VENTURE CAPITAL & PRIVATE EQUITY FINANCING IN INDIA

By Rasmeet Kohli1

Venture Capital & Private Equity Financing are becoming increasingly popular routes of foreign investment into India. These two asset classes have seen a phenomenal growth in the past few years in the country and are expected to increase further in the coming years. Before dealing with the private equity and venture capital financing in India, this article endeavours to explain the concepts of Venture capital and Private Equity (PE) as these two concepts are perceived to play into each other's territory. Depending upon the stage at which funding is availed of, Venture funds/PE fund can be classified into various types: 1) Angel investors: These are typically high-net-worth individuals (HNIs) who have often been successful entrepreneurs themselves. They re-deploy their wealth in next-generation businesses. They invest in new-idea enterprises (that do not yet have external validation), help bring these ideas to market, take significant risks and invest a lot of time and energy in mentoring, management guidance and networking. Angel investors are also governed by considerations other than finance alone, such as belief in Entrepreneurship itself. 2) Venture capital (VC) funding provides funds for early stage companies. VC investments are traditionally made for scaling up operations (i.e. developing, launching and expanding new products or services). VCs take lesser degree of risk and invest more money than angel investors. However, a VC is about more than financial support alone. VCs provide entrepreneurial support and partnership-based value-addition, often in the form of providing financial advice, human resources, establishing networks with customers and overall guidance in company strategy. Private equity players are established investment bankers and typically invest into proven/established businesses. PE funds/players are among the largest sources of funding for enterprises that are relatively secure with an established track record, requiring significantly large funds for expansion and growth. As such, they take reasonably well-defined risks and

their exit strategy is usually up to the stage when the company goes public or gets acquired at high value. PE funds are generally seen to attract huge amount of capital from investors, including pension funds, insurance funds, university foundations and individuals. PE investors can be domestic or foreign private equity firms. Domestic PE firms are either established as trusts, or set up as a company. All Private equity (PE) investments from outside the country are either classified as Foreign Institutional Investment (FII) for investments in listed companies or Foreign Direct Investment (FDI) for investment in unlisted companies. If a PE investment takes place in an unlisted firm, it falls under India's FDI rules. A PE fund can also buy into listed companies. However, in order to do such investments, the PE fund has to become a registered FII. After registration as an FII, there are two kinds of transactions that can be entered by a PE Firm. PIPE (Private Investment in Public Equity) Deals: In this type of transaction, the company sells shares directly to the PE Fund. Under the FII category, the Private investment in public equity (PIPEs) are large transactions contracted between the PE Fund. Ordinary secondary market transactions (where the PE fund buys shares on the secondary market). These are pure FII transactions. However, these two cases are not differentiated by capital control2. Various Stages of Investment for VCs/Private Equity Funds in India PE investments at various stages in India, can be understood with the help of the following table3. PE firms may consider entering a firm at an early stage as a venture capital fund, later it may prefer to go for growth capital/late stage investing and even consider investing into a company after it lists on a stock exchange i.e. it may enter into a Private Investment in Public Equity (PIPE) deal.

3)

2 3

The author is with the NSE. The views expressed in the article are personal. The author would like to thank Ms.Anuradha Guru, NSE for her support in writing this article. The structure of PE is taken from 'Indian Financial Markets', Ajay Shah, Susan Thomas and Michael Gorham.Pg.46 and Pg.215. Data source is Venture Intelligence. The data is available in public domain till 2007 at www.indiavca.org/ IVCA%20Presentation_February%202008.pdf

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According to a study4 in 2006, over 90% of private equity funds are invested in late stage initiatives by mature firm. As evident from the table below, maximum PE investments (30%-40%) come in the late stage of companies or as PIPE deals which are forming nearly 25%-30% of total PE investments. In the year 2008, late stage deals i.e. private equity investments accounted for 38% of the pie in volume terms and 51% in value terms during 2008. Venture Capital Investments accounted for 31% of the PE deals5. PE Investment by Stage in India 2006 2007 Amount No.of Amount (US $ mn) Deals (US $ mn) 505 364 3,396 43 1,401 94 14 136 14 80 542 1,321 5,070 434 4,210

Mergers and acquisitions : As the Indian economy's growth has kept a steady pace, industry-wide consolidations are an attractive route for a PE investor to make an exit.

