the government has taken steps for mobilising domestic capital from banks, mutual funds and insurance companies. In fact, the Alternative Investment Policy Advisory Committee in its report submitted on 19 January 2018 recommended the use of domestic funds as they currently constitute only a minor percentage of the total funds invested annually. Under a domestic fund structure, the fund vehicle (typically a trust entity registered with SEBI as an AIF) is treated as tax pass-through subject to certain conditions. The income earned is taxable in the hands of the investors directly. Further, the characterisation of income in their hands is the same as that realised or distributed by the investee company to the fund. On 3 July 2018, SEBI raised the cap for overseas investments in AIFs and VCFs from 36,457.7 million rupees to 54,686.6 million rupees. Investments in AIFs in 2019 rose 53 per cent over 2018, to 1.4 trillion rupees.40 Further, a restriction on allocating foreign portfolio investors (FPIs) to more than 50 per cent of the securities in a single debt issuance prompted FPIs to use the AIF route to make debt investments into India. In 2020, despite the pandemic-led disruptions, AIFs raised commitments worth more than 350 billion rupees in the first half of the financial year ending on 31 March 2021 (majorly by Category II AIFs), which is marginally more than the amount raised in the year-ago period. Even the registrations of new funds appears to have picked up after the initial impact of the pandemic subsided.41

vi Preferred jurisdictions for offshore funds


The primary driver that determines the choice of jurisdiction for setting up India-focused funds is a domicile that has executed a DTA with India. Currently, India has separate DTA agreements with various countries, such as Ireland, Mauritius, the Netherlands and Singapore. The Netherlands has been a popular jurisdiction primarily with portfolio investors. This is because the capital gains tax benefit is available to Dutch entities on sale of shares of an Indian company to a non-resident and, on sale of such shares to an Indian resident as long as they hold less than 10 per cent of the shares of such Indian company.

Over the years, Mauritius has been one of the most favoured destinations to set up India-focused funds and accounts for more than 30 per cent of the foreign investment into India. This is because India's DTA with Mauritius that provided a capital gains exemption, on sale of shares of an Indian company. While the India–Singapore DTA had a similar exemption, it was subject to satisfaction of certain conditionalities, popularly known as the limitation-of-benefits clause.

Recent treaty changes

The DTA between India and Mauritius was amended on 10 May 2016 pursuant to a protocol signed between the respective governments (the Mauritius Protocol). Pursuant to the Mauritius Protocol, the capital gains tax exemption is being phased out and any capital gains arising from sale of shares (acquired after 1 April 2017 and transferred after 31 March 2019) will be taxable in India at the full domestic rate. Further, shares acquired after 31 March 2017 and transferred before 31March 2019 will be taxed at 50 per cent of the domestic tax rate of India subject to certain conditions. This phasing out of the capital gains exemption is only applicable to sales of shares and not sales of debentures. Accordingly, sales of debentures continue to enjoy tax benefits under the India–Mauritius DTA, making Mauritius a preferred destination for debt investments.

Further, prior to the Mauritius Protocol, India did not have the right to tax any residuary income of a Mauritian tax resident arising in India. The Mauritius Protocol has now enabled India to tax 'other income' arising from a Mauritian tax resident in India. In addition, the Financial Services Commission of Mauritius has introduced domestic substance rules to determine whether Mauritius-based entities are managed and controlled in Mauritius. India and Mauritius have also agreed to assist each other to collect revenue claims, upon a request from each other's revenue authorities. All such measures, viewed cumulatively, signal India's serious resolve to curb tax avoidance.

The amendments to the India–Mauritius DTA have made it a significantly less popular destination for making investments. Taking its cue from the Mauritius Protocol, the respective governments of India and Singapore signed a protocol amending the India–Singapore DTA on similar lines, introducing source-based taxation for capital gains arising upon transfer of shares (acquired on or after 1 April 2017).

Singapore or Mauritius

Although Singapore is no longer a relevant jurisdiction for investors seeking to take advantage of tax arbitrage, Singapore is taking various steps to attract foreign investors, including by introducing the concept of a Singapore variable capital company (SVCC) to be used as a vehicle for investment. The SVCC is expected to simplify the process of redemption of open-ended funds. Currently, the redemption of open-ended funds is a long, drawn-out process involving drawing up of accounts, audit and issuance of a solvency certificate. Singapore also enjoys an edge over Mauritius because of its outstanding banking facilities, access to financial products and better talent, thus causing a shift of funds from Mauritius to Singapore.

vii Investment route for offshore funds

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 NDI Rules). The NDI 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 NDI Rules were originally not substantial, many changes have been pushed through individual amendments since its notification. Under the NDI 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 NDI 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 NDI Rules have been aligned with the SEBI (Foreign Portfolio Investors) Regulations 2019 (the FPI Regulations) to provide that an 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 application for an FDI proposal, 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 three 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);
  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 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.

