The Private Equity Review: India

I Overview

The year 2020 brought the covid-19 pandemic along with other headline-grabbing challenges like global geopolitical tensions, lockdowns, trade wars, the India–China military stand-off, presidential elections in the United States, slowing consumption growth in core sectors, stress in the banking and lending space. However, despite the uncertainty resulting from the covid-19 pandemic, macroeconomic outlook and geopolitical situations, deal values in 2020 nearly retained parity with 2019, recording 1,268 transactions worth US$80 billion, up 7 per cent from 2019.2

As the pandemic wreaked havoc across economies, capital markets tanked, and foreign portfolio investors (FPIs) and foreign institutional investors (FIIs) pulled out nearly 1.18 trillion rupees from India in March. However, markets rebounded sharply and from June to December an influx of money came rushing back and Indian markets saw new inflows in excess of 2 trillion rupees. Massive inflow of capital, low interest rates and abundant liquidity also pushed India's stock markets to a record high, paving the way for India's expected road to recovery.3

Despite the pandemic and contracting economy, corporate India showed agility, adaptability and resilience in 2020. Despite the number of private equity (PE), venture capital (VC) and mergers and acquisitions (M&A) transactions dropping to the lowest in the last five years, the total value of PE, VC and M&A transactions in 2020 grew close to 12 per cent at US$83.6 billion.4 Despite the challenges faced by the Indian economy in 2020, 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 2020

Despite a cautious approach of investors in the first half of 2020, India appears to be resilient and has demonstrated signs of a stable deals landscape. 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 2020. 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, in 2020, telecom, retail, education and pharmaceuticals continued to attract investors and recorded increase in value invested. Because of continuing challenges for companies across manufacturing, infrastructure, financial services and real estate sectors, there has been significant increase in the 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.

PE funds such as Warburg Pincus, Goldman Sachs, Carlyle, General Atlantic, Blackstone, Silver Lake, Vista Equity and KKR, along with SWFs such as Public Investment Fund (PIF), GIC, Mubadala Investment Company, CPPIB, the Abu Dhabi Investment Authority and the Qatar Investment Authority, continued to demonstrate appetite for investing in Indian assets.

Mukesh Ambani's Reliance Industries Ltd, India's biggest private sector refiner, retailer and telecom operator left everyone with flurry of dealmaking in both M&A and PE space. It signed more than two dozen deals accounting for nearly US$31 billion.5

M&A dealmaking in India

The M&A space saw overall value rise by 15 per cent but number of deals slipped by about a third in 2020. The value of M&A deals stood at US$43.6 billion and total number of deals was a little above 620 compared to US$37.77 billion across 931 deals in 2019.6 M&A deals rose in value despite the pandemic.7

As per the PwC report, domestic M&A activity in India accounted for nearly 50 per cent of total M&A activity at US$20.7 billion, followed by inbound M&As amounting to US$13.4 billion, whereas outbound M&A and other M&A activity amounted for US$3.8 billion and US$4.3 billion, respectively. The top 5 M&A deals struck during 2020 were as follows.8

TargetBuyerDeal typeDeal value (US$ billions)% sought
Jio Platforms LtdFacebook IncInbound5.79.9
Jio Platforms LtdGoogle LLCInbound4.57.7
Future Enterprises Ltd (retail, wholesale, logistics and warehouse business)Reliance Retail Ventures LtdDomestic3.3100
Lummus TechnologyHaldia Petrochemicals Ltd and Rhone Capital LLCOutbound2.7100
GMR Airports LtdGroupe ADPInbound1.549

Reliance Group companies dominated the M&A dealmaking space in an unprecedented manner, which included Facebook and Google's investment of over US$10 billion in Jio Platforms Ltd and Reliance Retail Ventures Ltd's proposed acquisition of wholesale, logistics and warehousing businesses of Future Group for close to $3.4 billion. In the tech sector, cash rich Indian companies, Infosys, Wipro, Tech Mahindra and HCL Technologies remained active. In addition, Cognizant spent more than US$1.1 billion on various M&As in 2020. The healthcare sector saw 63 deals worth US$2.4 billion in 2020 compared to US$1.89 billion across 88 deals in 2019. Edtech was among the most active sectors in the start-up ecosystem, in which Byju's acquisition of coding-focused WhiteHat Jr for US$300 million proved to be highlight deal of 2020. Unacademy also struck at least five deals: Coursavy, Kreatryx, PrepLadder, Mastree and CodeChef. UpGrad made at least two acquisitions – recruitment and staffing firm Rekrut India Pvt Ltd, and test-preparation company The Gate Academy. In the e-commerce space Walmart-owned Flipkart acquired Mech Mocha and made investment in Aditya Birla Fashion and Retail Ltd.9