There are three main areas where private equity investors add value. These are financial engineering, governance engineering and operational engineering6. Financial engineering refers to steps to add value by making capital structure more efficient - that is, decreasing the cost of capital. Typically, this goal is achieved in buyouts by taking on leverage and bringing in outside capital. Governance engineering refers to processes that create value by improving incentives and monitoring in the companies that private equity investors finance. These steps can include the imposition of formal monitoring techniques and compensation that links pay to performance. Operational engineering refers to initiatives by private equity funds to improve the firms they finance through the provision of formal and informal consulting services to boost production processes, working capital management, marketing and product mix, and related areas.

No.of Deals

Venture Capital Growth PE Late Pre IPO Private Investment in Public Equity (PIPE) Buyout Buyout-Large Others (Includes Infrastructure Investments) Total

98 32 136 14 80

7 3

370 765

7 3

173 474

Evolution of VC/PE Investment in India 17 387 312 7,156 17 365 2,010 14,234 In India, the evolution of PE investments can be traced back to the formation of VC Funds in India. PE has now entered the economic mainstream and this segment has particularly gained momentum over the past few years. The concept of VC and PE is very recent in India as compared to other countries like USA, UK, Europe, Israel etc where it has been in existence since many years. In the absence of an organized venture capital industry, individual investors and development financial institutions have hitherto played the role of venture capitalists in India. Entrepreneurs have largely depended upon private placements, public offerings and lending by financial institutions. In 1973, a committee on "Development of Small and Medium Enterprises" highlighted the need to foster venture capital as a source of funding new entrepreneurs and technology. Later, a study was undertaken by the World Bank to examine the possibility of developing venture capital in the private sector, based on which Government of India took a policy initiative and announced guidelines for venture capital funds (VCFs) in 1988. Thereafter, Government of India issued guidelines in September 1995 for overseas venture

Source: Venture Intelligence Exit strategies of PEs There are various forms of exit from an investment by a private equity investor. These are: Direct sale to investors seeking a shareholding in a firm acquired by the fund. The initial public offering (IPO) is a preferred exit option in developed PE markets. Even Black and Gilson [1998] argue that well developed equity markets are a necessary condition for venture capital investing to work, because venture investors rely on the ability to exit their investments through initial public offerings (IPOs). Post-purchase listing of the company permitting sale of equity through the stock market. Sale to another private equity firm, referred to as a secondary buyout.

4 5 6

Rafiq Dossani and Asawari Desai, 'Accessing Early Stage Risk Capital in India', Stanford-Ti Study 2006. Press Release by India Infoline & Venture Intelligence. Kaplan and Strmberg [2008].

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capital investment in India. Further, as a part of its mandate to regulate and to develop the Indian securities markets, SEBI under Sec 12 of SEBI Act 1992 framed SEBI (Venture Capital Funds) Regulations, 1996. Pursuant to the regulatory framework, some domestic VCFs were registered with SEBI. Some overseas investment has also come through the Mauritius route. The SEBI committee on Venture Capital was set up in July 1999 to identify the impediments and suggest suitable measures to facilitate the growth of VC activity in India. Also keeping in view the need for a global perspective, it was decided to associate Indian Entrepreneurs from Silicon Valley in the committee headed by KB Chandrasekhar. These guidelines were further amended in April 2000 with the objective of fuelling the growth of VC activities in India. Thereafter, based on recommendations of the K.B. Chandrasekhar Committee, which was set up by SEBI during the year 1999-2000, Guidelines for Overseas Venture Capital Investment in India were withdrawn by the Government in September 2000, and SEBI was made the nodal regulator for VCFs to provide a uniform, hassle free, single window regulatory framework. SEBI also notified regulations for foreign venture capital investors. On the pattern of foreign institutional investors (FIIs), Foreign Venture Capital Investors (FVCIs) were also to be registered with SEBI. The Advisory Committee on Venture Capital, set up under Chairmanship of Dr. Ashok Lahiri, submitted its report to SEBI in the year 2003. It helped SEBI in considering the amendments to the regulations that facilitated the further development of vibrant venture capital industry in India. Then in July 2006, the 'Committee on Technology Innovation and Venture Capital' was constituted by the Planning Commission to examine issues related to technology innovation and policies for venture capital in India. This is a very important report from the viewpoint of Private equity in India because it differentiated between 'Venture Capital' & 'Private equity' unlike the other reports which mentioned only about the venture capital funding in India. To quote, the report stated "Venture capital funding is special; but it must be seen as part of a spectrum of funding that an enterprise may tap at different stages of its life cycle. An enterprise financed by a VC fund may have obtained some initial funding from family and friends or from an angel investor. It may at a later stage be financed by a private equity fund."