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 NDI Rules also allow FVCIs to purchase equity, 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 The insolvency code

2020 has been an unusual year for the Insolvency and Bankruptcy Code 2016 (IBC). Until February 2020, India witnessed 3,600 admitted cases relating to insolvency resolution out of which 205 were resolved and 89 have ended with liquidation. However, the number of admitted cases sharply dropped in 2020 as the government has suspended the insolvency proceedings against defaulting companies (i.e., companies who are unable to meet their payment obligations towards their creditors). This moratorium was put in place on account of the global pandemic and will be in continuation until March 2021.42

In 2020, as mentioned earlier, the most important amendments came through an ordinance to provide relief to pandemic-stressed companies by incorporating new provisions in the IBC that disallowed filing of applications for initiation of corporate insolvency resolution process. In addition, the appellate form, the National Company Law Appellate Tribunal has issued suo moto orders granting exclusion of lockdown period from the period of completion of corporate insolvency resolution process. Further, pursuant to a notification issued by the Ministry of Corporate Affairs (MCA) in March 2020, the threshold for minimum amount of default was increased from 100,000 rupees to 10 million rupees.

The immediate impact of the Insolvency Code is evident from the improvement in India's ranking in World Bank's 'resolving insolvency index', moving up to 52nd position in 2020 from 108th position in 2019.43

IV Solicitation, disclosure requirements and fiduciary duties

Typically, investment vehicles issue a private placement memorandum (PPM) or an offer document to raise funds from prospective investors. The PPM sets out all material information to enable the investors to make an informed decision, including fund structure, summary of key terms, background of the key investment team, risk factors, disciplinary history and risk management tools in Category III AIFs.

In accordance with the AIF Regulations, managers and sponsors are beginning to set out the risk of their investments in relation to the minimum amount required to be invested. Because a PPM in India acts as both a marketing and a disclosure document, careful attention has to be paid while drafting the PPM to ensure a fine balance between regulatory requirements prescribed by SEBI and the marketing leverage that they want from their commitments to the fund.

With respect to offshore India-focused funds, the disclosure requirements, marketing guidelines and limits on solicitation are governed by the laws of the fund's domicile or jurisdiction. While there is no regulatory framework governing the marketing documents of offshore India-focused funds, under the AIF Regulations, AIFs are required to disclose certain financial information, including sharing valuation reports and filing the PPM with SEBI, for domestic funds. Further, there are limitations on the number of investors that an investment vehicle can attract. For instance, no AIF scheme (other than an angel fund) can have more than 1,000 investors.

Recognised as fiduciaries, directors of an investment vehicle are exposed to liabilities arising out of breach of their duties towards the fund and its stakeholders. Accordingly, directors should be mindful of their duties and exercise a supervisory role, during the entire cycle of a fund. For instance, at the time of fund formation, a director should ensure that the structure of the fund is tax-compliant, and that the information set out in the offer documents is not untrue or misleading. During the life of the fund, the directors should ensure policies regarding conflicts of interest are in place and adhered to. Similar principles are built into the AIF Regulations and the REIT Regulations, which require the sponsor and the manager to act in a fiduciary capacity towards their investors and disclose any potential conflicts of interest.

V Taxation

i Taxation of foreign funds

Following the adoption of the GAAR on 1 April 2017, the Indian tax authorities have the ability to treat arrangements outside India as an 'impermissible avoidance arrangement' if the main purpose of the arrangement is to obtain a tax benefit and the arrangement has no 'commercial substance'. Mere location of the entity in a tax-efficient jurisdiction will not invoke the GAAR. Accordingly, it is critical for a fund to demonstrate commercial reasons for setting up a fund in a particular jurisdiction. The steps that a fund may undertake to demonstrate commercial reasons include the renting of office space, and employment of personnel in that jurisdiction.

