The Private Equity Review: India

I Overview

Following pandemic-driven slowdowns and other disruptions including inflation, geopolitical tensions between major global and regional superpowers, local elections in key states in India, disruptions in the global supply chain and firm crude prices, 2021 proved to be a watershed year for deal activity in India and we witnessed a record high that surpassed the pre-covid level. Supported by record amounts of dry powder available with the private equity (PE) players, low interest rates, a strong fundraising environment and healthy capital markets, dealmaking activity scaled new heights in 2021.2 In a radically changed world, characterised by uncertainty, geopolitical instability, shifting consumer preferences and accelerated digitisation, there is a heightened need for agility and adaptability. Businesses are showing signs of adapting, be it embracing technology, diversifying non-core businesses or tapping new markets through acquisitions, divestitures and fundraising.3 The fundamentals for deal making from previous years continue to remain strong and the market expects the high levels of deal activity to continue in 2022.4 The Indian economy seems to have recovered much faster from the second and third waves of covid-19 than from the first wave a year ago. The controlled reopening of economic activities and accelerated immunisation drive have led to optimism in the economy and the deal space.5

India's GDP grew by 8.4 per cent in the second quarter (July–September) of fiscal year 2020–2021, compared to a 7.4 per cent contraction during 2020.6 The Organisation for Economic Co-operation and Development (OECD) estimates that in the third quarter of 2021 India enjoyed 12.7 per cent growth in its GDP. While the growth was visible across all sectors, eight sectors recorded more than US$1 billion in investments during the third quarter of 2021 itself with e-commerce receiving the highest value of investments followed by the financial services sector.7

As the demand for digitisation skyrocketed during the pandemic, India's start-up ecosystem recorded investments of nearly US$36 billion.8 In terms of exits, 2021 witnessed US$43.2 billion worth of exits through initial public offerings, secondary (at US$14.4 billion across 56 deals) sales and strategic sales (at US$16.9 billion across 96 deals). In this regard, the technology sector recorded the highest value of exits in 2021 (US$17.4 billion across 39 deals compared to US$847 million across 10 deals in 2020). The year saw the venture cycle come a full circle, particularly through exits through initial public offerings of companies such as Zomato, PolicyBazaar, Paytm and Nykaa. General Atlantic, TA Associates, Temasek, Visa, March Capital and Clearstone Venture executed definitive agreements to sell their stakes in Billdesk for US$2.9 billion to the PayU, to make it the largest exit in the third quarter of 2021 and the largest exit in the financial services sector.

After a remarkable overall surge in 2021, the momentum is expected to continue in 2022.

i Deal activity

General dealmaking trends in India in 2021

We witnessed a remarkable spike in deal activity in 2021, outperforming 2020 by 40 per cent in terms of value and 60 per cent in terms of volume. PE claimed the lion's share of deal activity in 2021, contributing 57 per cent by value and 61 per cent by volume, while M&A contributed the remaining 43 per cent by value and 39 per cent by volume. PE deal value reached an all-time high – 32 per cent higher in volume and 50 per cent higher in value compared to 2020. Deal volumes were bumped up by M&A activity in 2021, more than double the volume and 28 per cent higher in value compared to 2020. Mega deals have contributed greatly to this uptick.9 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.

While marquee transactions drove deal values, heightened PE volumes drove the overall deal volumes during the year 2021 witnessed the deadly second wave of covid-19 during the April to June quarter, bringing the economy to a halt, thereby resulting in the slowdown of activities in certain sectors. However, in light of the vaccination drives, the domestic economy continued the path to gradual recovery with the resumption of activities in the latter part of the year. Amid this, the year recorded over 2,100 deals valued at US$91.1 billion. In 2021 there were 14 deals valued at over a billion dollars each, 15 deals valued between at US$500 million and US$999 million and 135 deals valued at between US$100 million and US$499 million. While these deals accounted for only 8 per cent of the total deal volumes, they constituted 80 per cent of the value.10

Start-ups, e commerce and IT sectors were the major deal drivers in 2021, both in terms of volume and value. Banking, education, pharma, energy, manufacturing and aviation also witnessed high-value marquee deals during the year. The year 2021 also saw the emergence of 33 unicorns.11