Regulations for Private Equity Investors and Venture Capital Investors The activities of VCFs are regulated by formal legislation under the aegis of SEBI (Venture Capital Regulations, 1996 & SEBI Foreign Venture Capital Investors Regulations, 2000), FDI and RBI FEMA provisions. The important statutes that require compliances for private equity investment in India are the Companies Act, 1956 (the "Act"), the Foreign Exchange Management Act, 2000 and the Securities and Exchange Board of India Act, 1992 along with the rules and regulation therein. While, for tax exemption purposes, guidelines are issued by the Central Board of Direct Taxes (CBDT). Private investment in public equity (PIPE) deals are also governed by the SEBI DIP Guidelines, which deals with the regulations relating to QIBs and Preferential Placement. The Ashok Lahiri committee had debated the need to regulate VC industry given that investment in venture capital industry is made primarily by QIBs, which are banks and institutions, and high net worth individuals. Further, apart from investment restrictions laid down in the regulations, a VCF invests in accordance with the private placement memorandum submitted to the investors, who are largely institutions and capable of monitoring the use of funds. Foreign Direct Investments Most Private equity funds make FDI under the automatic route, which does not require any prior approval. However, there are certain sectors such as broadcasting, courier services, print media etc, in which investment is allowed with the approval of Foreign Investment Promotion Board (FIPB). Further, FDI is prohibited in few sectors like multi-brand retail trading, gambling and betting etc. RBI follows definition of FDI given by IMF wherein PE investments more than 10% are treated as FDI. Foreign institutional investors Foreign institutional investors (FIIs), including private equity funds so registered, investing in the public markets, have to comply with the SEBI (Foreign Institutional Investors) Regulations, 1995. These limits FII investment in an Indian company to 10% of the capital, and limit the aggregate investments of all FIIs and its sub-accounts to 24%, the latter limit being amenable to modification subject to sectoral limits. Global scenario of PE firms The PE activity can be seen in terms of the funds raised and investments made by them7. The global scenario of PE firms in terms of the funds raised by the PE players in different countries for the period 2001-2008 can be seen from the table below:

The data on PE Activity in terms of funds raised and investments made have been sourced from Emerging Markets Private Equity Association (EMPEA) and the PWC, Global PE Report 2008. Here, the data pertaining to funds raised by PEs in different regions has been taken from EMPEA which reports the latest data till 2008. However, countrywise PE investments and funds data for the year 2007 has been sourced from the PWC report. The data on funds raised and investments reported by EMPEA and PWC may slightly vary due to different mechanism and sources of capturing the data.

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Global Private Equity Fund Raising (2001-2008) in US $ Million

Regions Western Europe US Asia Latin America CEE/CIS Africa Middle East Multi-Region Emerging Markets Global Markets

2001 35,611 110,000 7,064 624 575 92 78 N/A 6,561 154,044

2002 28,868 68,200 3,221 407 530 151 1,050 N/A 3,231 102,427

2003 34,037 49,300 4,801 417 406 741 680 116 3,489 94,498

2004 37,230 92,000 7,651 714 1,777 1,380 320 618 6,454 141,690

2005 85,026 151,800 18,269 1,272 2,711 791 1,915 3,630 25,765 265,414

2006 108,000 252,000 25,828 2,656 3,272 2,353 2,946 2,580 33,193 399,635

2007 152,000 291,000 34,734 4,419 14,629 2,340 5,027 4,077 59,160 508,226

2008 105,700 265,600 46,869 4,461 5,559 3,218 5,898 7,721 66,517 445,026

Source: EMPEA, March 2009

According to the Price Waterhouse Coopers, Global Private Equity Report 2008, approximately US $ 297 billion of private equity and venture capital was invested globally in 2007 which was 0.55% of World's GDP. The global scenario of Private equity funds for a decade is presented in the table below.