The other potential taxation risk in India for offshore funds is the risk of being perceived to have a permanent establishment in India on account of the fund's relationship with the investment advisory team based in India, in which case it would be liable to tax in India. As stated earlier, when determining POEM and actual residency status of an entity, the key guiding principle is, inter alia, to demonstrate that decision-making for the fund is being undertaken at the offshore fund level and not in India. To encourage fund management in India, the Finance Act 2015 provided for safe-harbour rules, where fund management activity carried out through an eligible fund manager in India by an eligible investment fund shall not constitute a business connection in India, subject to the fund and fund manager satisfying various restrictions, such as participation or investment by persons resident in India to be limited to 5 per cent, and a prohibition on the fund making any investment in its associate entity and carrying on or controlling and managing any business in India or from India.

ii Taxation of domestic funds

Category I and Category II AIFs enjoy a tax pass-through status. Accordingly, the income from investment is not taxed in the hands of such funds but is taxed in the hands of the unitholders. The taxation of Category III AIFs depends on the legal status of the fund (i.e., company, limited liability partnership or trust). Accordingly, investment fund income, other than the business income, is exempt from tax and income received by or accrued to Category I and Category II AIF unitholders is chargeable to tax in the same nature and in the same proportion as if it were income received by or accrued to the unitholder had the investment been made directly by the unitholder. This amendment has provided long-awaited clarity to AIFs given that, prior to this amendment, AIFs were subject to trust taxation provisions that posed several tax uncertainties.

On similar lines, amendments were made to provide pass-through status to REITs and InvITs. Taxes are imposed on these in the manner set out below.

DividendExempt subject to conditionsExemptExempt
InterestNo withholdingExemptTaxable
Rental income (only applicable for REITs, not InvITs)No withholdingExemptTaxable
Capital gainsN/ATaxableExempt
Other incomeN/ATaxableExempt

Further, tax implications for different streams of income in the hands of the investors are set out below.


Hitherto, dividends declared by Indian companies attracted a dividend distribution tax at the effective rate of 20.56 per cent, with the dividends being tax exempt in the hands of shareholders. Considering the excessive tax liability on undistributed or distributed profits of a domestic company as well as on the investors, the government has, vide Finance Act 2020, abolished dividend distribution tax and adopted the classical system of dividend taxation. Now, dividend will be taxable in the hands of investors at the rates applicable to them under the relevant DTA. Non-resident investors will also be able to claim foreign tax credit of such withholding tax in their resident country, which otherwise may not have available to them in the erstwhile regime.


Interest income is subject to tax in the hands of Indian resident investors at the rate that would otherwise apply to the investors on their ordinary income. Income from interest on debt ranges from 5.4 per cent to 43.68 per cent, depending on the regulatory regime, currency of debt and rate of interest.

Capital gains

Any short-term capital gain arising on the transfer of listed equity shares on any recognised stock exchange in India, where securities transaction tax is payable, is subject to tax at the rate of 15 per cent (plus applicable surcharge and cess) subject to any tax benefit under the relevant tax treaty. Sales off the market that result in short-term gain are subject to tax at the rate of 40 per cent (plus applicable surcharge and cess) in case of a foreign company, and 30 per cent (plus applicable surcharge and cess), subject to any tax benefit under the relevant DTA, and at the applicable marginal rate in the case of residents.

Any long-term gain on sale of listed securities is taxed at 10 per cent (plus surcharge and cess) in case of a resident and a non-resident. Further, any long-term gains on sale of unlisted securities are taxed at 10 per cent (plus surcharge and cess) in the hands of the non-resident and at 20 per cent (plus surcharge and cess) in the hands of resident (without the benefits of indexation and neutralisation of foreign exchange fluctuation).


With effect from 1 April 2020, any accumulated losses (in the nature of business loss) incurred by Category I or Category II AIFs will be passed to the investors who will be able to set these off against their income, provided that they have held units in the AIF for longer than 12 months. In addition, with effect from 1 April 2020, any accumulated losses (not in the nature of business losses) incurred by Category I or Category II AIFs prior to 31 March 2019 will be passed to the investors, subject to the condition that they held units in the AIF on 31 March 2019. Accordingly, such losses can be carried forward and set off by the investors against their income from the year in which the loss had first occurred, taking that year as the first year in accordance with Chapter VI of the Income Tax Act. However, such pass-through benefit of losses will not be available to investors who acquired units of AIFs on or after 1 April 2019.

Offshore investments

By way of a circular dated 3 July 2019, the Central Board of Direct Taxes has clarified that any income in the hands of a non-resident investor from offshore investments routed through a Category I or Category II AIF that is deemed a direct investment outside India is not taxable in India under Section 5(2) of the Income Tax Act. The circular further clarified that any exempt loss arising from the offshore investment by a non-resident investor may not be set off or carried forward against the income of the Category I or Category II AIF. This clarification essentially prevents double taxation of the non-resident investor's income in India and in its country of residence.


