In 2011, India was the fastest growing private equity (PE) market in Asia. A recent report by accounting and consulting firm Grant Thornton, titled “Global Private Equity Report 2012,” now suggests that India is the most challenging market globally for this sector.
The Grant Thornton report notes that while the fundraising environment for PE firms across the world is seen as being very tough and sentiments are more negative as compared to last year, this is most evident in the Asia Pacific region and BRIC countries. And within these, “it is the Indian PE firms in particular that have the most negative outlook on the ability to raise new funds.”
Regarding deal activity, too, India is expected to be at the bottom. The report points out that although expectations are more cautious than they were in 2011, globally PE investment activity is expected to stay the same or even move up in the coming year. But, in the Chinese and Indian markets “there is a substantial downturn in confidence regarding deal activity.” The report goes on to add that it is in India that “the PE industry may see the greatest change over the next year … despite [the country] being regarded by many as a PE hot spot.”
So why has India fallen off the pedestal? According to the report, multiple factors are at play. The report notes: “The Chinese slowdown has been predicted by many and is starting to occur, albeit growth remains above 7% and no doubt this is impacting on transaction activity confidence. India is under more than just economic pressure, with political burdens and policies having an adverse effect on corporate growth.”
Pointing out that the survey was done before the recent pro-reform measures announced by the Indian government, Harish H. V., partner, India leadership team at Grant Thornton India says: “The Indian political scenario over the past year has been one of significant challenge which has impacted the reforms process and also impacted progress on various projects, be it in the public or private sector. Some of the policy measures like retrospective taxation and confusion on GAAR [General Anti-Avoidance Rules] have also contributed to negative sentiment from an investor perspective. There is a clear perception of lack of decisiveness on the part of the government in major policy areas, especially those in infrastructure….”
Arun Natarajan, founder and CEO of Venture Intelligence, a Chennai–based research services firm focused on PE and M&A deals, adds that slow to non-existent reforms and lack of profitable exits continue to be the main dampeners. Says Natarajan: “Indian PE has been facing challenges which are a mix of both country-level issues and industry-level issues. The lack of economic reforms over the past several years and retrograde steps like the attempt to tax transactions retrospectively [like in the Vodafone-Hutch deal] have shaken global investor confidence. On top of that, the lack of good returns — especially the huge overhang of un-exited investments from the 2006-2007 period — is something that LPs [limited partners] have been quite critical of.”
What does India need to do to regain its popularity in the PE sector? Harish lists down some immediate measures:
1. The first step is to recognize the PE sector as a separate sector which comprises financial investors and not strategic investors from an approval perspective. Also, there is a need to clarify rules on taxation related to GAAR and other aspects and confirm that retrospective taxation will not be applied on structures that confirm to law at the point they were created.
2. Recognize the value that PE firms bring about in terms of creation of new entrepreneurs and economic growth and treat them as a separate category from a capital markets perspective by allowing them faster processes and flexible rules for investing in companies through different structures. Obviously, this needs to be done for qualified PE firms only, Harish notes.
3. Ensure that projects are not stymied through policy measures once they commence.
4. Enforce governance practices through rule of law and punishment to economic offenders.
5. Improve court processes to deal with disputes between PE firms and corporates so that action can be taken quickly.
Natarajan of Venture Intelligence notes: “The fundamentals of the economy — whether it’s the relatively strong economic growth, especially when compared to the developed world, strong domestic consumer spending, etc. — continue to keep India attractive for multinationals and also long-term financial investors who are the most significant source of capital for Indian PE funds. Consistent government action on the reforms front, especially with a focus on implementation rather than mere pronouncements of intent, is likely to be the main positive catalyst.”