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Precious Metal. Market Watch. Pinterest Reddit. Getty Images. During the month, start-ups accounted for more than half of the total PE investment volumes and topped the investment value chart capturing 52 per cent and 29 per cent, respectively. The month witnessed a USD million investment in Grofers , making it one of the largest investments in the online grocery retailing segment, the report added. It also said that the investment resulted in the e-commerce sector capturing 20 per cent of PE values, while this deal alone accounted for 18 per cent of total PE deal values.
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Apart from start-up and e-commerce, energy and banking sectors also witnessed big-ticket investments of over USD 50 million. Grant Thornton India Director Pankaj Chopda said, "May being the month of election results, the uncertainty in deal landscape is expected to soon fade away in the coming months. Not making enough money in stocks? Click here for real-life stories of successful investors. Read this article in : Hindi. Read more on private equity. India Inc. Grant Thornton. Merger and acquisition. Follow us on.
Download et app. Become a member. Mail This Article. My Saved Articles Sign in Sign up. The Indian government has notified certain transactions that are exempt from this requirement such as the acquisition of shares under the FDI route, and the acquisition of shares pursuant to a court order, etc.
Second, for the computation of capital gains on the transfer of shares of unlisted companies, if the consideration for such transfer is less than fair market value, as determined on the basis of specific formulae prescribed by tax laws, such fair market value shall be deemed to be the full value of consideration received for purposes of computing capital gains. A similar anti-abuse provision also applies to transfers of immovable property of a value less than the value determined for the computation of stamp duty. The value of such Indian assets as well as all the assets owned by the foreign company is determined on the basis of specific formulae prescribed by tax laws.
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Indian tax laws also prescribe additional disclosure requirements in multilevel holding structures to facilitate such determination. Transfers by non-resident sellers to resident buyers or non-resident buyers are subject to withholding of the requisite amount of capital gains tax. Non-resident investors, other than registered FPIs, may also be subject to lower tax rates depending on their eligibility to claim benefits under the applicable tax treaty between India and their country of residence.
Registered FPIs are subject to a special tax regime under Indian tax laws.
India favourite to win the World Cup: Azharuddin
The above indirect transfer provisions do not apply on the transfer of investments made by a non-resident investor in shares of or interest in an entity registered as a Category-I or Category-II FPI ie, a foreign institutional investor registered as a sovereign fund or an accredited private equity fund. The above exemption has provided foreign investors with much needed relief from indirect transfer taxes.
Non-resident sellers were historically exempt from paying capital gains tax if their investments were structured through jurisdictions having a favourable double taxation avoidance agreement with India. Mauritius, Singapore, Cyprus and the Netherlands were the most popular jurisdictions for PE investors to invest into Indian companies, as capital gains and dividends are not taxable and income tax rates are low. India has recently amended its double taxation avoidance agreements with Mauritius, Singapore and Cyprus to be able to tax capital gains arising out of direct disposal of Indian assets.
These are key jurisdictions from which substantial foreign investment has been received in the last few years. Equity shares acquired prior to 1 April by PE investors based in Mauritius, Singapore and Cyprus will continue to be tax-exempt. Equity shares acquired by PE investors based in Mauritius and Singapore on or after 1 April but transferred prior to 1 April will be taxed in India at 50 per cent of the applicable domestic Indian capital gains tax; and on or after 1 April but transferred on or after 1 April will be taxed at full applicable domestic Indian capital gains tax.
Equity shares acquired by PE investors based in Cyprus on or after 1 April will be taxed at applicable 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. It is now imperative to demonstrate that there is a commercial reason, other than for obtaining a tax advantage, for structuring investments out of tax havens. GAAR can be used to challenge arrangements with the main purpose of obtaining a tax benefit and deny benefits otherwise available under a tax treaty.
Further, a foreign company is to be treated as tax resident in India if its place of effective management PoEM is in India. If the foreign company becomes resident in India, it would be taxed at an effective rate of Accordingly, PE investors must exercise caution while structuring their fund management structures, and in some cases their investments, in Indian companies.
Indian companies, irrespective of their ownership and control, continue to be taxed in India on their corporate income at a rate of 30 per cent exclusive of applicable surcharges and levies. As an incentive to start-ups and medium scale companies, the Indian government announced in the Union Budget that the rate of income tax for companies with a turnover of up to million rupees in the previous financial year will be 25 per cent instead of 30 per cent in each case exclusive of applicable surcharges and levies.
