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Move to allow shares held by funds as lock-in to help start-ups with low promoter holdings

25 August 2012 Volume 1, Issue 14 Powered by

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Sebi extends a helping hand for PE-backed IPOs

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t's one hurdle less for private equity (PE) players looking for exits from companies where the promoter holding is very less or there is no identifiable promoter. The Securities and Exchange Board of India (Sebi) has said PE funds can pitch in to fill the shortfall in promoters' lock-in during initial public offerings (IPO). According to Sebi rules, promoters have to lock in a minimum of 20 per cent of the post-issue capital for three years. This measure was introduced in the mid-1990s, after several investors burnt their KEY TO IPO LOCKS Promoters to lock in minimum 20 per cent of postissue capital Shares cannot be sold for three years from IPO Sebi-registered funds allowed to share this burden Funds can lock-in up to 10 per cent Move to facilitate companies with low promoter holding hands by investing in companies floated by fly-by-night operators, to ensure that the promoters had enough incentive to stay with the company after listing. But this proved to be a stumbling block for many technocrat-promoted, PEbacked start-ups, where the promoter holding fell short of 20 per cent. Now, Sebi has decided to allow registered PE and venture funds to contribute up to 10 per cent to this lock-in. "To encourage professionals and technically qualified entrepreneurs who are unable to meet the requisite 20 per cent contribution by themselves, promoters will be allowed to meet the same with the contribution of Sebi registered alternative investment funds such as SME funds, infrastructure funds, PE funds, VCFs (venture capital funds), etc, subject to a cap of 10 per cent," Sebi said in its press release. Prithvi Haldea, chairman and managing director,Prime Database, said: "There was an increasing realisation that a number of technology companies are started with external funding on day one. There is further dilution through stageI, stage-II funding, leaving promoters short of the lock-in obligations." According to him, the move to allow funds to contribute to this lock-in was sought by the industry for long. "The PEs and VCs typically have a horizon of three to five years.They should not have a problem with the lock-in," Haldea added. In the past, Sebi had made a few special exemptions on a case-by-case basis. In 2010, a clutch of private equity and venture capital funds had taken the mantle of promoters in SKS Microfinance.Vikram Akula, the entrepreneur who promoted the firm, had only six per cent stake in the company. Since this fell short of the regulatory requirements, four entities - Sequoia Capital, Sandstone Capital, Kismet Capital and SKS Trust - took the mantle of promoters. Experts said such commitment from funds would be a confidence booster for retail investors who participate in IPOs.PE funds,which are committed to taking the companies to IPOs, will be happy doing it, said Deepesh Garg of Ozone Capital. "This will be a facilitating step, but it's not going to fire up the IPO market," Garg added. (Source:Business Standard)

REGULATORY ISSUES POSE HURDLE ON BUYBACK ROUTE

ncertainty around buyback arrangements has put private equity (PE) firms, struggling to exit their investments, in troubled waters. The number of buybacks so far this year has halved compared with 2010 numbers, and the value of these deals has declined about 90 per cent. This year, nine such deals accounting for $79 million have been recorded. In 2009 and 2010, the buyback route was a favourite among PE investors: 15 buyback deals, worth $535 million, were recorded in 2009, while 23 deals, worth $1.5 billion, were carried out in 2010. Last year, 21 buybacks deals were recorded, and these amounted to $317 million. Most private investments have a put-on or a pre-agreed buyback clause in the shareholders' agreements. Through this option, investors' stakes are bought back by promoters at a pre-determined price, offering investors an assured exit irrespective of market conditions. However, in October 2011, the Department of Industrial Policy and Promotion (DIPP) issued an order

that any equity instrument with an option of assured returns - such as buyback, put or call - would not be eligible for foreign direct investment and would be considered debt instruments. These would have to comply with external commercial borrowing guidelines, the order added. "Going by recent trends, PEs are not able to use the buyback route for exits," said Aakash Choubey,partner Khaitan & Co. "This is largely due to the fact that in certain cases, buybacks may be regarded by the regulator as put options and would, therefore, be unenforceable." RBI pricing guidelines state that if buyback is carried out by an unlisted company,the buyback price cannot be more than the price arrived at by the discounted cash flow method. In case of listed companies, the pricing has to be compliant with Sebi's pricing norms. DIPP had withdrawn the order after a month, following stiff opposition. But uncertainty still looms over the put option clause. (Source: Business Standard)