Rank

Country

Investment (US $ Bn)

Funds Raised (US $ Bn) 302 48.52 5.94 4.62 6.46 7.68 11.00 6.63 1.29 4.03 0.11 5.49 2.79 3.68 0.85 3.86 15.52 2.82 0.42

Y-O-Y Change (%) 35 -16 136 28 -12 22 3 112 608 157 23 -2 270 64 130 8 220 -8 -57 228

1 2. 3.

USA United Kingdom India Japan Australia France China Germany Malaysia Singapore Taiwan Sweden South Africa Netherlands Korea Spain Hong Kong New Zealand Italy Denmark

105.72 40.10 17.51 14.71 14.61 14.40 10.62 8.73 5.40 5.35 4.93 4.89 4.65 4.60 4.28 3.58 2.87 2.73 1.71 1.42

Cumulative Investments by Private Equity Funds during 1998-2007 Regions Cumulative Investment Value (US $ Bn) Global North America Europe Asia Pacific Middle East & Africa Central and South America 1,490.88 709.83 451.91 265.77 27.75 35.61

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17.

Source: Global Private Equity Report, 2008 PWC

18. 19.

The following table gives the ranking of Top 20 countries based on PE Investments in the year 2007.

20.

Source: Global Private Equity Report, 2008- PWC

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According to the PWC, Global Private Equity Report 2008, approximately US $ 86.3 billion of private equity and venture capital was invested in the Asia Pacific region in 2007. Among the nine Asian Pacific Countries featuring among the top 20 countries based on PE Investment, India's share is 22.24% followed by Japan with a share of 18.68% and Australia (18.56%). Rank Asian Pacific Countries Investment (US $ billion) % age share in Asia Pacific (Top 9 Countries) PE Investment 22.24 18.68 18.56 13.49 6.86 6.80 6.26 3.65 3.47 100.00

According the report by Grant Thornton on 'Top trends in middle-market private equity' there are seven trends that have recently altered the way the private equity community conducts business. These are: 1. Private equity firms are returning to the days where they spend substantially more time looking for quality companies to invest in and are performing a thorough due diligence rather than jumping into an investment headfirst. 2. PE firms have adapted to the changing market by opting to do cross-border deals. PE firms are interested in emerging markets. 3. PE firms have transformed themselves by hiring operational partners, which is a recent phenomenon. The middle market firms hire partners who don't necessarily have private equity knowledge but possess expert knowledge in a particular sector. 4. Emergence of Sovereign Wealth Fund (SWF) is also a recent trend and PEs believe SWFs have an increasing long term impact on marketplace. 5. Megafunds have hired more talent to broaden their scope, luring private equity talent away from middle market firms, therefore squeeze on middle market compensation is another significant trend. 6. Despite the global credit crisis, certain industry sectors have remained particularly strong, despite the global credit crisis. Technology, healthcare and energy sectors continue to present strong investment opportunities and are expected to do so for years to come. 7. With lines blurring between PE firms, hedge funds, lenders and bankers, PE firms are emerging as asset managers. This trend has already begun to take place in the larger market and is now emerging in the middle market.

1 2 3 4 5 6 7 8 9

India Japan Australia China Malaysia Singapore Taiwan Hong Kong New Zealand Total

17.51 14.71 14.61 10.62 5.40 5.35 4.93 2.87 2.73 78.73

Source: Global Private Equity Report, 2008- PWC India's Ranking in PE Investment according to various parameters India has carved out a niche for itself in the Global private equity market. India ranks number one in terms of the compound average growth rate of 79% followed by Malaysia (67%) and Denmark (56%). The CAGR for US was 12% while for UK it was 19%. India ranked 3 rd in terms of funds raised and investment value after USA and UK. In terms of ranking based on high-tech investment, India was ranked 3rd after USA and UK while in terms of expansion investment trends India was ranked 2 nd after USA. The table below gives a snapshot of India's ranking according to various parameters. Parameters Ranking based on Growth of PE investments (CAGR for 1998-2007) (79%) Ranking based on Investment Value (US $ 17.51 Bn) Ranking based on High Tech Investment Trends (US $ 5.17) Ranking based on Expansion Investment (US $ 7.18) Ranking based on Buyout investment (US $ 0.97) Source: Global Private Equity Report, 2008- PWC 19 2 3 3 Rank 1

