Short term hurdles, long term hope

Author: | Published: 1 Aug 2012
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Please give a brief description on your firm's business profile

CLSA Capital Partners is the alternative asset management arm of CLSA Asia-Pacific Markets, Asia's leading independent brokerage and investment group. With approximately US$2.6 billion in funds under management and seven offices across the region, including Hong Kong, Singapore and Tokyo, CLSA Capital Partners offers a diversified and increasing range of investment vehicles. Our funds are designed to generate exceptional returns and combine CLSA's unique understanding in Asia with a long term investment capability. Our experienced team with long established roots in the region has helped many Asian companies realise their potential.

To what extent do you outsource work and to which law firms?

Given our pan-Asian and multi-sector focus, we use a wide variety of firms for work. This ranges from transactional investment work, regulatory advice relating to our operations, and fundraising. In India, the law firms we primarily use are Trilegal, Amarchand and Wadia Ghandy.

How has the private equity market in India performed this year?

The dealmaking environment has been fairly sluggish to date. Investors have definitely become more cautious as a function of the macro-challenges now facing the Indian economy as well as the global economic macro situation; added to this are the ongoing uncertainties around the taxation environment in India, as well as the inconsistency and lack of clarity around the enforceability of certain fairly central investment terms.

The Sebi notified the new Takeover Code on September 23 2011. To what extent is this as a positive development?

We see this as a pretty positive step. The new Takeover Code provides more clarity and has, in a number of areas, sought to address ambiguities that existed in the previous regime. The increase in the trigger for an open offer to 25% is certainly a positive development for those investors, like ourselves, that tend to lean toward minority/ non-control investments.

To what extent do you think the Code will revolutionise the investment landscape in India?

"Revolutionise" is perhaps too strong a word. There is little doubt that, for example, the increased open offer trigger is favourable to private equity investors who are looking to minority investments. It broadens the universe of investments they can look at without triggering open offer requirements and, with an improvement in the overall macro environment, will likely support an increase in Pipe transactions beyond current levels. It will also support investee companies to obtain more robust capital financing. In addition to that, takeover issues that have previously affected or even prevented minority investment exits will be eased. However, the Takeover Code changes in and of themselves will have a limited impact given some of the other policy and regulatory hurdles that exist in the India FDI environment.

What are the key challenges facing the Indian private equity market?

The key challenges we are seeing at this time are:

  • India still has a structural over-supply of private equity capital given the volume of quality deal flow. Therefore, deals are highly intermediated, competitive tension is typically high for any quality deal and private equity valuations are not representative of the headwinds confronting the Indian economy.
  • Regulatory hurdles and uncertain policy environment in various sectors has somewhat shaken investors' confidence. These uncertainties erode the ability to accurately anticipate the behaviours of the investment environment and act as a fetter to inflows of investment capital from overseas. While our belief in the overall long term growth story of India remains intact, there is no doubt that the regulatory inconsistency presents challenges.
  • The recent tax law amendments are unfavourable for FDI in India and there is considerable uncertainty as to how these changes will be applied and enforced. The application and enforcement of these changes will likely take some considerable time to crystallize, during which there will likely be a drag on overall FDI volumes.
  • Forex fluctuations are affecting returns (notional or actual) in dollar terms.
  • Aside from the above issues, the general economic scenario in India looks very challenging at this point of the cycle. The high fiscal deficit, high inflation, monetary tightening and lack of political resolve to execute reforms across sectors are combining to suppress volumes of FDI that India could otherwise be seeing. India does remain a compelling growth story and key investment destination, and the hope must be that a number of the resolvable regulatory and policy-led issues can be smoothed out to the benefit of FDI.

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