M&A dealmaking in India

M&A deals saw a strong 14 per cent growth at US$42 billion across 499 deals, 39 per cent up from 2020. The surge in the values was largely supported by 10 deals recorded at and over US$1 billion each. Further, the deal volumes also reached pre-covid-19 levels, recording 13 per cent growth over 2019 volumes. While outbound volumes were higher than inbound volumes, high value inbound deals pushed the cross-border deal values to US$19.3 billion in 2021.12 Outbound deal activity was primarily fuelled by large deals in the renewable energy sector, such as Adani Green Energy's acquisition of SB Energy India for US$3.5 billion and Reliance New Energy Solar's acquisition of REC Solar Holdings for US$771 million. The next big contributor to deals was the IT sector, with Wipro's acquisition of Capco for US$1.5 billion and the acquisition of Great Learning and Epic by Byju's for US$600 million and US$500 million respectively. Domestic deal activity in 2021 was up 41 per cent from 2020 in terms of value, owing to seven billion-dollar deals. Economic optimism and the availability of abundant capital spurred domestic M&A in 2021, with companies liquidating non-core assets to streamline large corporate structures and in turn using the cash to buy assets. In the post-pandemic world, companies are also forced to react more quickly to competition by consolidation in order to capture a share of the pie, especially in the retail and consumer technology sectors.13

PE dealmaking in India

PE investment values recorded US$48.2 billion in 2021, marking the highest yearly values witnessed in any given year since 2011. This surge in the investment values is attributed to 112 high-value investments of US$100 million and above. Despite the turbulence caused by covid-19 and other geopolitical tensions, 2021 witnessed 1.5 times the growth in investment volumes compared with 2020, attracting a considerable portion of funding from overseas investors.14 Consolidation to achieve size, scalability, new product portfolios and better operating models catapulted deal activity upward in the PE space.

Control still remains 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 2021 by stage

In terms of deal type, all deal types except growth deals recorded increase in investments. Contrary to past trends where growth and buyouts used to be the top categories by value, for the first time, PE/VC investments in start-ups were the highest, recording US$28.8 billion in 2021 (US$7.3 billion in 2020), almost equal to the total value invested in start-ups in the previous three years combined and 2.5 times the previous high of US$11.7 billion recorded in 2019.15

After recording a significant decline during the pandemic in 2020, buyouts recorded a strong rebound and were the second largest deal type with US$22 billion recorded across 63 deals. This is also the highest ever – almost twice the value recorded last year (US$11.8 billion) and 28 per cent higher compared to the previous high recorded in 2019 (US$17.2 billion).16

Growth investments recorded US$19.2 billion across 183 deals, 16 per cent lower than last year (US$22.9 billion). 2020 had recorded large investments in Reliance group entities worth US$17.3 billion. Adjusted for these one-off large investments in 2020, growth investments have grown almost 3.3 times in 2021.17

Private investment in public equity (PIPE) deals increased by 46 per cent to US$4.5 billion across 77 deals (US$3.1 billion across 62 deals in 2020). Credit investments were at par with 2020 at US$2.6 billion across 85 deals (US$2.6 billion across 74 deals in 2020).18

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.19 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,20 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.21

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.22

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.23 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.24

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.25

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.26

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.27

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 2018.28

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 Insolvency and Bankruptcy Code 2016 (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 be 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 Department for Promotion of Industry and Internal Trade (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 (post listing of shares) 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,29 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'.30 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

As per PwC reported, PE activity reached an all-time high in 2021 and recorded 1,258 deals worth an enormous US$66.1 billion, up by 32 per cent in volume and 50 per cent in value from 2020. This was achieved by eight billion-dollar deals primarily in the technology sector totalling US$15.5 billion. Clearly, the technology sector dominated the PE landscape in 2021, contributing a total of US$40 billion to deal value. Abundant dry powder from PE investors contributed to PE activity. PE funds have demonstrated their faith in India's growth story and made long-term investments despite the pandemic. The India-centric dry powder has helped PE funds, and established companies with greater liquidity are expected to record more big-ticket deals.31