PE growing in Emerging countries According to the World Economic Forum's 'The Global Economic Impact of Private Equity Report 2009', from 2004 to 2007, the dollars raised by PE funds investing in the emerging economies of Asia, Russia and the former Soviet Union, Latin America and the Middle East and Africa have increased between eight- and thirty-fold. Further the report stated that emerging markets account for a very modest share (under 4% on a US dollar weighted basis) of PE activity over the years 1990 through 2008. The share has grown in recent years particularly in the growth equity category. Therefore, financial markets matter for private equity activity and particularly the equity market

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development matters the most for the development of private equity. This is because the PEs exit through the public offering route. According to Emerging Markets Private Equity Association (EMPEA), PE players in the emerging markets8 raised US $ 66,517 million which constituted 14.95% of the total funds raised by the PE funds around the globe. The details pertaining to the funds raised and investments made by the PE players in emerging markets and their shares vis-a-vis total PE funds raised in the Global Market is depicted in the table below: Years Funds Raised in Markets %age share of funds Investments %age share of in Emerging investments Market made to Global PE Investments 3,676 1,891 6,677 7,239 12,050 35,821 50,480 47,835 3.29 2.23 5.91 7.12 10.85 9.12 7.90 NA PE Investment is growing at a fast rate in Brazil, Russia, India and China (BRIC) economies. In recent years, there has been an explosion of private equity investing in BRIC markets due to the common growth story being witnessed by these four countries. The rapid economic growth, tax exemption benefits, prudent fiscal policy and sound 2004 2005 2006 2007 2008 6,454 25,765 33,193 59,160 66,517 4.56 9.71 8.31 11.64 14.95 economic reform are some common features of the BRIC economies which have lured the PE investments. Why PE Investments in India? Indian economy is one of the fastest growing economies of the world. The strong fundamentals of India such as average GDP growth of 8.5% for last five years, increasing saving Source: EM PE Industry Statistics by EMPEA,March 2009. and investment rate, its stable democratic government, well educated population, abundance of English language speakers have caught the attention of the PE players and have brought it on the priority list of all PE funds. On the one hand, Indian growth story has lured the Private equity investors and on the other the Indian economy has gained significantly from the PE Sector. PE firms have shared their global exposure and has had its spillover effect on various fronts such as as- corporate governance standards, knitting global connectivity, building executive teams, improving/raising organizational capability, enhancing evaluations and creating liquidity. Further, PE firms also provide the domestic entities the necessary mentoring and advice without having to go to public markets. PE penetration in Emerging Market versus Developed Markets can be seen with the help of the following graph which shows Private equity Investment as a percentage of GDP (2007) in developed and emerging countries. In India venture capital plays a vital role in the development and growth of innovative entrepreneurships. Venture capital VC/PE Flows in India Source: EMPEA

Emerging raised to (US $ Mn) globally 2001 2002 2003 6,561 3,231 3,489 4.26 3.15 3.86

funds raised (US $ Mn)

Here Emerging markets of Africa, Asia, Central/Eastern Europe, Russia, Latin America, and the Middle East are taken into consideration.