With a number of companies struggling to stay afloat, large strategic investments are expected in 2021 in the M&A space in India.10

PE dealmaking in India

The year 2020 saw record PE dealmaking activity in India and exceeded expectations with investments worth US$38.2 billion.11 Consolidation to achieve size, scalability, new product portfolios and better operating models catapulted deal activity upward in the PE space. Similar to M&A space, Reliance Group companies dominated headlines in PE space too. Following Facebook, a consortium of funds, including TPG, KKR, General Atlantic, Silver Lake and other PE players and SWFs invested US$9.8 billion in Jio Platforms. Similarly, Reliance Retail Ventures saw investments worth over US$5.1 billion from similar PE and SWF investors. These investments catapulted growth stage and late-stage PE investments to an all-time high in India.12

The downward trend in deal volume continued in 2020; however, deal values surged upward in 2020 indicating an increase in the average ticket size. 2020 recorded 17 deals in the billion-dollar bracket compared to nine such deals in 2019.13

Though 2020 saw a decline in buyout deals, control still remain 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. In addition, it showcased 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. Consolidation, secondaries and deleveraging are expected to remain key drivers for PE activity in 2021. PE funds, SWFs and strategic investors sitting with significant volumes of dry powder will be willing to take a long-term view on their investments in 2021.

PE investments in 2020 by stage

Based on data collected from 1 January 2020 to 7 December 2020, as per a PwC report, growth investment deals were the major contributors to PE dealmaking in India and accounted for US$15 billion compared to US$8.5 billion in 2019, followed by late-state investments (US$11.2 billion in 2020 compared to US$9.6 in 2019). Buyouts witnessed a sharp decrease compared to 2019 and saw deals worth US$3.8 billion compared to US$12.2 billion in 2019, followed by early stage investments (US$1.1 billion compared to US$1.4 billion in 2019) and public investment in private equity (PIPE) deals (US$0.9 billion compared to US$2.5 billion in 2019).14

Exits

The downward trend in exits compared 2018 and 2019 continued in 2020. Exits reached an all-time low in the last six years. In 2020, exits declined 46 per cent in terms of value (US$6 billion versus US$11.9 billion in 2019) and 4 per cent in terms of volume (151 deals in 2020 versus 157 deals in 2019).15

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

An Ernst & Young (EY) survey shows that Indian organisations still prefer the conventional ESOP, where the Indian company typically sets up an employee trust to administer the ESOP scheme. Employees are given the option to purchase shares, and the option can be exercised after vesting in the employees. Usually, the share option plan is structured in such a way that shares will vest in tranches,17 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.18

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.19

Because 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.20 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.21

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.22

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) 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.23

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.24

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 2018.25

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 Reserve Bank of India (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.

ii Legal framework

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), real estate investment trust (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 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 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.

GAAR

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 a 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,26 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'.27 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.

III Year in review

i Recent deal activity

Piggybacking on US$17.3 billion investment in Reliance Group entities, 2020 recorded PE/VC investments of US$47.6 billion,28 out of which PE accounted for nearly US$39.2 billion,29 at par with investments in 2019. As per the report by IVCA,30 whereas the number of PE deals decreased, 2020 surpassed all records for PE investment by value:

Year20162017201820192020
Number of deals8928589841012812
Amount (US$ billion)13.523.936.436.339.2

Key investors, LPs, SWFs, pension funds

Along with the usual segment leaders Blackstone and KKR, West Asian sovereign wealth funds and a couple of US buyout firms proved to be the top bulls in the PE investment segment in India. Saudi Arabia's PIF led the ranking for top PE investor in 2020.31 Together, 11 PE investors invested or committed at least US$25 billion in 2020.32 The number of investors who invested more than US$1 billion doubled in 2020 and there were eight investors who put in at least US$2 billion to work in India in 2020.33 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 2020. As per the VCCircle Report, the following were the top PE/SWF investors in India in 2020:34