Over 1.4 lakh cos dormant in India M

ore than 1.4 lakh companies in India are lying dormant, with Maharashtra accounting for the largest number of such entities, followed by Delhi and Andhra Pradesh, the government today said. Maharashtra, whose capital Mumbai is known as the country's biggest financial and corporate hub, had a total of 35,664 dormant companies as on August 20, 2012, while the national capital had 28,905 such companies on this date. Replying to a question in Lok Sabha, Minister of State for Corporate Affairs RPN Singh said that the ministry has launched a 'fast track exit mode' for getting these defunct companies de-registered. Asked about details of the registered companies that have been inactive and dormant for at least ten years, the minister provided a state and union territory-wise list of such firms. Maharashtra and Delhi are followed by Andhra Pradesh (23,284), Tamil Nadu (16,373) and Gujarat (11,269) among the ones with the highest number of dormant entities. Among others, Karnataka has 8,221 dormant companies,Uttar Pradesh (5,316),Kerala (2,422), Punjab (2,413), Haryana (2,206), Rajasthan (1,467), Madhya Pradesh (1,403), Chandigarh (1,233), Bihar (1,019) and West Bengal (967). Lakshadweep accounted for lowest number of such companies (2), while others with small numbers included Mizoram (6), Tripura (7), Arunachal Pradesh (11), Meghalaya (15), Manipur (18), Daman and Diu (25) and Nagaland (26). (Source:The Economic Times)

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HR: People who mean business
ears ago when I interviewed youngsters for a position in human resources (HR), I would invariably ask what attracted them to the job. Nine out of 10 would say it was because they "liked people." Well, that's a relief, I guess! But, how many accountants do you know who were hired for their love of money? Jokes apart, if only it were as simple as that. The HR value proposition must address not just its traditional stakeholders - employees and the internal organisation - but also customers, investors and influencers, such as analysts, business alliances and regulators.What constitutes value to these stakeholders? In simple terms - something that helps them achieve their objectives.To the business, HR creates value by anticipating labour market trends,forecasting skills,addressing talent shortage, entering new markets, optimising costs, building brand and ensuring corporate governance. For employees, HR creates value by enabling learning, investing in careers,creating a fair and secure workplace and most of all valuing the happiness quotient of employees. Business acumen: Head honchos and leaders-in-the-making are now expected to possess business and organisational knowledge in addition to functional expertise. Passionate leadership: All of the above takes passion, vision and commitment. If that means jumping right into "other people's business" and asking uncomfortable questions, so be it.Although HR leaders must align with the organisational agenda, the best ones will not hesitate to question something that isn't being done right, or to propose a better alternative.Leadership is part vision, part undisputable business logic, and part consensus. Change management: Those leading HR, like all other functional heads, have to adapt to change, but unlike the rest, must also initiate, lead and sustain change within the organisation. In their revised role of business - as opposed to employee-advocate - HR leaders need to put business interest ahead of all others, which in today's dynamic environment usually means changing the status quo. The author, Nandita Gurjar, is a senior vice-president and group head, HR, Infosys (Source: The Hindu Business Line)

Generational gap leads to challenges at workplaces

ndian workplaces have become an interesting blend of three generations -the business leaders and CEOs are Baby Boomers (born between 1946 and 1964), management teams and senior professionals are Gen X (born between 1965 and 1980) while youngsters are Gen-Y (born between 1981and 1995). This generation gap has led to differences in communication-styles, mindsets,motivational tools and use of technology, leading to challenges at the workplace. To gain a better understanding, let's evaluate the three generations on the following parameters: Achieving results: Boomers are competitive and like putting in long hours at the office, even working on weekends if needed; Gen X likes to work independently and are always trying to strike a balance between their work and personal life; Gen Y prefers sharing ideas with virtual teams and people across the globe. Clearly, companies that focus on the end result and

The generation gap has led to differences in communication styles, mindsets, motivational tools and use of technology, leading to challenges at the workplace offer flexibility (e.g. telecommuting, videoconferencing) are best suited to achieve the desired results across generations. Communication style: Boomers enjoy face-toface interactions as they focus on the vocal and visual components when communicating; Gen X prefers interacting via formal emails and over the phone while Gen Y likes communicating via shorter emails/ text/ instant messaging. Workplaces which can accommodate different communication styles are ideal for minimising this generation gap. Authority:Boomers enjoy the power and authority that goes with their job; Gen X are independentthinkers who dislike authority while Gen Y dislike formal chain of command preferring to work in teams where everyone is allowed to air their opinion, regardless of their title. Workplaces which assign both younger and older employees to internal task forces handle this age diversity well. Business meetings: Both Gen X and Y dislike traditional meetings where authority flow is top-todown,a style patronised by the Boomers. On the other