The Finance Act 2019 exempted taxation of income arising from the transfer of global depository receipts, rupee-denominated bonds and derivatives on a stock exchange in an IFSC, for non-resident investors of Category III AIFs, provided that the income is solely in the form of convertible foreign exchange and all units of the AIFs are held by non-residents (except for units held by the sponsor or manager). The scope of this exemption has been further expanded vide the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 by extending it to (1) income on transfer of any securities (other than shares in a company resident in India); (2) income from securities issued by a non-resident where such income otherwise does not accrue or arise in India; and (3) business income from a securitisation trust. This exemption is a positive step to boost offshore funding raising by Category III AIFs in an IFSC.

Additionally, a unit situated in an IFSC (as defined under the Special Economic Zones Act 2005) is exempt from tax on dividend distributed from income accumulated by such unit from its operations in the IFSC from 1 April 2017. Similarly, the distributions made by mutual funds located in IFSCs, which derive income solely in the form of convertible foreign exchange and all units of which are being held by non-residents, are tax exempt.

VI Regulatory developments

i Amendments to Foreign Direct Investment Policy

Under the Foreign Direct Investment Policy (the FDI Policy), any investment by a citizen or an entity of or incorporated in Bangladesh or Pakistan required prior government approval. Additionally, investments from Pakistan were prohibited in sectors such as defence, space and atomic energy. In this regard, a significant amendment to India's FDI policy came in April 2020 through Press Note 3 of 2020 (Press Note 3) issued by the Department of Industrial Policy and Promotion, Government of India, which imposed certain restrictions on investment in India by entities residing in countries sharing a land border with India. Press Note 3 was issued with the intent of curbing opportunistic takeovers and acquisitions of Indian companies at distressed valuations, in light of the disruptions caused by the covid-19 pandemic. Pursuant to Press Note 3, any investment by an entity of a country that shares a land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country will require the prior written approval of the government of India. Accordingly, any potential investor into India will need to test their shareholding structure to confirm whether there is any beneficial ownership by an entity or individual with citizenship to whom such location restrictions apply.

In addition, Press Note 3 does not define the term 'beneficial ownership'. Accordingly, stakeholders have relied on the definition of beneficial ownership as defined in other legislations such as Companies (Significant Beneficial Owners) Rules, 2018 or the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005. However, these legislations prescribe different thresholds for determination of beneficial owners, adding to the regulatory uncertainty.44 In addition, Press Note 3 has introduced the requirement of prior approval of the government of India in case of transfer of any current or future foreign direct investment in any Indian entity that results in the beneficial ownership being transferred to any person of a country sharing its land borders with India.

Another important amendment to the FDI policy was introduced in February 2020 pursuant to which foreign investors are now permitted to acquire up to a 100 per cent stake in an insurance intermediary, subject to verification by the Insurance Regulatory and Development Authority of India. Accordingly, investments in intermediaries such as insurance brokers, insurance consultants, surveyors and third-party administrators can be made under the automatic route.

ii Relaxations under the IBC

As set out in Section III, the government has provided certain exemptions and relaxations through certain amendments to the IBC, one of the most significant being the prohibition on filing of applications for corporate insolvency resolution (against entities that have defaulted in payments to their creditors) after 25 March 2020. This relaxation was initially valid for a period of six months but has now been extended until 31 March 2021. In addition, the resolution professional (appointed for, inter alia, overseeing the insolvency resolution process) has been precluded from initiating proceedings against directors of corporate debtors accused of fraudulent or wrongful trading, for instances where the filing of applications for initiation of corporate insolvency resolution process have been disallowed. Another notable development is the increase in the minimum amount of default from 100,000 rupees to 10 million rupees. Consequently, the number of admitted cases have reduced significantly, which has provided much need relief to companies dealing with the onslaught of the covid-19 pandemic.

iii REITs and InvITs

In January 2020, SEBI issued guidelines on rights issue of units by InvITs and REITs, which were subsequently amended in March 2020. These guidelines provide a framework for issue of units by a listed InvIT or REIT to its unitholders, prescribing certain conditions such as minimum subscription of 90 per cent, pricing and provision for fast-track rights issue. This will ensure that the REITs are able to raise funds while at the same time meeting certain regulatory thresholds.