PE/SWF investorAmount (US$ billion)Number of deals
Saudi Arabia's PIF3.34
Blackstone3.27
KKR3.055
Silver Lake2.83
Brookfield2.86
GIC2.215
Mubadala2.052
ADIA2.06
Vista PE1.51
General Atlantic1.46
Carlyle0.853

SWFs have been relatively active in the telecom and retail space in 2020, 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.35

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. GIC turned out to be the most active investor. Apart from sealing a mega deal for an India-dedicated platform for warehousing, it backed The Phoenix Mills, Midspace REIT and Prestige Estate in 2020.36

Key trends, sectors and deals

Despite the slowdown in deal volume, deal value saw an upward trajectory, indicating an increase in the average ticket size. Nineteen of the 85 large deals in 2020 were on account of investments in Reliance Group entities (worth US$17.3 billion). Other large deals in 2020 include Brookfield's acquisition of commercial space from RMZ Corp US$2 billion, Blackstone's purchase of the rental income assets of Prestige Group for US$1.5 billion, Blackstone's acquisition of Piramal Glass Private Limited for US$1 billion, Thoma Bravo's US$729 million buyout of Majesco Limited's US business, a US$660 million investment in food delivery platform Zomato by Tiger Global, Fidelity and a group of other investors and Baring PE Asia's buyback of shares of Hexaware Limited worth US$565 million.37 In another trend in 2020, investors showed preference for 'quality companies' by shelling out large cheques for minority stakes without board seats or voting preferences. KKR, TPG and General Atlantic settled for a below 10 per cent stake in Reliance entities.38

Following the success story of the Blackstone-backed first REIT39 in India in 2019, REIT offerings from Mindspace and Brookfields were lapped up by investors. Further, InvITs also attracted significant attention from the investors in 2020. In one of the mega deals of 2020, PIF and ADIA invested US$1 billion to acquire a 51 per cent stake in Digital Fibre Infrastructure Trust (DFIT), the InvIT established by Reliance.

As per the EY Report, in 2020 almost all sectors recorded a sharp decline in value invested, except telecom, retail, education and pharmaceuticals. Telecom was the top sector with US$10 billion invested across 13 deals (10 times increase year-on-year (yoy)), followed by retail and consumer sector with US$6.6 billion invested across 46 deals (6.7 times increase yoy), real estate with US$5.2 billion invested across 31 deals (16 per cent decline yoy), financial services with US$4.8 billion invested across 144 deals (47 per cent decline yoy), technology with US$3.3 billion invested across 140 deals (16 per cent decline yoy), pharmaceuticals with US$3.0 billion invested across 36 deals (2.4 times increase yoy), e-commerce with US$2.5 billion invested across 112 deals (47 per cent decline yoy) and education with US$2.1 billion invested across 71 deals (2.7 times increase yoy). The infrastructure sector, that received the highest value of investments in 2019, received US$5.0 billion across 30 deals in 2020 (64 per cent decline yoy).40

The top five PE transactions (by deal value) in 2020 were:41

CompanyInvestorDeal value (US$ billions)Stake (%)
Jio PlatformsPublic Investment Fund of Saudi Arabia, Vista Equity Partners, Mubadala Investment, ADIA, Silver Lake, L Capital Asia, TPG Capital, Qualcomm Ventures, KKR, Intel Capital and General Atlantic9.9N/A
Reliance Retail VenturesMubadala Investment, ADIA, TPG Capital and GIC2.64.25
Reliance Retail VenturesSilver Lake, KKR and General Atlantic2.54.25
RMZ CorporationBrookfield1.9N/A
Reliance Retail VenturesPublic Investment Fund of Saudi Arabia1.32.04

As per the EY Report, other notable PE deals in India in 2020 (excluding Reliance group, infrastructure and real estate) were:42