hand, workplaces which use business meetings as platforms for free exchange of ideas minimise this gap. Rewards: Boomers display status and loyalty to their employer; Gen X are freethinkers who thrive on recognition amongst their peer group, while Gen Y enjoys jobs that offer them enhanced responsibility and mental stimulation. Clearly, reward programmes should be designed to motivate employees across generations which will increase efficiency and productivity Personal time: Boomers use personal time to pursue hobbies; Gen X views free time as 'family time' while Gen Y uses their free time/weekends for volunteer work, CSR initiatives, educational pursuits and 'down time' with friends. Create opportunities for generations to mingle and enjoy each other's company,especially when designing mentoring programmes, off-sites and training programmes. (Source:The Economic Times)

ENTREPRENEURS, START-UPS TAKE TO YOUTUBE

n his day job, Vikram Singh Yadav practices medicine at a New Delhi hospital. But by night he is an entrepreneur hosting his own channel on YouTube.His show 'Medical and Surgical Educational TV' has over 800 videos shot by Yadav that he has uploaded online. Many individual entrepreneurs and startup firms are taking to the video channel to build fast-growing businesses. Since September last year, when YouTube, the video arm of search giant Google, opened doors to its partner programme in the Indian market, the number of businesses using the channel has

grown five fold. "The number of videos uploaded by Indian partners are behind only the US," says David MacDonald,head of YouTube Partner Operations, APAC. The big draw for video creators is the opportunity to retain nearly 55% of all advertisement revenues generated through their content on the platform.The speedy adoption by individual entrepreneurs and start-ups has made India the third largest contributor to partner views globally. This is helped by the fact that YouTube is the third most viewed site in India after Google and Facebook, with 29 million visitors in May this year,

according to online data provider Vizisense. According to industry estimates, YouTube's reach extends to 62% of India's internet population as opposed to 46% worldwide. "YouTube has clearly emerged as the default destination for video on the web, providing high reach to video content creators," says Amit Bhartiya, vice-president - mobile and Vizisense, Komli Media. Industry executives estimate that over a 100 start-ups are earning more than Rs 1 lakh per month from monetising content on YouTube, while the top most earners could be earning between Rs.5 crore and Rs.7 crore. (Source: The Economic Times)

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Vedanta may offer 25% more for govt's stake in Hind Zinc, Balco
edanta Group may shell out Rs.21,635 crore,up to 25 per cent more than previously offered,for buying the government's remaining stakes in Hindustan Zinc and Balco as its earlier offers have not been accepted so far.

Just Dial revives public offer plan

ust Dial Ltd, the Mumbai-based directory service provider promoted by V S S Mani, has revived its initial public offering (IPO) plan,a move that will help private equity (PE) investors partly monetise their holdings. The company that received capital markets regulator Securities and Exchange Board of India's approval for the IPO in April this year had postponed the issue as a depreciating rupee deterred foreign investors from Indian markets. The company, however, raised Rs.327 crore from existing PE investors,Sequoia Capital India and SAP Ventures, in June. This took Just Dial's total fund raising from PE funds to Rs.580 crore. "The company does not need fresh fund as it has already raised that, but it needs to bring the IPO to provide investors an opportunity to monetise their investments," said a person familiar with the development, requesting anonymity. Since the IPO is now intended for the secondary sale of shares of PE investors' stake and not for the issue of fresh shares by the promoters as approved by Sebi in April, the company has once again filed for regulatory approvals by revising the proposed capital structure. Sequoia Capital, SAIF Partners and Tiger Global Holdings own 18.5, 19.84 and 20.22 per cent holdings,respectively,in the company.Besides,EGCS Investments has 0.93 per cent stake in Just Dial,while SAP Ventures owns 1.59 per cent stake. (Source: Business Standard)