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financing started in India in 1988, with the formation of Technology Development and Information Company of India Ltd. (TDICI) promoted by ICICI and UTI Bank. At the same time, Gujarat Venture Fund Limited & Andhra Pradesh Industrial Development Corporation in the early 90s was started by State level Financial Institutions. Thus, venture capital was initially the prerogative of development Financial institutions. The mid 90's saw the rise of Foreign Venture Capital Funds which focused on development capital without any sectoral focus and was dependant more on opportunities. After the success, of these funds, there was emergence of a number of India-centric foreign VC firms. The scenario of PE/VC investments caught momentum in the late 1990s with the growth of Indian IT companies and with the simultaneous global dot-com boom. On the back of global IT boom, Indian IT sector was viewed as a prominent funding opportunity and consequently saw a lot of Venture capital being pumped into the country. However, the dot com downfall in 2001-02 burst the bubble and it led to huge losses for the PE and VC Community, especially for those who had invested heavily in start ups and early companies. After almost three years of downturn in 2001-2003, the PE market began to gradually recover towards the end of 2004. By early 2004, fund raising in the US, which accounted for more than 60 per cent of the world's PE market, had begun to stabilize. The ripple effects were soon felt in other parts of the world, including emerging markets like China and India. Consequently, PE investors began investing in India in a big way. According to Venture Capital Intelligence, private equity firms invested US $ 10,793 million over 399 deals in India in 2008. However, this was less than the previous year PE investment of US $ 14 billion over 439 deals) During the year 2008, maximum number of PE deals was made in IT/ITeS sector. Primarily, investments by Private equity investors are made in IT/ITeS, Manufacturing, Healthcare and Banking and Financial services. Industry IT & ITES Manufacturing Year No. of Deals Value of Deals (US $ million) Others 2000 2001 2002 2003 2004 2005 2006 2007 2008 280 110 78 56 71 146 299 439 399 1,160 937 591 470 1,650 2,200 7,500 14,234 10,793 Healthcare & Life Sciences Energy Media & Entertainment Enginnering & Construction Other Services Shipping & Logistics Hotels & Resorts Telecom 11 8 7 6 6 4 3 3 2 Banking and Financial Services No. of Deals (%) 27 12 11 In the late 1990s, the flows were only in IT Companies and now it is across a wide range of sectors, though the maximum number of deals have been made in Information Technology and IT enabled services (IT/ITeS) sector. PE Investments by Industry-No. of Deals Source: Venture Intelligence In the three year period ended December 2008, PE and VC firms invested almost $32 billion (i.e. a staggering Rs. 1,30,000 crores) into Indian companies. However, the volume of PE deals decreased by 24.17% during the year 2008 due to economic downturn.

Source: Venture Intelligence (Press Release from www.india infoline.com)

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Company Wise Top PE Investment in India in 2008 Company Sector Amount (US $ mn) Aditya Birla Telecom Indiabulls Power Cairn India Bharti Infratel Caf Coffee Day Source: Venture Intelligence (Press Release from www.india infoline.com) According to Venture Intelligence PE Impact Study, PE and VC investment, when chosen and leveraged well, helps companies create innovative business models, scale up rapidly and accelerate growth in several ways that add significant value to the Indian Economy. PE and VC firms are forging active partnerships with their investee companies to improve capital efficiency, business strategy and corporate governance, besides opening up new markets internationally. About 59% of the PE backed companies are focused on the domestic market. While the growth rate of exports at PE-backed companies (at 31%) lags that of large cap companies, it is still higher than at non PE backed companies (26.3%) and midcap companies (27.8%). According, to Venture Intelligence report, out of the total PE backed companies, 44% of them are large cap companies, 43% are midcap companies and 13% are small cap companies. Opportunities and Challenges for Private Equity players in India The increasing impact of private equity on Indian business is a dual effect of indigenous factors such as an expanding domestic market and globalization which would further scale up the PE Segment. However, at the same time, there are various opportunities and challenges that are faced by private equity players in India. Oil & Gas Exploration Telecom Coffee Chain 250 250 KKR JP Morgan 278 Mobile Service Power 395 Farallon Capital, LN Mittal Orient Global 640 Providence Investors