Dividend distribution tax DDT at an effective rate of DDT is payable by every company in India. Multilevel structures will result in DDT being payable by each company while upstreaming dividends to the ultimate parent company. An exemption from this cascading effect of DDT is available only if a parent company in the structure holds more than 50 per cent of its immediate subsidiary the parent company may avail of the exemption regardless of the extent of shares held by its shareholders ; and if dividends are distributed by such parent company from dividends received from its immediate subsidiary in the same financial year when they are received, provided the same amount of dividend shall not be taken into account for reduction more than once.
Indian companies are also required to pay minimum alternate tax MAT on the basis of profits disclosed in their financial statements. MAT is applicable to Indian companies and also to foreign companies in certain circumstances, subject to exemptions on certain specified streams of income for foreign companies.fracehllemalle.gq
Private equity investors continue to pump record high capital into India in 2018
The applicability of MAT to foreign companies was controversial until a recent clarification in Indian tax laws, and judicial pronouncements clarified that foreign companies shall not be subject to MAT where:. Interest income on Indian rupee-denominated debt is subject to withholding tax at a rate of 40 per cent, unless the debt investment is structured through a tax-friendly jurisdiction and the borrowing is structured as a bond with an interest rate that is below a prescribed rate. In such cases, the withholding rate can be reduced to 5 per cent if such bonds are issued prior to 30 June Interest income on foreign currency debt is subject to withholding tax at a rate of between 5 and 20 per cent, depending on several factors.
As Indian laws do not permit PE investors to avail of domestic acquisition financing, PE investors are not ordinarily subject to withholding tax in India. Employees in India are subject to individual income tax at varied slabs. Indian income tax laws follow a progressive slab rate for individuals. The highest slab rate is 30 per cent exclusive of applicable surcharges and levies. Income received pursuant to the exercise of stock options, severance payments and golden parachutes are taxed as salaries.
Indian tax laws do not permit parties to treat share purchase transactions as asset acquisitions. What types of debt are typically used to finance going-private or private equity transactions? What issues are raised by existing indebtedness of a potential target of a private equity transaction?
Are there any financial assistance, margin loan or other restrictions in your jurisdiction on the use of debt financing or granting of security interests? The RBI prohibits Indian banks from granting loans for purposes of the acquisition of shares. Only non-banking financial companies may lend monies for purposes of acquisition financing. However, borrowing costs and limitations on the extent of leverage that may be availed prevent PE investors from borrowing from such institutions. 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. Structures using Indian companies that are owned or controlled by foreign investors are also not feasible, as such companies are prohibited from raising any debt from the Indian market to make any further downstream investments. Public companies including private companies that are subsidiaries of public companies are not allowed to provide any security or financial assistance for the acquisition of its own securities.
The assets of such Indian companies cannot be leveraged for the purposes of acquisition financing as a result. NCDs are less regulated than overseas loans, and can be secured by Indian assets, as applicable regulations mandatorily require the appointment of an Indian debenture trustee to hold security on behalf of the debenture holders. Further, as there are limited end use restrictions on privately placed NCDs, PE investors may consider investing in such instruments to finance domestic acquisitions.
An emerging form of debt financing is the use of masala bonds. Masala bonds were notified by Indian regulators in September , and are Indian rupee-denominated debt instruments that may be issued to overseas lenders. As such instruments are denominated in Indian rupees, overseas lenders are expected to bear the risk of exchange rate fluctuations.
Since their introduction. PE investors have not used masala bonds to finance domestic acquisitions. This is largely owing to a prevailing view that proceeds raised through the issuance of masala bonds cannot be used for capital markets and domestic equity investments. In addition, Indian regulators introduced additional conditions on the issuance of masala bonds in that have reduced the flexibility to structure such investments.
For example, all masala bond issuances now require prior RBI approval. What provisions relating to debt and equity financing are typically found in going-private transaction purchase agreements? What other documents typically set out the financing arrangements? As acquisition financing is generally not permitted in India, the transaction documents for going-private transactions typically do not contain provisions relating to debt or equity financing. How are these issues typically handled in a going-private transaction?
Fraudulent conveyance and other bankruptcy issues do not arise in light of our responses relating to restrictions on acquisition financing. Are there any statutory or other legal protections for minority shareholders? Under law, minority shareholders holding more than 25 per cent of the voting rights of a company have the power to block all special resolutions. Approval by a special resolution is required for all material corporate actions, including certain share issuances, alteration of charter documents in certain cases, and winding up, etc. Further, the holders of 10 per cent or more of the share capital of a company, or of 10 per cent or more of the total number of members, or or more members, can initiate proceedings against the company or its shareholders for oppression or mismanagement or both.