CompanyInvestorSectorStageDeal value (US$ millions)Stake (%)
Piramal Glass Private LimitedBlackstoneIndustrial ProductsBuyout1,000100
Majesco Limited (US Business)Thoma Bravo LPTechnologyBuyout729100
Zomato Private LimitedTiger Global, Kora and othersE-commerceGrowth Capital660N/A
Hexaware Technologies LimitedBaring PE AsiaTechnologyPIPE56529
Natrol LLC (US unit of Aurobindo Pharma)New Mountain CapitalPharmaceuticalsBuyout550100
Think and Learn Private Limited (Byju)General Atlantic, Own Ventures, Tiger Global, Silver Lake Management and othersEducationGrowth Capital496NA
JB Chemicals and Pharmaceuticals LimitedKKRPharmaceuticalsBuyout49065
Piramal PharmaCarlylePharmaceuticalsGrowth Capital45020
Everise Holding (C3)BrookfieldTechnologyBuyout400>50
ECL Finance LimitedFarallon Capital and SSG CapitalFinancial ServicesCredit Investment346NA
Piramal Enterprises LimitedFarallon CapitalFinancial ServicesCredit Investment300NA

In addition, other notable infrastructure and real estate investment in 2020 (excluding RMZ Corp –Brookfield deal) as per the EY report were:43

CompanyInvestorSectorStageDeal value (US$ millions)Stake (%)
Prestige Estates Projects Limited (rental income assets)BlackstoneReal EstateBuyout1,500100
ESR Cayman JV (industrial and logistics assets)GICReal EstateBuyout60080
Chennai Nashri Tunnelway LimitedCube HighwaysInfrastructureBuyout527>50
RattanIndia Power LimitedGoldman Sachs, Varde PartnersInfrastructureCredit Investment566NA
Ayana Renewable Power Private LimitedCDC Group, Green Growth Equity Fund, NIIFInfrastructureBuyout390NA
IndInfravit TrustCPPIB, OMERS Infrastructure Management and othersInfrastructureGrowth Capital24624
Shapoorji Pallonji Infrastructure (5 solar assets)KKRInfrastructureBuyout204100
Navayuga Roads Projects Private Limited (two road assets)Edelweiss Alternative Asset AdvisorInfrastructureGrowth Capital150NA
Renew Power LimitedDevelopment Finance CorporationInfrastructureCredit Investment142NA
Acme Cleantech (600 MW solar assets)ActisInfrastructureBuyout127100

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 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 2019.44 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 assets sector.

The distressed assets market was already going through teething problems when the covid-19 pandemic struck. 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 2021.45

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 Insolvency and Bankruptcy Code 2016 (the Insolvency Code or 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 (approximately US$1,371.45) to 10 million rupees (approximately US$0.137 million).

India's macroeconomic troubles are attracting a new wave of global investors betting they can eke out profits from the rising number of capital-starved businesses struggling to stay afloat. Researcher Venture Intelligence calculates that funds have already pumped $1.5 billion in distressed assets in India this year, 55 per cent more than through all of 2019.46

Indian banks had the world's worst bad loan ratio among major economies even before its strict lockdown began in March, throttling economic activity. The central bank now estimates soured assets will rise to an over two-decade high of 12.5 per cent by the end of March 2021, from 8.5 per cent a year ago, a sign of the difficulties businesses will face.47 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. After the 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 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. 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. In November 2020, India's largest private-sector mortgage lender HDFC Ltd acquired nearly 20 per cent. According to experts, the size of the market in opportunities in the NPA space is pegged at US$150 billion.48

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. In one of the major deals in distressed space, India's central bank asked Singapore-based DBS Group Holdings Ltd's India unit to take over capital-starved Lakshmi Vilas Bank Ltd in 2020.49 While, marquee deals like Reliance Jio's proposed acquisition of debt-laden Reliance Infratel Limited (financial creditors are expected to take a haircut of as much as 90 per cent on their loans under the resolution plan) and Vedanta's Group proposed acquisition of 13 companies of insolvent appliance maker Videocon Industries were initiated in 2020, the biggest stressed asset transaction for 2020 in stressed asset was State Bank of India infusing 60.5 billion rupees in Yes Bank for a 48.2 per cent stake.

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, as there is a 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. However, it was more on account of the cautious approach by the investors as a result of the pandemic in 2020. 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.50 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.51

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.

Challenges

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 2020

Compared to 2019, 2020 saw a sharp decline in buyout deals. 2020 recorded 43 buyouts worth US$11.8 billion compared to 61 buyouts worth US$16.5 billion in 2019. Overall buyout activity recorded a decline of 28 per cent in terms of deal value and 30 per cent in term of volume.52 As per the PwC report, the risk averse approach adopted by several funds earlier in the year, as well as need for smaller rounds for cash infusion in cash strapped business, led to a drop in buyout activity in 2020.53 In spite of a notable downward trend because of this cautious approach, 2020 saw its share of notable buyout deals.