As per Grant Thornton report 2021 saw 14 deals valued at over a billion dollars each, 15 deals valued between US$500 million and US$999 million and 135 deals valued between US$100 million and US$499 million. While these deals accounted for only 8 per cent of the total deal volume, they constituted 80 per cent of the value. M&A deals saw a strong 14 per cent growth at US$42 billion across 499 deals, 39 per cent up from 2020. The surge in value was largely supported by 10 deals recorded at and over US$1 billion each. Further, the deal volumes also reached pre-covid-19 levels, recording 13 per cent growth over 2019 volumes. While outbound volumes were higher than inbound volumes, high-value inbound deals pushed the cross-border deal values to US$19.3 billion in 2021. PE investment value recorded US$48.2 billion in 2021, marking the highest yearly values witnessed in any given year since 2011. This surge in the investment values is attributed to 112 high-value investments of US$100 million and above. Despite the uncertainty surrounding covid-19 and other geopolitical tensions, 2021 witnessed 1.5 times the growth in investment volume compared with 2020, attracting a considerable portion of funding from overseas investors.32

Start-ups, e-commerce and the IT sector were the major deal drivers in 2021, both in terms of volume and value. The banking, education, pharma, energy, manufacturing and aviation sectors also witnessed high-value marquee deals during the year. The year 2021 also saw the emergence of 33 unicorns.33

As per the EY Report, the top PE and VC deals in India in 2021 (excluding infrastructure and real estate) were:34

CompanyInvestorSectorStageDeal value (US$ million)Stake (%)
Flipkart Private LimitedThe Qatar Investment Authority, SoftBank, Tiger Global, Tencent, GIC CPPIB and othersE-commerceGrowth capital3,60010
Hexaware Technologies LimitedCarlyleTechnologyBuyout3,000100
Mphasis LimitedBlackstone, ADIA, UC Invest, GICTechnologyBuyout2,80056
VFS Global Services Private LimitedBlackstoneBusiness and professional servicesBuyout1,87075
EncoraAdventTechnologyBuyout1,50080
Hinduja Global Solutions Limited, Healthcare Services BusinessBaring Private Equity AsiaBusiness and professional servicesBuyout1,200100
Atria Convergence Technologies LimitedPartners GroupTelecommunicationsBuyout1,200NA
TML EV CoTPG Rise Climate, ADQAutomotiveGrowth capital1,00011
ASK GroupBlackstoneFinancial servicesBuyout1,00074
StraiveBaring Private Equity AsiaTechnologyBuyout900100
Dream Sports Fields Private Limited (Dream11)Falcon Edge, DST Global, D1 Capital, Tiger Global, TPG Capital and othersMedia and entertainmentGrowth capital84011
BundlTechnologies Private Limited (Swiggy)Falcon Edge, Prosus Ventures, Accel India, Think Capital, GIC and othersE-commerceStart-up80016
InfogainCo.Apax PartnersTechnologyBuyout800100
IPL franchise for AhmedabadIrelia Company Pte Limited (CVC Capital Partners)Media and entertainmentBuyout749100
EruditusLearning Solutions Pte.LimitedCPPIB, Accel, SoftBank, Sequoia Capital and othersEducationGrowth capital65020

In addition, top infrastructure and real estate investments in 2021 as per the EY report were:35

CompanyInvestorSectorStageDeal value (US$ million)Stake (%)
Embassy Industrial Parks Private LimitedBlackstone Real Estate PartnersReal estateBuyout715100
IRB Infrastructure Developers LimitedGIC Private Limited, Ferrovial SAInfrastructurePIPE71242
ReNewPowerBlackRock, TT International Asset Management, TT Environmental Solutions Fund, Zimmer Partners and othersInfrastructurePIPE610NA
Engie SA-Indian Solar Energy AssetsEdelweiss fundInfrastructureBuyout55075
NHAI InVITCPPIB, Ontario Teachers' Pension Plan BoardInfrastructureGrowth capital53750
First Solar, TN PlantUS International Development Finance Corporation (DFC)InfrastructureCredit investment500NA
RMZ Corp, construction projects JVCPPIBReal estateGrowth capital340NA
2 Solar Projects of Fortum IndiaActisInfrastructureBuyout332100
Ground Holding Realty (JV with The Guardians Real Estate)Kotak Realty FundReal estateGrowth capital27250
Clean Max Enviro Energy Solutions Private LimitedAugment Infrastructure PartnersInfrastructureBuyout222NA

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 2019.36 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 2021.37

Following the trend of changes and clarifications, 2021 witnessed certain amendments to the Insolvency Code and the Insolvency and Bankruptcy Board of India (IBBI) (Insolvency Resolution Process for Corporate Persons) Regulations 2016 (the CIRP Regulations). With effect from 4 April 2021, the government promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 to provide a pre-packaged insolvency resolution process (IRP) for corporate persons classified as micro, small and medium-sized enterprises due to the unique nature of their businesses and simpler corporate structures. This is expected to ensure quicker, more cost-effective and value-maximising outcomes for all stakeholders. In terms of timelines, the pre-packaged IRP needs to be completed within 120 days from the date of admission of the application by the adjudicating authority. The ordinance was replaced by the Insolvency and Bankruptcy Code (Amendment) Act 2021 on 11 August 2021.