Are there any legal requirements that may impact the ability of a private equity firm to acquire control of a public or private company? The acquisition of control of Indian companies may be regulated or restricted 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 tender offer regulations, any acquisition of shares or voting rights entitling the acquirer along with persons acting in concert to exercise 25 per cent or more voting rights in a public listed target company requires such acquirer and the persons acting in concert to make an offer to the public shareholders to acquire at least 26 per cent of the voting shares of the target company. Tender offer regulations also prescribe other means of consolidation in case an acquirer already holds a substantial stake in the target company, including norms relating to creeping acquisitions where up to 5 per cent of the voting rights in a target company may be acquired in a fiscal year.
That said, the tender offer regulations also set out certain acquisitions that are exempted from the requirement to make a tender offer. Examples include acquisitions pursuant to a scheme or arrangement pursuant to an order of a court or a tribunal or a governmental authority, and acquisitions of stressed companies pursuant to a resolution plan approved under the recently notified Insolvency and Bankruptcy Code Under Indian exchange control regulations, FDI in certain regulated sectors is not permitted beyond a specified limit.
For example, FDI in the insurance sector is limited to 49 per cent. Further, under exchange control regulations, downstream investments by an Indian company that is not owned or controlled by resident Indians are considered as downstream foreign investments.
PE investors looking at control or ownership of Indian companies have to be cognisant of this requirement, as Indian business groups with multiple subsidiaries engaged in activities falling under different sectors for purposes of FDI will need to comply with sectorial caps and investment conditions, including pricing and valuation guidelines, prescribed under Indian exchange control regulations in respect of each such subsidiary.
What are the key limitations on the ability of a private equity firm to sell its stake in a portfolio company or conduct an IPO of a portfolio company?
In connection with a sale of a portfolio company, how do private equity firms typically address any post-closing recourse for the benefit of a strategic or private equity buyer? IPOs continue to be the exit route of choice for most PE investors, given larger access to capital in international and domestic public markets and free transferability of shares.
Limitations on private sales of unlisted Indian companies are largely contractual. In the absence of such restrictions, there are limited legal restrictions prescribed under Indian laws. Pricing guidelines under Indian exchange control regulations must be followed in a private sale to or by a non-resident. The above floor price operates as a cap in a transfer of shares from a non-resident to a resident. No such pricing restrictions apply to a transfer of shares by a non-resident to another non-resident.
In a private sale of shares of a listed company, the benchmark price is the price at which a listed company may undertake a preferential allotment of securities under applicable SEBI regulations. Foreign venture capital investors registered with the SEBI are exempt from entry and exit pricing guidelines. In PE investments where non-residents have been granted put or call options, the shares held by such non-residents are subject to a lock-in period of one year from the date of acquisition of such shares.
In addition to pricing guidelines, sectorial conditions and investment caps presented under FDI laws apply to sales of portfolio companies. Further, both the buyer and seller must be cognisant of antitrust issues and potential antitrust filings if certain thresholds relating to assets and revenues are met or if the transaction is likely to have an appreciable adverse effect on competition in India. IPOs are the exit method of preference for PE investors. PE investors negotiate that they will have priority to offer up to all their shares as part of an offer for sale.
IPO clauses also prescribe a minimum valuation at which the IPO must be undertaken for it to be considered a successful exit. PE investors typically include veto rights on key components of the IPO process, including timing, pricing, the appointment of merchant bankers, and the stock exchange for listing of shares. These obligations and conditions, however, are not entirely binding on the company and the promoters, as IPOs are largely market-driven.
Obligations to conduct an IPO are usually on a best-efforts basis as a result. It is, therefore, difficult for PE investors that own minority stakes and do not control management to demand an IPO and force the process. The company must have a track record of profitability and net worth, and minimum net tangible assets, etc. While these conditions need not be satisfied in certain cases, Indian companies focused on e-commerce and technology, and start-ups may not be able to satisfy such conditions.
All shareholders are subject to a one-year post-issue lock-in, except stock option holders who have been allotted shares prior to the IPO and certain registered domestic and foreign venture capital investors who have held shares in the company for at least one year prior to the date of filing of the draft offer document. Companies with majority PE ownership often do not undertake an IPO owing to the above restrictions, and look at secondary sales as preferable means of exit. PE investors are reluctant to provide post-closing recourse to buyers. Upside sharing arrangements that a PE investor may enter into with promoters, directors or key employees of listed companies to incentivise them and share returns beyond a hurdle rate require disclosure to stock exchanges and prior approval of the board and public shareholders.
Promoters and interested shareholders are not permitted to vote on such matters. What types of lock-up restrictions typically apply in connection with an IPO? What are common methods for private equity sponsors to dispose of their stock in a portfolio company following its IPO? However, it is not uncommon to negotiate certain governance rights to continue post-IPO.