Anil Agarwal, Chairman, Vedanta Group If the deal goes through, this deal alone could meet over 72 per cent of the government's disinvestment target of Rs.30,000 crore for this year. "We have not made any fresh proposal to the government. Whatever proposal we gave in January,that is the only proposal pending. Price will depend on what methodology government selects for valuation," the company spokesperson said. He added that, "this is just an enabling resolution to comply with the UK- listing requirements." Vedanta has called shareholders meeting on August 28 in London,alongside its annual gen-

eral meeting,to seek nod for the sweetening its offers in the two firms, but a company spokesperson said that it is just an " enabling provision" and no new offer has been made yet to the government. "As GoI has not,to date,accepted the company's offers, approval from shareholders is being sought on the basis that the company is authorised to negotiate the acquisition of the entirety of the GoI's interest in HZL for an aggregate consideration not more than 15 per cent higher than the price offered and in Balco for an aggregate consideration not exceeding USD550 million," it said in a notice to company shareholders.vFor Balco's remaining stake, the company has pegged the new price at USD550 million (Rs.3,028.78 crore), an increase of 62.72 per cent from the offer of USD338 million (about Rs.1,782 crore) made in January.Taken together, it becomes 19.92 per cent increase in the offer price of January in US dollar terms. The offer gets sweetened by 25.24 per cent in Indian currency terms at Vedanta's dollar-rupee exchange rate of 55.0688 (August 7). As per the company, it has written to the government twice, in April and July, after making the offer first in January.The offer has not been accepted yet.It said the shareholders' approval would allow it "to complete the transactions in a timely manner". (Source:FPJ)

ue for us, we are open to eading private insurer give small equity,say up to 5 Reliance Life has begun per cent, to it at today's valtalks with a few banks uation with guarantee to for sale of minority stake of buy them back at future valup to 5 per cent and to enter uation. This is what we are into product distribution alpursuing while talking to liance.The bank would serve banks for a bancassurance as a bancassurance partner tie-up," he said.In insurance and help expand the prod- Reliance Life uct distribution network of President and parlance, the term 'bancasReliance Life Insurance, Executive Di- surance' is used for distribution of insurance products which is part of Anil Am- rector Malay through the bank branches bani-led Reliance Group's fi- Ghosh nancial services arm Reliance Capi- and currently this model of insurtal. "We are looking for a bank part- ance distribution accounts for 25-30 ner of significant size and are in per cent of premium income for the touch with a couple of banks for al- private insurers in the country. "No liance. We are also open to discus- doubt, we have a distribution gap sions on giving a very small equity and it can be served by one bank of to a bank of critical size as distribu- a significant size and reach. If we do tor stock option," Reliance Life Pres- not get the bank of that critical size, ident and Executive Director Malay we can go for more than one bank," Ghosh said. He, however, did not Ghosh said. Last year, Reliance Life identify the banks with which Re- Insurance sold 26 per cent stake to liance Life is in discussions for a po- Japan-based Nippon Life Insurance tential deal.The equity stake offered Co for around Rs.3,062 crore. Earlier to such a partner would be capped this month, Reliance Life reported a at 5 per cent. Ghosh said that Re- whopping 140 per cent jump in its liance Life would not offer any up- first quarter net profit to Rs.19 crore front payment for the bancassur- in the current financial year. ance alliance. (Source: The Financial Express) "If a firm in five years can create val-

Reliance Life eyes INFOSYS WHISTLEBLOWER LOSES CASE banks for stake sale U.
S. court dismisses harassment charges filed by Jack Palmer against the IT firm accusing it of misusing B1 visas.Infosys Ltd's American employee Jay (Jack) Palmer, whose lawsuit against the IT bellwether was dismissed by a US court on Monday, would continue in the company but would be benched,a top official said. "Palmer, who is a principal consultant by designation in the US,will continue to be an employee of our American subsidiary but will be on the bench, as our utilisation rate is currently less.He will be put on work as and when we get new projects," Infosys chief executive S D Shibulal said. The verdict is a big relief to Infosys, as it comes at a time when the company is also facing a Grand Jury investigation in the US over alleged misuse of B1 visas. The US authorities are separately investigating Palmer's charges of Infosys violating US visa rules. He accused the company of using short- term business visas (B1) instead of work visas (H1- B) meant for high-skilled employees. Expressing satisfaction over the ruling by Alabama federal judge Myron H. Thompson for throwing out Palmer's case with costs citing technicalities in the Alabama state law, Shibulal said the verdict vindicated the company's stand all along that he had no basis to support the charges leveled against the software