In addition, the IBBI has made substantive amendments to the CIRP Regulations, such as:

  1. limiting modifications to the resolution plan to only one instance;
  2. disallowing resolution plans submitted beyond the specified period or by an unlisted applicant; and
  3. bringing the committee of creditors (CoC) under the purview of the IBBI as CoC is expected to comply with the prescribed guidelines.

Apart from the legislative amendments, the Insolvency Code was significantly shaped by verdicts passed by the Supreme Court of India. One of the key developments in the Insolvency Code is the Supreme Court's decision to uphold the constitutional validity of the central government notification dated 15 November 2019 that operationalised the provisions in respect of personal guarantors of the corporate debtor under the Insolvency Code. The notification was challenged on the basis that it, inter alia, amounts to impermissible and selective application of the Insolvency Code.

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.38

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 2020.39

As per the PwC report, there was significant momentum in the distressed asset space in 2021 with long-awaited big-ticket resolutions such as Air India and Dewan Housing Finance Corporation, and the bankruptcy admission of a few large firms, including Reliance Capital. Besides Air India, some of the marquee cases that were resolved in 2021 include bankrupt township developer Jaypee Infratech, which got the highest bid from Suraksha Group. Bhushan Power & Steel (BPSL), which owed 480 billion rupees, was acquired by Sajjan Jindal-owned JSW Steel for US$2.7 billion (INR 19,350 crore) after three years, and grounded Jet Airways was acquired by Kalrock Capital consortium after two years. Within IBC, Kotak Special Situations Fund and Blackstone-backed IARC among others won bids for road assets. Under liquidation, Nagarjuna Oil Corporation got approval to be acquired by the Chatterjee Group owned Haldia Petrochemicals. Another Mumbai housing project of bankrupt Ariisto Developers obtained approval from the court to be bought by Bengaluru-based Prestige Estates Projects in the January to March quarter. Outside the insolvency law, notable resolutions include Ares SSG Capital's acquisition of Altico Capital's assets; the acquisition of global PE firm KKR-backed JBF Industries by Reliance Industries and CFM ARC; and Future Group and Shapoorji Pallonji's one-time restructuring deal. Nine years after being grounded, the recovery of Kingfisher Airlines Limited's dues worth 58.33 billion rupees was the icing on the cake for lenders.40

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.41 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.42

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 2021

2021 was an exceptional year for buyout deals, recording 42 deals worth US$17.4 billion, almost three times the deal value recorded in 2020. The charge was led by five billion-dollar investments in the technology and financial services sectors totalling US$9.5 billion. The largest deals were Carlyle's US$3 billion investment in Hexaware, a leading global provider of IT and BPO services, and Blackstone's US$2.8 billion investment in Mphasis, a leading provider of cloud and digital solutions.43 However, steered by the need for value creation, preservation and enhancement, control will remain a key element for most investors in future. Control has become and will remain a key element and deal driver in most transactions.

iv Exits

In 2021 exits recorded an all-time high of US$43.2 billion, more than seven times the value recorded in 2020 and 60 per cent higher than the previous high of US$27 billion recorded in 2018. In terms of volume, exits recorded an 85 per cent increase compared to 2020 (280 deals in 2021 versus 151 deals in 2020). Exits via sale to strategic buyers were the highest at US$16.9 billion (93 deals) in 2021, 16.5 times the value recorded in 2020 (US$1 billion across 44 deals) and second highest value of strategic exits. In terms of numbers, strategic deals in 2021 were the highest ever. Exits via secondary sale (sale to other PE or VC funds) were second in line with US$14.4 billion recorded across 56 deals, which is more than the value recorded in previous seven years combined and 14 times the value recorded in 2020 (US$913 million across 20 deals). 2021 was a record year for PE or VC-backed IPOs with exits worth US$5.1 billion recorded across 44 IPOs (twice the previous high of 22 PE or VC-backed IPOs recorded in 2017) which includes many firsts for the Indian market like the first SPAC listing by an Indian company which saw ReNew Power list on the NASDAQ via a merger with RMG Acquisition Corp II, a blank cheque special purpose acquisition company (SPAC) and many first-time IPOs by new age start-ups like Zomato, Nykaa, Policybazaar and PayTM. The PayTM IPO was the largest ever PE-backed IPO in India as well as the largest IPO in India's corporate history raising US$2.5 billion.44