List of private equity firms - Wikipedia
PE investors often negotiate for a board seat or an observer right to survive post-IPO. Similarly, veto rights in certain cases have been known to survive post-IPO. There is ambiguity under Indian law as to the nature of veto rights. Negative control and positive control have not been clearly distinguished, and there is no definitive judicial pronouncement on this subject. See question 15 on the lock-in restrictions applicable in connection with an IPO.
In addition, Indian exchange regulations prescribe certain lock-in restrictions for FDI in certain limited sectors or in certain situations. For example, FDI in construction and development projects is subject to a lock-in of three years. Such transactions must take place during specified times and up to specified volumes or value.
The ruling market price of the shares would be the purchase price in such transactions, except in a block deal where the price should not exceed 1 per cent above or below the applicable reference price. FDI is not permitted through on-market transactions, unless the non-resident investor has acquired, and continues to hold, control of the target company and satisfies certain other conditions including those stated above. Off-market transactions may take place at a negotiated price, subject to compliance with pricing guidelines prescribed under Indian exchange control regulations in case of a non-resident seller or buyer.
In both cases, parties should keep applicable tender offer and antitrust regulations in mind while structuring such transactions. See question 3 on insider trading issues on disposal of shares where a PE investor continues to have a board representation or otherwise has material price sensitive information. What types of companies or industries have typically been the targets of going-private transactions? Has there been any change in focus in recent years? Do industry-specific regulatory schemes limit the potential targets of private equity firms?
Post-liberalisation of the Indian economy, the information technology and information technology-enabled services sectors have attracted the most attention from PE investors. Having said that, manufacturing, financial services, banking services, healthcare, consumer goods, real estate and pharmaceuticals have also witnessed several landmark PE investments. E-commerce and consumer start-ups have seen a lot of PE activity lately. It is expected that healthcare and allied services, financial technology, non-renewables and green energy will be the next big sectors.
Indian exchange control regulations prescribe entry routes for FDI by setting out activities undertaken by companies in India that are prohibited from receiving FDI, that may receive FDI, subject to prior regulatory approval, and may receive FDI without any approvals ie, the automatic route. These regulations also prescribe sectoral caps and conditions to be satisfied for FDI in certain sectors. Potential investment targets may be limited on account of Indian exchange control regulations prescribing sectoral conditions, investment caps, lock-in restrictions or minimum capitalisation.
What are the issues unique to structuring and financing a cross-border going-private or private equity transaction? Cross-border going-private and PE transactions are subject to the considerations described in questions 1 and 9. The primary considerations for structuring cross-border transactions are Indian exchange control regulations and tax implications. What are some of the key considerations when more than one private equity firm, or one or more private equity firms and a strategic partner or other equity co-investor is participating in a deal?
Club or group deals are on the rise in India. Inter se rights of the PE investors and alignment of their objectives are the principal considerations in group deals. Additional complications may arise when such transactions are structured among financial and strategic investors. As the objectives of financial and strategic investors are fundamentally different, the interplay of their individual rights, particularly in case of exit rights and transfer restrictions, is of great importance. Although uncommon, several Indian companies have attracted investments from multiple strategic investors.
In such group deals, due consideration must be given to rights affecting the ability of each strategic investor to acquire further shares in the company. What are the key issues that arise between a seller and a private equity buyer related to certainty of closing? How are these issues typically resolved?
Most closing conditions usually relate to due diligence issues that need to be addressed prior to a PE investment. Having said that, promoters, selling shareholders and companies are reluctant to have extensive closing conditions, and negotiate extensively to limit closing conditions to fundamental issues only. Legal and regulatory conditions on account of Indian exchange control regulations, tax laws, and sector-specific regulations are unavoidable and usually non-negotiable. Similarly, buyers insist on the inclusion of third-party consents, such as lender consents.
In listed company transactions, closing conditions are often limited to legal and regulatory conditions, and key consent requirements. Any due diligence specific conditions are addressed separately prior to the execution of transaction documents and are not mentioned in the transaction documents. A buyer is not obliged to invest upon a failure to fulfil closing conditions, and is usually granted the unilateral right to terminate transaction documents and walk away from the transaction.
Conversely, sellers may seek either specific enforcement of closing or seek damages from a buyer, if a buyer does not intend to invest upon fulfilment of closing conditions. Break or termination fees, although uncommon in Indian transactions, may also be negotiated, particularly in auction deals, and such amounts are typically held in escrow or provided as a guarantee until closing. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries lexology. Back Forward.
Share Facebook Twitter Linked In. Follow Please login to follow content. Register now for your free, tailored, daily legal newsfeed service. India April 17 Transaction formalities, rules and practical considerations Types of private equity transactions What different types of private equity transactions occur in your jurisdiction?