major. "We are extremely pleased by the judgment, which Palmer, who is a principal consultant by designation in the US, will continue to be an employee of our American subsidiary but will be on the bench, as our utilisation rate is currently less" S. D. SHIBULAL Infosys chief executive puts an end to the case and reaffirms our policy of not retaliating against Palmer or any of our people. We have a well defined whistleblowers policy. Whenever charges are made, we investigate to verify them but will not retaliate," Shibulal asserted. Palmer had alleged that he was harassed at work, sidelined and even received death threats for refusing to participate in an alleged Infosys' scheme to use workers on business visitor, or B- 1 visas, for tasks that required an H- 1B work visa. Thompson ruled that some of claims brought by Palmer against Infosys were not covered by the state law. "As evident from the ruling, Palmer did not have a case against us, much less documents to prove that we retaliated against him. The fact that the case was dismissed even before considering for trial proved that Palmer's attempt to accuse us of wrong- doing or violating state laws by falsifying documents failed," he noted. (Source: FPJ)

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Transfer pricing Export, import cos face black money probe norms out, to ease tax woes T
T
olerance of 5 per cent variation in actual and arm's length price maintained, advance pricing agreement norms soon, caution on safe harbour rules The finance ministry has decided to bring in greater clarity in transfer pricing norms. A senior finance ministry official said as the first step, the government issued a notification on Friday to clear doubts over the possibility of changes in the permissible variations from the market price to the arm's length price for assessment year 2012-13. The notification said where the variation between the arm's length price determined under Income Tax Act provisions and the price at which an international transaction had been undertaken did not exceed five per cent of the latter, the price at which the transaction took place would be taken as the arm's length price. The arm's length price is critical for companies with international operations and subsidiaries trading with each other. There is often an incentive to reduce the overall tax burden by manipulation of inter-company prices. Five per cent tolerance in arm's length pricing continued for the current assessment year Finance Act 2012 has fixed a 3 per cent upper limit from the next assessment year onwards APA norms expected to be notified by the month-end Govt to tread cautiously on safe harbour rules as very few countries have implemented these The finance ministry's decision to allow a five per cent variation this year is significant, as the Finance Act 2012 has fixed an upper ceiling of three per cent as the tolerance range for determining the arm's length price from assessment year 2013-14 onwards. The official said the continuation of the five per cent tolerance range for 2012-13 would be a big relief for industry.The announcement of advance pricing agreement (APA) norms, introduced in the Budget,was next in line,said another official. The APA norms were expected to come by the end of the month, which was set to signal the government's intention to bring in transparent processes,he said.The APA regime had to begin from July 1. But, owing to a delay in the notification of norms,it is yet to start. Currently, global taxation experts consider India as one of the most difficult transfer pricing destinations, with more than half the transfer pricing audits facing adjustments resulting in an additional tax demand and litigation. Income tax officials had gone on an overdrive in the last two financial years to collect as much additional revenue from transfer pricing adjustments as possible and the estimates even touched Rs.80,000 crore in 2011-12 alone, impacting multinational companies doing business in India and Indian companies with a big presence abroad. (Source:Business Standard) rade transactions by a host of export and import firms have come under the scanner of central economic intelligence agencies for alleged money laundering and tax evasion. Sources said Central Economic Intelligence Bureau and Directorate of Revenue Intelligence officials have found details of suspicious trade transactions by some of the firms, based in major industrial hubs of the country including Mumbai, Delhi, Surat and Ludhiana, which were manipulating import and export invoices thereby generating black money. According to preliminary probe based on assessment of past two year trade transactions, a number of ' fly by night' exporters and importers (who only export or import goods once and then vanish) have been found in routing of black money and the officials are trying to ascertain their whereabouts, they said. "We have come to know over 100 such suspected trade dealings in Middle East, the US and the UK among others. Most of these transactions seem to be dubious and the address of the recipients and booking agents here have been found to be incorrect," a source said. He said the details of these exports will also be shared with the concerned authorities in those countries. In addition, economic intelligence agency officials have found certain dubious consignments sent to India, most of which are lying unattended at various air and sea cargo stations, and examining them to know their background. Last month, the DRI had claimed to have busted over Rs.1,000 crore hawala racket in Punjab involving certain international syndicates and Delhi- based businessmen. The officials claimed they have exposed the racket while probing a scam by an exporter who fraudulently used inflated bills to misuse a duty drawback scheme run by the Finance Ministry and gained incentives worth Rs.60 cr. "There has been spurt in activity related to Trade Based Money Laundering (TBML). All field officials have been told to cross check export and import consignments in case of any suspicion," the official said. TBML is the process of transferring or moving money through trade transactions. In practice, this can be achieved through misrepresentation of price, quantity or quality of imports or exports. (Source: FPJ)

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