One of the largest control deals was Brookfield's acquisition of controlling stake in real estate assets of RMZ corporation for US$2 billion. Certain other buyouts included PIF and ADIA acquiring a controlling stake in Reliance Digital Fibre Infrastructure Trust for US$1.02 billion, Blackstone acquiring a 100 per cent in assets of Prestige Estate assets for US$1.5 billion; Blackstone a 100 per cent stake in Piramal Glass Private Limited for US$1 billion, Thoma Bravo LP acquiring Majesco Limited (US business) for US$729 million, New Mountain Capital acquiring Natrol LLC (US unit of Aurobindo Pharma) for US$550 million and KKR acquiring a controlling stake in JB Chemicals and Pharmaceuticals Limited for US$496 million.54

However, steered by the need for value creation, preservation and enhancement, control will remain a key element for most investors in future.55 This was demonstrated by the late pick-up in buyout deals in last month of 2020, which recorded nine buyouts worth US$4.7 billion (40 per cent of all buyouts by value in 2020).56 2020 also witnessed signing of one of the biggest buyout deals in the Indian market (i.e., proposed acquisition of retail, wholesale, logistics and warehouse business of Future Enterprises Limited by Reliance Retail ventures for US$3.3 billion), which is expected to be completed in 2021. Control has become and will remain a key element and deal driver in most transactions.

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.57 Amidst market volatility, the downward trend seen in 2019 continued in 2020 and exits reached an all-time low in the last six years. In 2020, exits declined 46 per cent in terms of value (US$6 billion versus US$11.9 billion in 2019) and 4 per cent in terms of volume (151 deals in 2020 versus 157 deals in 2019).58

Open market sales accounted for the largest share of the exit value in 2020 at US$2.4 billion (67 deals), a 47 per cent decline compared to 2019. Public offerings provided exits worth US$1.2 billion across nine IPOs in 2020 compared to US$247 million across eight IPOs in 2019. Exits via strategic sales dropped 47 per cent to US$1 billion across 44 deals. Secondary sales recorded their lowest value in 4 years at US$913 million across 20 deals.59

According to VCCircle, the following were the top exit deals by PE firms that fully exited portfolio firms in 2020.60

Top PE/VC full exit
Target companyPE sellerExit amount (rupees)*Investment amount (rupees)Internal rate of return (%)Mode
AU Small Finance BankWarburg Pincus40,300,000,0002,550,000,00065–68Open Market
AU Small Finance BankIFC19,600,000,000960,000,000 – 970,000,00058–60IPO + Open Market
Indus TowersProvidence18,850,000,000†21,000,000,000†Likely haircutSecondary (M&A)
Metropolis HealthcareCarlyle15,458,200,0007,730,000,00017–18IPO + Open Market
Laurus LabsWarburg Pincus14,000,000,0005,500,000,00023–24IPO + Open Market
AU Small Finance BankChrysCapital12,800,000,000 – 12,850,000,0001,350,000,000 – 1,360,000,00053–55IPO + Open Market
Intas PharmaceuticalsCapital International9,960,000,0006,900,000,00015Secondary
Happiest MindsJP Morgan
CMDB II
4,523,300,000680,000,000 – 700,000,00043–44IPO
IndiaMartElevation Capital2,050,000,000 – 2,100,000,000600,000,000 – 700,000,000123–130Open Market
* Multiple tranches leading to full exit in 2020
† VCCirle Estimates

In addition, according to VCCircle, the following were the top partial exit deals by PE firms in 2020.61

Top PE/VC partial exit
Target companyPE sellerExit amount (rupees)*Investment year
SBI Cards†Carlyle70,400,000,0002018
Embassy Office Parks REITBlackstone22,750,000,0002017
EPL (formerly Essel Propack)Blackstone18,500,000,0002019
Crompton Greaves ElectricalAdvent, Temasek16,310,000,0002015
CoforgeBaring PE Asia8,780,000,0002019
CAMS†Warburg Pincus7,513,300,0002018
Manappuram FinanceBaring PE Asia7,210,000,0002011
Tanla PlatformsBlackstone5,869,500,0002018
Aavas FinanciersPartners Group3,610,000,0002016
* VCCirle Estimates
† Exits vis IPOs; other exits are via open market deals