From a sector point of view, technology sector recorded the highest value of exits in 2021 (US$17.4 billion across 39 deals versus US$847 million across 10 deals in 2020) accounting for 40 per cent of all exits by value following mega exits such as the US$8.6 billion exit from Global Logic by CPPIB and Partners Group and Baring PE Asia's US$3 billion exit from Hexaware. Financial services was the next big sector with exits worth US$9.5 billion across 49 deals (US$2.1 billion across 40 deals in 2020). E-commerce recorded the third highest value of exits at US$2.6 billion across 30 deals (US$107 million across nine deals in 2020) on the back of large strategic acquisitions of 1MG and BigBasket by the TATA Group and four IPOs including Zomato, Nykaa, Go Fashion and CarTrade.45

EY report reports the following as top exits of 2021:46

CompanySectorSellersBuyerExit typeDeal value (US$ million)Stake (%)
GlobalLogic IncTechnologyCPPIB, Partners GroupHitachiStrategic8,64090
Hexaware Technologies LimitedTechnologyBaring PE AsiaCarlyleSecondary3,000100
IndiaIdeas.com LimitedFinancial servicesGeneral Atlantic, TA Associates, Temasek, Visa, March Capital, ClearstoneVenturePayU (Prosus NV)Strategic2,87661
Mphasis LimitedTechnologyBlackstone Capital Partners VIBlackstone Capital Partners Asia and Blackstone Capital Partners VIIISecondary2,00055
VFS Global Services Private LimitedBusiness and professional servicesEQTBlackstoneSecondary1,87075
SB Energy HoldingPower and utilitiesSoftbankAdani Green Energy Limited (AGEL)Strategic1,76080
EncoraTechnologyWarburg PincusAdventSecondary1,50080
BigBasketE-commerceAlibaba, IFC and AbraajTATA GroupStrategic1,00050
SPI GlobalTechnologyPartners GroupBaring Private Equity AsiaSecondary800100
Atria Convergence Technologies LimitedTelecommunicationsTA Associates, True NorthPartners Group AGSecondary800NA

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

In June 2021, the DPIIT issued the Press Note 2 of 2021, pursuant to which up to 74 per cent of FDI is permitted in insurance companies under the automatic route. Prior to this, only up to 49 per cent FDI was permitted in insurance companies.

In addition, under the foreign direct investment policy (the FDI Policy), up to 49 per cent of FDI under the automatic route is permitted in petroleum refining by public sector undertakings (PSUs), without any disinvestment or dilution of domestic equity in existing PSUs. In July 2021, the DPIIT issued the Press Note 3 of 2021, wherein it provided that notwithstanding the foregoing, 100 per cent of FDI under the automatic route is allowed if an 'in-principle' approval for strategic disinvestment of a PSU has been granted by the government.

Another significant amendment to the FDI Policy came in October 2021 with the Press Note 4 of 2021 (Press Note 4) issued by the DPIIT. Press Note 4 allowed 100 per cent FDI in the telecoms sector under the automatic route. Prior to the Press Note 4, up to 49 per cent of FDI in the telecoms sector was permitted under the automatic route and a prior government approval was required in case of FDI beyond 49 per cent. However, this relaxation is subject to the Press Note 3 of 2020 issued by the DPIIT in April 2020 which imposed certain restrictions on investment in India by entities residing in countries sharing a land border with India.

In addition, the DPIIT clarified that an investment made by an Indian entity which is owned and controlled by non-resident Indians, on a non-repatriation basis, will not be considered for calculation of indirect foreign investment.

