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India: Expediting PE activity

Taj Mahal in sunrise light, Agra, India

Niloy Pyne

Barnik Ghosh

Private Equity (PE) firms entering the Indian market have adopted two types of indigenous models for investment, since the model of leveraged buy-out followed in many western markets is not permitted in India. These models are: (i) the growth model, where PE funds acquire a minority stake in a company with some affirmative rights and a board seat primarily for oversight, but no involvement in the day-to-day management; and (ii) the buy-out model, where PE firm buys an ownership stake either on its own or with other PE firms in the expectation of exit through public listing. PE firms need an approval from the Foreign Investment Promotion Board (FIPB) for foreign investments into funds which have been registered as trusts under the Alternative Investment Funds (AIF) Regulations 2012. Indian asset managers sponsoring PE funds set up offshore vehicles, which need to first be registered with the Securities and Exchange Board of India (SEBI), which takes about a month or so. The application is then sent to the Reserve Bank of India, which generally takes an additional six months for clearing the application. Simultaneously, an application needs to be filed with the FIPB for foreign direct investment clearance in case of foreign investments.

The above procedure is tedious and time consuming. In some cases, the FIPB has either kept in abeyance, rejected or deferred certain applications like that of ICICI Venture Funds Management and Franklin Templeton Asset Management because of the inability of the entities to disclose details of prospective foreign investors or beneficial owners due to contractual agreements and confidentiality issues. The delay in securing approval often results in the entire project being dropped, since investors are wary of the uncertainty and do not have the patience to wait indefinitely for the deployment of their funds, which can be invested swiftly in other jurisdictions. One solution is to fast-track applications by genuine foreign investors from countries compliant with the Financial Action Task Force, so that inability to disclose identities of beneficial owners does not result in the rejection of the application.

Another idea to surmount the delay in AIF registration is to facilitate a single window clearance for PE firms by a committee of representatives from the Reserve Bank of India and SEBI.

Niloy Pyne and Barnik Ghosh

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