In June 2020, SEBI amended the REIT Regulations and the Infrastructure Regulation with a view towards enhancing the ease of doing business in India. One of the key amendments permitted sponsors of InvITs and REITs, whose units have been listed for a period of three years to de-classify themselves (i.e., cease to be a sponsor), subject to the approval of the unitholders of the relevant InvITs and REITs. This amendment will effectively allow the persons identified as sponsors to step down from such position subject to the fulfilment of certain conditions.

Another key change relates to change or change of control of the sponsor or the inducted sponsor of an InvIT or REIT, which now requires approval of 75 per cent of the unitholders of the relevant REIT/InvIT (by value) excluding the value of units held by parties related to the transaction. In the event such approval is not obtained, the inducted sponsor or sponsor needs to provide an exit to the dissenting unitholders by purchasing their units. In addition, the term 'change in sponsor' has been defined to mean any change because of the entry of a new sponsor, whether or not the existing sponsor has exited. This amendment effectively grants additional protections in relation to the rights of unitholders of just investment trusts.

In this context, prior to June 2020, each sponsor under the REIT Regulations needed to hold at least 5 per cent of the outstanding units of a REIT at any time. In addition, the sponsor and its sponsor group were required to hold at least 15 per cent of the outstanding units of the REIT. The amendments to the REIT Regulations in 2020 have done away with the perpetual lock-in of sponsor and sponsor group's unitholding. Currently, the REIT Regulations mandate a post-listing lock-in of 25 per cent of the outstanding capital of REIT for a period of three years. Moreover, a lock-in period of one year will apply in the event the unitholding exceeds 25 per cent in the REIT.

iv Amendments to AIF Regulations

In October 2020, SEBI amended the requirements to be fulfilled by the key investment team of the 'manager' of an AIF. Under the new norms, the key investment team of the manager of an AIF should have minimum experience of five years and adequate professional qualification. These requirements may be fulfilled individually or collectively by the personnel of key investment team.

In addition, a new provision was added to the AIF Regulations which provides that the manager of the AIF will be responsible for all the investment decisions of the AIF. In this context, the manager may constitute an investment committee subject to compliance with certain conditions, including the following: (1) members of the committee will be equally responsible for the investment decisions as the manager; (2) the manager and the investment committee will jointly and severally ensure compliance of the investments with the AIF Regulations, any fund documents or any agreement with the investors; and (3) external members whose names were not disclosed in the placement memorandum may be appointed only with the consent of 75 per cent of the investors (by value of their investment in the AIF). Such provisions have been introduced for ensuring the competency of the key investment teams of AIF managers.

v Amendments in the consequences of certain offences under the Companies Act, 2013

In order to ensure ease of compliance, the MCA has modified the consequences of certain offences under the Companies Act, 2013 (CA 2013) and deleted the penal provisions for other offences. The recent amendments introduced in September 2020, inter alia, provided for a reduction in the amount of monetary penalty for certain offences (such as failure to filing notices for alteration of share capital, filing of annual return, filing of board or shareholders' resolutions and surpassing the prescribed maximum number of directorships).

In addition, the several existing offences have been de-criminalised by removing the penalty of imprisonment in relation to, inter alia, offences pertaining to buy-back of securities, mis-statements in financial statements and board's report, improper constitution of sub-committees and failure of directors to disclose interest in matters in which he or she is interested. Moreover, the amendments also recategorised certain offences from compoundable offences to in-house adjudication framework. Accordingly, various registrars of companies can now adjudicate on such offences, thus reducing the burden of the National Company Law Tribunal.

In addition to the aforesaid changes introduced for the purpose of easing the compliance requirements of companies doing business in India, CA 2013 has been appropriately amended to deal with the exigencies of the covid-19 pandemic. Earlier, certain matters (such as approval of annual financial statements, board report and prospectus) could not be dealt with in a board meeting through video conferencing or any other audio-visual means. In other words, decisions on such matters required the physical presence of the requisite quorum of directors. This condition has been relaxed in March 2020 and will continue until June 2021. Accordingly, all corporate matters can now be dealt with in a board meeting through video conferencing or any other audio-visual means, without any restriction. In respect of general meetings of shareholders of a company, the MCA has issued several circulars and directions in 2020 that have set down the norms to be followed for conducting such meetings through video conferencing or other audio-visual means until 31 December 2021.