Pre-packaged insolvency resolution under the Insolvency Code

The covid-19 pandemic has affected the business operations of micro, small and medium-sized enterprises (MSMEs) and has exposed many MSMEs to financial distress. In view of simpler corporate structures and unique business operations of MSMEs, in August 2021 the government amended the Insolvency Code to introduce pre-packaged insolvency resolution process (PPIRP) in respect of corporate debtors classified as MSMEs under the Micro, Small and Medium Enterprises Development Act 2006 in order to ensure speedier resolution of insolvency of MSMEs. PPIRP is a hybrid model combining the efficacies of informal (out-of-court) and formal (judicial) insolvency proceedings. A time limit of 120 days from the date of pre-packaged insolvency commencement has been stipulated for the completion of the PPIRP. In addition, unlike a CIRP, in case of a PPIRP, the management of the enterprise continues to be with the corporate debtor and a PPIRP permits the corporate debtor and its creditors to work out an informal plan for submission to the adjudicating authority.

Relaxation in lock-in requirements for promoter shareholding

In view of the changing ownership dynamics of Indian companies, in August 2021, SEBI amended the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations) to reduce the lock-in period for promoter shareholding to the extent of 20 per cent of the post issue capital to 18 months from the date of allotment in the initial or further public offering instead of the previous lock-in period of three years. However, this amendment is applicable only if:

  1. the issue's object involves only offer for sale;
  2. the issue's object involves only raising funds for purposes other than capital expenditure for a project; or
  3. in the event of a combined offering (i.e., fresh issue along with offer for sale), the issue's object involves financing for purposes other than capital expenditure for a project.

In each of these cases, the lock-in period for promoter shareholding in excess of 20 per cent of the post-issue capital has been reduced to six months instead of the previous lock-in period of one year. In respect of the pre-initial public offering securities held by a non-promoter shareholder, the lock-in period has been reduced from one year to six months.

In addition to the above, where the promoter of the issuer company is a corporate body, the definition of 'promoter group' has been rationalised to exclude companies having common financial investors. Further, the disclosure requirements in the offer documents in relation to group companies of the issuer company have been reduced to exclude disclosure of financials of the top five listed and unlisted group companies. However, these disclosures continue to be made available on the group companies' websites.

REITs and InvITs

In July 2021, SEBI amended the Infrastructure Investment Trust Regulations 2014 (InvIT Regulations) and the Real Estate Investment Trusts Regulations 2014 (REIT Regulations) to mandate the minimum subscription amount from any investor in the initial and follow-on offer of units by InvITs and REITs to be within the range of 10,000 and 15,000 rupees, instead of the earlier minimum subscription amount of 100,000 rupees for InvITs and 50,000 rupees for REITs. This amendment also reduced the trading lot size for the purpose of trading of units on the designated stock exchange from 100 units to one unit. In addition, pursuant to this amendment, with respect to the private placement of units of InvITs that are not listed, the minimum number of unit holders or investors other than the sponsor, its related parties and its associates will be five, and the combined unit holding for such investors at all times needs to be at least 25 per cent of the total unit capital of the InvIT. In this regard, an investor and its associates or related parties will be considered as a single unit holder or investor.

In addition, in October 2021, the RBI amended the Foreign Exchange Management (Debt Instrument) Regulations 2019 to include debt securities issued by InvITs and REITs among the list of debt securities that may be purchased by a foreign portfolio investor.

Amendments to the Limited Liability Partnership Act 2008

In August 2021, the Ministry of Corporate Affairs (MCA) has initiated the process of decriminalisation of the Limited Liability Partnership Act 2008 (the LLP Act). The total number of compoundable offences has been reduced from 21 to seven and 12 offences or defaults have been shifted to an in-house adjudication mechanism. In addition, the provision for imprisonment in the event of non-compliance with any order passed by the National Company Law Tribunal has been omitted. The MCA's endeavour has been to remove criminality of those offences that do not involve any malafide intentions and consequently, to increase the ease of doing business for law abiding limited liability partnerships (LLPs).

In addition, in line with the concept of small companies, a category of small LLPs has been introduced in the LLP Act. These small LLPs will be subject to lesser compliances, lesser fee or additional fee and lesser penalties in the event of default. The MCA's endeavour here is to incentivise unincorporated micro and small partnerships to convert into an organised LLP and derive the benefits of the LLP Act.

Another significant amendment to the LLP Act is that the central government will establish special courts for the purpose of ensuring speedy trial of offences under the LLP Act. These special courts will be empowered to try an offence under the LLP Act other than an offence with which the accused may be charged at the same trial under the Code of Criminal Procedure 1973. The special courts will also be empowered to try in a summary way any offence under the LLP Act which is punishable with imprisonment for a term not exceeding three years. In addition, the LLP Act has been amended to remove the additional fee of 100 rupees per day imposed in case of a delay in filing of forms or documents and the time limit of 300 days for delayed filings has been removed. Instead, the central government has been empowered to prescribe a reduced fee or different fees for different classes of LLPs and for different types of forms or documents.