Valuation concerns and expectation mismatch between buyers and sellers resulted in a number of exit plans being shelved in 2020. Despite a dull first half, exits through IPOs picked up pace in the second half of 2020. November and December saw monthly exits move up to US$1 billion. Open market exits remain strong and secondary exits are expected to recover sharply in 2021. With exuberant capital markets in India, there is an expectation of a number of PE/VC portfolio-driven listings in the first half of 2021.

IV Regulatory developments

i Relevant regulatory bodies

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

  1. the RBI: 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; and
  4. other sectoral regulators: depending on the sector where the PE investor makes an investment, there may be sectoral regulators who will also oversee the investment; for example, the MCA oversees corporate affairs, the RBI oversees banks and financial services companies, the Insurance Regulatory Development Authority oversees the insurance sector, the Telecom Regulatory Authority of India oversees the telecommunications sector and the Directorate General of Civil Aviation oversees the aviation sector.

ii Key regulatory developments

Amendments to foreign direct investment policy

Under the foreign direct investment policy (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/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.62 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.

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 the corporate insolvency resolution process have been disallowed. Another notable development is the increase in the minimum amount of default from 100,000 rupees (approximately US$1,371.45) to 10 million rupees (approximately US$0.137 million). 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.

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 a 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 of, 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 as a result 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, it is noteworthy to mention that 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.

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 a minimum of five years' experience and adequate professional qualifications. These requirements may be fulfilled individually or collectively by the personnel of the 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.

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

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 they are interested. Moreover, the amendments also re-categorised 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.

Filing of resolutions by NBFCs

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.

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 due date for conducting 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.

Developments relating to compromise or arrangement

In February 2020, the central government notified Sections 230(11) and 230(12) of the CA, which deal with takeover offers in unlisted companies. The sections provide 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.

V Outlook

It would appear that 2020 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, 2021 will test the maturity, adaptability 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, covid-19 and vaccine: uncertainty and volatility triggered by major geo-political events (United States–China ties, India–China ties, the impact of the coronavirus and any new lockdowns), a strong dollar against other currencies and the imposition of new sanctions and trade barriers by nations may keep impacting upon emerging markets in general.
  2. Investor outlook: fundamentals for investment in India will remain strong in the long run, with key drivers such as (1) major reforms aimed at cleaning up the economy and improving ease of doing business in India; (2) record levels of dry powder at the disposal of Asia-focused private equity funds; (3) the race for dominance in the telecom, technology, e-commerce industry; (4) renewed interest in India's growth story from very deep-pocketed long-term institutional investors, SWFs and strategic buyers; and (5) the availability of high-quality distressed assets on the auction block.
  3. Primary triggers: triggers include (1) consolidation to strengthen market position; (2) financial deleveraging; (3) monetising of non-core assets; (4) entering new geographies; (5) the faster pace of insolvency proceedings; (6) the great Indian distressed-asset sale supplying assets at attractive valuations across a number of core areas; (7) 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 2021. Pharmaceuticals, insurance, telecom, 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 2021.
  4. The government of India has put in motion plans to divest a number of 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 because of the size and valuation of these heavyweight assets.

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. Overall, the deal triggers seen in 2020 are expected to continue to drive both deal values and volumes in 2021.


Footnotes

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

7 See footnote 4.

8 See footnote 2.

9 See footnote 7.

10 See footnote 2.

11 ibid.

12 ibid.

13 See footnote 2.

14 ibid.

18 ibid.

20 See footnote 16.

21 ibid.

23 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).

24 See footnote 22.

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

27 ibid.

28 See footnote 15.

30 ibid.

32 ibid.

33 ibid.

34 ibid.

37 See footnote 15.

39 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.

40 See footnote 15.

41 See footnote 2.

42 See footnote 15.

43 See footnote 15.

51 ibid.

52 See footnote 15.

53 See footnote 2.

54 See footnotes 15 and 2.

55 See footnote 2.

56 See footnote 15.

58 See footnote 15.

59 ibid.

61 ibid.

62 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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