Opportunity for SMEs The Small and Medium Enterprises (SMEs) in India is an emerging segment and look for various avenues for raising funds. In such a scenario, PE investments are an alternative and viable source of financing the SMEs not only because of the financial support that they can provide but also because of the global exposure that can be provided to the SME sector. This is in form of deploying members of their team on the boards of directors of their investee companies and taking active part in their governance and activities. This would bring more accountability, transparency and corporate governance. Further, the portfolio companies would also get exposure to global standard practices in operations, human resources management, financial planning, reporting and investor relations. Opportunity in Key sectors Sectors like back-end retail, logistics, infrastructure, power, renewable energy, hospitality, transportation and telecommunication have gained favour among the private equity firms. Even the Research and Development sector has caught momentum. Initially, lack of capital to invest in R&D held back corporate India. Private Equity capital is helping address this issue. Growth in R&D investments at PE-backed companies is over twice that at their non PEbacked counterparts. Other new investment avenues with huge potential for PE investments are education and agriculture sector in India. According to the Venture Capital Intelligence report on 'Private Equity Pulse-Education', over 80% of the fund managers are looking forward to invest into education companies in India . Kaizen is India's first private equity (PE) fund being raised to focus on investing in education businesses. Rabobank Group, launched the India Agri Business Fund, the first PE fund to focus on investing in agribusiness in India. The $100 million fund aims to boost the growth of the sector by making value-added equity investments, with a focus on small and medium enterprises and companies in rural areas. Even Microfinance and Clean Technology are some emerging sectors for PE players. Challenges According to Dossani (2006), there were various problems

Opportunity According to Dossani (2006), there were various advantages for running a PE firm in India such as cost competitiveness which may be vanishing fast; development of a strong capital market environment which is capable of providing capital for the next stage growth.

associated with the PE firm in India. They are, lack of well established domestic network of entrepreneurs, financiers, firms and research institutions; poor operating environment including poor corporate governance at the smaller firms and an inefficient legal system; tax environment and a costly process to create a tax-efficient structure for international investors.

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Complex Regulatory Issues and Fiscal Challenges The main barriers to entry for PE's in India are complex regulatory issues relating to sector investment and ambiguities in the Indian interpretation of the tax codes as well as the regulatory costs. Moreover, what aggravates the problem is that there are multiple regulations and little harmonization of guidelines across government agencies (SEBI, RBI, CBDT, Ministry of Company affairs). As on date there are no clear cut guidelines for Private Equity investment. Future Prospects Private equity in India has delivered higher returns over a longer time frame and has outstripped other investment avenues. Over the eight year period (2000-2008), on an average, sales of PE backed companies grew at 24.9%, a significantly higher rate than non PE backed companies which grew by 15.5%, Nifty (19%) and CNX Midcap (20.6%). Further, PE backed companies showed annual Profit After Tax (PAT) growth of 34.6% for the period (2000-2008), significantly higher than non-PE backed companies which showed PAT growth of 25.30%, Nifty 50 companies posted 26.4% PAT growth and CNX Midcap companies showed profit after tax growth of 25.4 % Private equity has entered the economic mainstream and has gained a lot of momentum over the past few years. As the report of the Planning Commission on 'Technology Innovation and Venture Capital" mentions, VC/PE funding is a percentage of our FDI inflow, it should be nurtured and encouraged further as it creates new ventures and new employment and is invested for the long term and is not that can be pulled out at short notices.. Therefore, PE investments can significantly contribute to forex reserves and also reduce the rupee volatility and be one of the factors towards contribution of financial stability. Further, a simple well defined regulatory regime with no scope of confusion can help the private equity industry to grow further.

Bibliography 1. SEBI October 2000,'Report of K.B Chandrashekhar on Venture Capital' 2. SEBI, Dr. Ashok Lahiri, November 2003, 'Report on Venture Capital in India'. 3. Government of India, Planning Commission New Delhi July 2006, Report on Venture Capital 4. Rafiq Dossani and Asawari Desai, 'Accessing Early Stage Risk Capital in India', 2006 5. Grant Thornton Report on 'Top Trends in Middlemarket private equity available on www.grantthornton.com. 6. India's Financial Markets-An Insider's Guide to how the markets work by Ajay Shah, and Susan Thomas and Michael Gordon, Elsevier, 2009. 7. Government India. 8. Globalization of Alternative Working Papers Volume 2, World Economic Forum, Report on 'The Global Economic Impact of Private Equity, 2009'. 9. Pricewaterhouse Coopers, Global Private Equity Report 2008. 10. KPMG, Private Equity Investing in India, 2008-A survey of private equity investor and their portfolio companies. 11. Capvent, Venture Intelligence Report on 'Private Equity Impact, 2009'. 12. TSJ Media, Venture Intelligence, India Venture capital. of India, National Knowledge Technology Innovation and

Commission, 2008, Report on Entrepreneurship in

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