Developments relating to compromise or arrangement

In February 2021, the MCA amended the Companies (Compromises, Arrangements and Amalgamations) Rules 2016 to provide that a scheme of merger or amalgamation under Section 233 of the Companies Act may be entered into between two or more start-up companies or between one or more start-up companies with one or more small company.

Amendments to the AIF Regulations

During the course of the year, SEBI introduced various amendments to the SEBI (Alternative Investment Funds) Regulations 2012 (the AIF Regulations). One notable amendment is that SEBI permitted alternative investment funds (AIFs) to invest in an investee company directly or through other AIFs, subject to the diversification limit of 25 per cent of investible funds for Category I and II AIFs and 10 per cent of investible funds for Category III AIFs. With this amendment, AIFs are permitted to make investments into portfolio companies directly and at the same time to also act as funds of funds. However, an AIF investing in another AIF is not allowed to have an AIF as its investor. In addition, SEBI provided a definition of 'start-up' to bring an end to the uncertainty about the scope of this term and has ensured that the definition is in harmony with the definition provided by the Department for Promotion of Industry and Internal Trade. Further, in October 2020 SEBI provided guidelines for the constitution of investment committees (ICs) by AIF managers. SEBI provided that IC members along with the AIF manager will be liable for the AIF's investment decisions and will be jointly and severally responsible with the AIF manager to ensure that the AIF's investments comply with the AIF Regulations, agreements with investors, private placement memorandum of the AIF, and any other fund documents and applicable laws. In January 2021, SEBI introduced a waiver mechanism for certain AIFs in respect of this liability and responsibility requirement.

Another notable amendment to the AIF Regulations is that the minimum investment by Category I AIFs under the venture capital fund (VCF) sub-category, into unlisted equity shares or equity-linked instruments of a venture capital undertaking or in companies listed or proposed to be listed on a small and medium enterprise exchange or small and medium enterprise segment of an exchange, has been increased from two-thirds of total investible funds to three-quarters of total investible funds. In addition to this, SEBI has decided to remove the other investment restrictions applicable on the residual portion of the VFC's investable, providing greater autonomy to the manager of the AIF to invest the funds. Through the amendments, SEBI has also introduced the concept of an accredited investor (AI) (i.e., any person who has been granted a certificate of accreditation by an accreditation agency) and the concept of large-value funds for AIs. Any AIF or any scheme of an AIF wherein each investor (other than the investment manager, sponsor, directors or employees of the AIF or of the AIF manager) is an AI and invests at least 7 million rupees will be classified as a large-value fund for AI.

In addition to the above amendments and with a view to incentivising the setting up of AIFs by Indian managers in the Gujarat International Finance Tec-City (India's first International Finances Services Centre (IFSC)), SEBI has introduced a circular permitting sponsor contribution from an Indian party sponsor to funds set up in overseas jurisdictions, including IFSC AIFs.

Developments in the mutual funds industry

In February 2021, SEBI amended the SEBI (Mutual Funds) Regulations, 1996 (MF Regulations). Prior to the amendment, a mutual fund sponsor was required to have a sound track record (i.e., profits in three out of five years, including the fifth year). In line with the significant role played by emerging technology and fintech companies in India and in order to promoter mutual fund innovation and geographic penetration, SEBI has relaxed this criterion of sound track record. Pursuant to the amendment, a mutual fund sponsor who does not meet the sound track record criterion will still be eligible to set up a new or acquire an existing mutual fund asset management company (AMC) and a trustee company if it meets the minimum net worth requirement of 1 billion rupees as a contribution towards the net worth of the AMC. This needs to be maintained until the sponsor makes profits for five consecutive financial years.

In addition, in March 2021 SEBI introduced various circulars for the mutual funds industry. Through one such circular, SEBI strengthened the reporting requirements for mutual funds. In case of any proposed change to the fundamental attributes of a mutual fund scheme, the trustees now need to obtain comments from SEBI before effectuating any such change. In addition, through the circulars, SEBI has introduced relaxations such as permitting trustees to delegate their functions such as to declare or fix a record date and decide the dividend quantum to AMC officials, and allowing AMC employees to participate in private placement of equity by any company. Another notable change is that SEBI has classified investment in non-convertible preference shares to be a debt instrument. This is pertinent to note in view of the limitation applicable to mutual fund schemes to invest not more than 10 per cent of their net asset value in debt instruments.

