India’s Private Equity Rules Face Call To Change

MUMBAI (Reuters) – Private equity executives and investment bankers believe India must change some foreign investment rules if the buyout industry is to play a bigger role in helping to fund companies and infrastructure projects.

Speakers at a Reuters India Investment Summit last week said that while India may be rich with opportunities, the government needs to tweak regulations to attract much needed capital.

“In India, unfortunately most of the rules are meant for the one crooked guy. To protect everybody from this crooked guy…,” said Blackstone Group’s (BX.N: Quote, Profile, Research, Stock Buzz) country head Akhil Gupta, “… the other 99 percent suffer.”

Western private equity giants, loaded with tens of billions of dollars, have piled into India in recent years seeking to invest in a booming economy filled with companies looking for outside capital to grow both at home and abroad.

India is also desperate for funds to fix everything from its crumbling roads to its faulty water system.

But the firms have found that despite the opportunities, sealing deals is tough, thanks to falling valuations, market volatility and owners’ reluctance to cede control.

Adding to the difficulties, several executives say, are certain private equity rules in India that hinder foreign investing –just when the country needs it.

One item under scrutiny is the so-called “flow price” rule, which says that when a foreign investor puts money into a company, it has to pay above the average price of the stock within a six month range.

Critics say such a requirement never factored in the turmoil that is roiling stocks today.

“The flow price rule is a stumbling block,” said Vedika Bhandarkar, JPMorgan’s (JPM.N: Quote, Profile, Research, Stock Buzz) India head of investment banking. “In a falling market like India, if you have a six month rule you can’t do a deal. That rule, we expect to be relaxed soon.”

But she added that on the whole, India’s rules are aligned with other countries and regions. Private equity firms must make an open offer for a further 20 percent if they buy more than 15 percent of a company’s shares. Such rules are meant to protect minority shareholders.

Another rule under the microscope bars a company from sharing non-public financial information with a potential investor. In a report on India private equity, consultant Bain & Co said the restriction on listed companies from sharing “price sensitive info” can hamper a private equity firm’s due diligence.

“Our whole value addition comes from being diligent on a company and then making a long-term commitment,” Blackstone’s Gupta said, adding a distinction should be made, so that “if you are going to block your money for two years, you can have access to whatever (information) you want.”

Due diligence rules do not apply to private companies.

Blackstone set up shop in India in 2005 and so far has announced seven deals worth $1 billion.

Rival Kohlberg Kravis Roberts & Co [KKR.UL] last month said it hired Citigroup’s (C.N: Quote, Profile, Research, Stock Buzz) south Asia chief Sanjay Nayar to head up its first Indian office. [ID:nBOM423898]

The Carlyle Group and Warburg Pincus LLC have a longer presence in India.

LACK OF LEVERAGE

Private equity and venture capital investments in India rose to $9.7 billion in January-September from $9.5 billion a year earlier, according to local deal tracker Venture Intelligence. The government has estimated that India’s infrastructure needs will require more than $500 billion over the next five years.

One thing that could spur more private equity investing in India is loosening a rule that bars foreign investors from borrowing money for deals — a key component of most private equity deals that are typically only one-third cash.

India’s no-leverage rule forces buyout firms to commit more cash to investments, which makes the deal less profitable.

ICICI Bank (ICBK.BO: Quote, Profile, Research, Stock Buzz) CEO K.V. Kamath said that appropriate levels of leverage are fine, but he supported the notion of keeping certain limits on borrowing.

“It’s at the root of a whole lot of problems,” he said. “In today’s context, the word leverage itself is getting to be an unacceptable word.”

By Michael Flaherty and Narayanan Somasundaram
(Editing by Ian Geoghegan)