Invest in India: Private Equity Transactions

Introduction

Private Equity Transaction are an alternative method for foreign investors to invest into India. They are

form of investments whereby which a foreign investors buys certain shares of the concerned company that are not publicly traded on stock exchange. In the past few years private equity transactions have grown significantly in India. Foreign investors who are interested in making profits without undergoing the hassle of setting up a separate company in India are looking at more and more options of investing into private equity transactions. Private Equity transactions have come a long way since its inception in the year 1999. Today there has been a shift towards larger deals, as investors seek to make bigger bets on successful companies. There has also been a greater focus on domestic investments, as domestic investors have become more sophisticated and have started to invest more in private equity. For more information on statistics of foreign investment please visit https://www.reuters.com/world/india/indias-private-equity-investments-fell-234-2022-sp-2023-02-28/

Types of Private Equity Transactions

There are various types of private equity transactions. Some of the most prominent ones are mentioned below.

One of the most traditional routes of investing equity is by way of acquiring separate entity. Also called as the Special Purpose Vehicles or the SPV, these are companies that are incorporated for a special or a temporary purpose, incorporated in tax and investor-friendly jurisdictions, or trusts registered as alternative investment funds.

Another type of equity investment is investing in the Foreign Direct Investment Route or investing in foreign portfolio companies or again investing into foreign capital ventures. All these routes are available when the foreign investor is desirous of purchasing equity preliminarily to earn profits instead of management of the company.

The third type of investment by foreign entity is by way of purchase of equity shares or preferential share of the company or by way of acquisition of shares with differential voting rights, or partly paid shares and/or other equity-linked convertible instruments (such as warrants, compulsorily convertible preference shares or compulsorily convertible debentures).

Lastly the foreign investor can invest its equity by way of acquisition of share or asset purchase and/or merger, demerger or amalgamations. Shares of a public listed entity can also be acquired by triggering a voluntary offer/mandatory tender offer (“MTO”).

Now let us look into some of the key issues that significantly impact the private equity transactions in India.

Usually, investing into private equity requires certain verification and compliance checks to be carried out before investing into the company. Further the time taken for transactions primarily depends on the nature of the investee (listed/unlisted) and the mode of acquisition. Acquisition of private companies is comparatively quicker compared to that of public companies, followed by acquisitions through schemes.

Also the foreign investors, needs to set aside a timeline for obtaining the required approvals from various government authorities such as the Reserve Bank of India, Foreign Exchange Management authorities, the Securities and Exchange Board of India (“SEBI”) in case of a listed company, the Competition Commission of India and other sector regulators, as the case may be vary on a case-to-case basis and are often unpredictable. Also the timelines for obtaining approvals or sanctions that involve courts or tribunals in India may take inordinately long.

Another critical issue to be considered by the foreign investor before investing into equity shares is to carryout a due diligence on the investee company. The seller is required to obtain contractual consents from third parties prior to consummation of the transaction, and buyers include measures for the investee company to rectify past non-compliances/regulatory lapses as pre-completion conditions to the transaction, all of which have an impact on the timetable.

In the advent of the recent changes made by the government of India vide a press notification 3 of 2020, Transactions involving foreign investment from India’s land bordering countries/investors whose ultimate beneficial owners are citizens of, or situated in such countries requires prior regulatory approval. Therefore, the foreign investor needs to consider the said notification before investing into equity shares in India. While this is not specific to Private equity investors, it mandates all Indian companies to investigate their ultimate beneficial owners and make appropriate public disclosures.

CONCLUSION

It is observed that private equity investment is proved to beneficial for the Indian economy as it is a valuable capital source, supporting financially distressed companies and fueling the growth of profitable businesses. It offers high-net-worth individuals and institutional investors opportunities to tap into equity markets, diversify portfolios, and participate in the success of promising companies.

We at D’Andrea & Partners Legal Counsel are a legal firm with its presence in India, Pune and provide all round legal and fiscal services relating to open a company in India, legal compliance, litigation and dispute resolution, drafting of agreements and contracts, intellectual property rights protections, HR and IPR Related work and other miscellaneous services. Should you have any query or wish to know more, please reach us at info@dandreapartners.com. We are also pleased to introduce our practical guide on Foreign Direct Investment in India which you can purchase on https://www.amazon.com/Foreign-Direct-Investment-India-Invest-ebook/dp/B0BP7M7GKD/ref=sr_1_3?qid=1695004259&refinements=p_27%3ACarlo+Diego+D%27Andrea&s=digital-text&sr=1 3&text=Carlo+Diego+D%27Andrea

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The above content is provided for informational purposes only. The provision of this article does not create an attorney-client relationship between D’Andrea & Partners and the reader and does not constitute legal advice. Legal advice must be tailored to the specific circumstances of each case, and the contents of this article are not a substitute for legal counsel.