In addition to the above, based on the representations made by the mutual funds industry in June 2021 SEBI enhanced the overseas investment limits applicable to mutual funds. The overseas investment limit has been increased from a maximum of US$600 million per mutual fund to US$1 billion per mutual fund. No change has been made to the overall industry limit of US$7 billion. In addition, the maximum limit of investment in overseas exchange traded fund has been increased from US$200 million to US$300 million, while no change has been made to the overall industry limit of US$1 billion.

Amendments in relation to delisting of equity shares

SEBI introduced amendments to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (the Takeover Regulations) in relation to delisting of equity shares of a company following an open offer, in order to increase the convenience of merger and acquisition transactions for listed companies. Pursuant to these amendments, if an incoming acquirer is desirous of delisting the target company, such acquirer needs to propose a higher price for delisting, with a suitable premium over open offer price. If the delisting threshold of 90 per cent is met by the response to the open offer, then all the shareholders who tender their shares will be paid the same delisting price. However, if such threshold is not met, all the shareholders who tender their shares will be paid the same takeover price. In addition, if a company is not delisted pursuant to the open offer and the acquirer crosses 75 per cent due to the open offer, a 12-month period from the date of the completion of the open offer will be provided to the acquirer to make further attempts to delist the company using the reverse book-building mechanism. If during this 12-month period the delisting is not successful, then the acquirer needs to comply with the minimum public shareholding requirement within a period of 12 months from the end of such period.

In addition to the above, the amended Takeover Regulations provide that if at the time of the open offer, the acquirer states upfront that it will opt to remain listed and the total stake at the end of the tendering period exceeds 75 per cent, then the acquirer may opt to proportionally scale down the purchase made under both the underlying share purchase agreement and the shares tendered under the open offer in such a manner that the 75 per cent threshold is never crossed. In the alternative, the acquirer needs to become compliant with the minimum public shareholding within the time stipulated under the Securities Contract (Regulation) Rules 1957.

V Outlook

It would appear that 2021 was a blockbuster year for PE deal making 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. The PwC report47 predicts that the following will be key dealmaking factors in India in 2022:

  1. Fuelled by PE activity, the start-up ecosystem is expected to remain strong in 2022 with more start-ups becoming unicorns. Many unicorns will become serial acquirers and trigger a wave of consolidation among start-up companies.
  2. It is expected that PE firms will participate in more buyout and control transactions in 2022. PE is expected to bet on early-stage innovative companies.
  3. Government-backed divestment is also expected to pick up steam and big-ticket divestments in the pipeline may see the light of day. These include the nation's largest insurer, Life Insurance Corporation of India, oil refiner and marketer, Bharat Petroleum, and IDBI Bank. 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.
  4. A rebound of the real estate and logistics sectors may also be on cards. These sectors are poised for recovery and rebound primarily owing to strong tailwinds in e-commerce and supply chain optimisation that will create demand in warehousing, commercial real estate, etc.
  5. A larger impact on ESG is expected. With increasing commitments being made to reduce carbon emissions by companies and PE funds, more capital will be mobilised for the transition to greener sources of energy, creating opportunities for M&A.

Separately, the following factors also will continue have a major impact on investing in India throughout the coming year:

  1. The uncertainty and volatility triggered by major geopolitical events (e.g. relations between the United States and China, between Russia and Ukraine, and between India and China) the ongoing impact of covid-19 and the possibility of new variants and subsequent lockdowns), a strong dollar against other currencies and the imposition of new sanctions and trade barriers by nations may affect emerging markets.
  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 2022. 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 2022.

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 2022 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 at a fast pace 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 2021. Overall, the deal triggers seen in 2021 are expected to continue to drive both deal values and volumes in 2022.


Footnotes

1 Raghubir Menon and Taranjeet Singh are partners and Niharika Sharma is an associate at Shardul Amarchand Mangaldas & Co.

4 ibid.

11 ibid.

12 ibid.

16 ibid.

17 ibid.

18 ibid.

21 ibid.

23 See footnote 19.

24 ibid.

26 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).

27 See footnote 25.

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

30 ibid.

33 ibid.

42 ibid.

45 ibid.

46 ibid.

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