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| CII report recommends for a favourable regulatory environment for Private Equity and Venture Capital Investments in India
August 22, 2011: The Private Equity & Venture Capital investments in India at US $ 9.5 billion in deals has created an impact in terms of achieving stellar performance of the companies in which they invest and nurture. The profits after tax of Private Equity backed firms have registered a growth of 35 per cent as against 21% growth registered by other listed companies. Given the growth needs of Indian economy it is pivotal that the Governance of the Private Equity and Venture Capital firms is reconceptualised towards a favourable regulatory environment that would promote Private Equity and Venture Capital Investment thus directing the much needed capital to corporations in India, said the CII Report.
The CII report sets out recommendations for a favourable regulatory environment for Private Equity and Venture Capital Investments in India by seeking removal of restrictions without seeking any tax concessions.
Private Equity & Venture Capital funds engage in substantial minority investments in private and public listed companies. Yet they are constrained in terms of not being permitted to purchase secondary shares and are limited to acquire stakes only up to 15 percent. The CII report suggests that SEBI-registered Private Equity & Venture Capital funds should be allowed to invest the permitted one-third of fund capital through both primary and secondary purchase of equity shares or equity linked instruments.
Further, such investments should be construed as complying with prevailing capital market regulations including open offer requirements. The CII report also suggests that Private Equity & Venture Capital funds should be allowed to invest 25 percent of the capital of target companies without resorting to an open offer. The Private Equity & Venture Capital investments are of medium to long term nature aimed at not purely investing but also nurturing the companies in terms of provision of management and operational support in a few cases to see to it that the return on these investments grow and expand in the medium and long term, the report alluded.
On the restrictions on investment in NBFCs, the report noted that as per the current regulations, SEBI registered Private Equity & Venture Capital funds investments are confined only to “financially weak or sick” companies and are prohibited from investing in NBFCs. Given the role played by the NBFCs, especially in meeting the micro funding needs of the economy, the CII report suggests that investments by SEBI-registered Private Equity & Venture Capital funds should not be confined to financially weak or sick companies but should also be allowed to encompass equity linked instruments or convertible instruments of all companies including investing in NBFCs, holding companies and buyout SPVs that are classified as Capital Investment Companies.
Further, the report also suggests that the time period of conversion of convertible equity linked instruments, subscribed to by SEBI-registered Private Equity & Venture Capital funds should be increased from 18 months to 5 years as applicable to QIPs by amending the SEBI regulations to facilitate more accurate price discovery.
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(Source- CII Press Release)
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