vi Filing of resolutions by non-banking financial institutions

Under CA 2013, banking companies were exempted from filing of resolutions passed by their board of directors for grant of loans, guarantees or providing security in respect of loans, in the ordinary course of their business. Pursuant to the amendments to CA 2013 in September 2020, such exemption has now been extended to all classes of non-banking financial companies and housing finance companies. This exemption will reduce the day-to-day procedural burden on the non-banking financial companies and housing finance companies that perform activities similar to those of banking companies.

vii Relaxations for conducting board and general meetings of companies

As per the Companies (Meetings of Board and its Powers) Rules, 2014, certain matters (such as approval of annual financial statements, board report, prospectus, etc.) cannot be dealt with in a board meeting through video conferencing or any other audio-visual means, except where the quorum requirement is satisfied by the directors physically present. This condition has been relaxed through amendment to the relevant rule in March 2020, in light of the restrictions posed by the global pandemic, and shall continue until June 2021. Accordingly, all matters can now be dealt with in a board meeting through video conferencing or any other audio-visual means without any restriction.

In respect of general meetings, the MCA has issued several circulars and directions in 2020 to ease certain norms: (1) extension of the due date for conducting the annual general meeting until 31 December 2020; and (2) permitting conducting of extra-ordinary general meetings as well as annual general meetings through video conferencing or other audio-visual means until 31 December 2021, subject to compliance of the procedural requirements specified in the relevant circulars.

viii Developments relating to compromise or arrangement

The central government in February 2020 notified Sections 230(11) and 230(12) of CA, which deal with takeover offers in unlisted companies. The section provides for arrangements between a company and its creditors or members or any class of them, specifying the procedure to be followed to make such a compromise or arrangement.

The newly notified Section 230(11) provides that in the case of unlisted companies, any compromise or arrangement may include a takeover offer. Section 230(12) permits a party aggrieved by the takeover offer to make an application, bringing its grievance before the National Company Law Tribunal (NCLT). In addition, the MCA has also notified the corresponding rules that prescribe the manner in which applications may be made under the aforesaid sections.

In effect, these provisions allow majority shareholders, holding 75 per cent of the shares of a company, to make a takeover offer to acquire any part of the remaining shares, by way of an application before the NCLT. For this purpose, shares have been defined to mean equity shares or securities such as depository receipts, which entitle the holder thereof to exercise voting rights. In addition, the amended rules set out the manner in which a minority shareholder (or any other party) aggrieved by such offer may make an application to the NCLT in relation to his or her grievances.

VII Outlook

Despite the Indian economy facing a slowdown, PE/VC investment levels in India continued to maintain parity with that of 2019, albeit largely as a result of the funding secured by the Reliance group for its technology and retailing arms, from a slew of foreign investors. However, excluding the Reliance deals, the Indian PE-VC ecosystem witnessed an aggregate investment of US$37.33 billion, which is a far cry from US$47.3 billion. Moreover, exits by PE/VC firms in 2020 suffered a sharp decline because of declining valuations, reaching a six-year low. However, the capital markets in India have been exuberant and there is an expectation of a number of PE portfolio company driven listings in the first half of 2021.

As we progress into 2021 with the worst of the global pandemic behind us, India is likely to be one of the fastest growing major economies over the next decade, which makes it an extremely attractive market for the global private equity industry. PE investments are expected to grow by 15 to 25 per cent as a result of India's growth potential owing to government initiatives and enhancements in ease of doing business, as well as an above-average showing in results by the Indian industry over 2020.


1 Raghubir Menon and Ekta Gupta are partners, Shiladitya Banerjee is a principal associate and Rohan Singh and Palak Dubey are associates at Shardul Amarchand Mangaldas & Co.

12 ibid.

13 ibid.

36 An AIF that invests in start-up or early-stage ventures, social ventures, small and medium-sized enterprises (SME), in infrastructure or other sectors or areas that the government or regulators consider socially or economically desirable (including VC funds, SME funds, social venture funds, infrastructure funds, angel funds and such other AIFs as may be specified).

37 An AIF that does not fall into Category I and III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted under the AIF Regulations will be a Category II AIF.

38 An AIF that employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives will be a Category III AIF. AIFs such as hedge funds or funds that trade with a view to making short-term returns or other open-ended funds can be included.

39 A sponsor is a person who sets up a REIT and is designated as such at the time of application made to SEBI. It also includes an inducted sponsor.

44 The Companies (Significant Beneficial Owners) Rules, 2018 prescribe a threshold of 10 per cent for significant beneficial owner of a company while the Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 prescribe 25 per cent controlling ownership or profit share of the company or person who holds the position of senior managing official, for identifying the beneficial owner.

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