Business Minds Meet
12/5/2011 2:52 PM Monday
Economic discussions in any corner of the world today are about nothing but how to get over the current crisis. There is gloom all over, be it in the US, where fears of a double dip recession loom large, or in the European region, where most of the countries are struggling to cope with the high govt. debt that has pushed them to the brink of a default. Violent protests in the Middle East and the North African region have added to investors’ worries. While all of this has grabbed tremendous attention, India continues to offer huge opportunities, thanks to its diverse economic dynamics. India has charted a consumption-led growth story, and continues its onward march, despite some roadblocks.
Among all the discussions, indisputably one of the most important ones is about ensuring enough capital. While traditionally, the capital market has been a good source for entrepreneurs and established corporates, capital flows dry up at times like these, creating a liquidity squeeze.
Over time, many alternative sources of capital have come up on the economic scene, the emergence of private equity being one of them. However, in the Indian context, entrepreneurs have not been able to source capital from this vital source very efficiently. Despite India offering huge opportunities, the frequently changing policies, as also a slow enforcement system, protective laws and security concerns create impediments to investment.
This is where the Indo-American Chamber of Commerce’s initiative to organise a high-profile PE conference becomes relevant. The conference focussed on various global PE issues in the current economic scenario, particularly in the Indian context. The main agenda was to facilitate high-profile networking and knowledge-building sessions among various stakeholders, with topics ranging from investment contract issues, investee issues, tax issues, restructuring and enforcement of rights.
While there are many issues that need to be tackled in order to bring in capital smoothly through this route, there are also many impediments. There are various stages at which people invest. According to Anand Desai, National President, IACC, “A full-fledged private equity investment depends on the maturity level of a business”.
Why should investors be keen to invest in India? Well, as is a given fact, India is a growing economy with a whole lot of opportunities, and that is reason enough for investors to consider India carefully. Where would PE investors be keen to invest? “Private equity typically looks at quality managements, because they believe that managements can put the money to good use”, says Desai.
The way PE investors look at opportunities is something that needs to be looked at carefully. Desai shares with us a classic example-based explanation of how this happens. “You put money into a construction company that has made individual buildings, and you expect them to build a township. However, in reality, this may not happen. This is because the guy’s experience is, say, at scale ‘x’. You probably want him to deliver at a scale of ‘100x’, which he may not have the competence to do. This is where the sophistication of private equity guys comes in”, he explains.
Typically, there are three ways in which an exit for a PE is worked out. One is that the company will come up with an IPO if it is unlisted. Second is what is called a ‘put option’. Here, they have the right to require the promoter to buy the shares. Of course, this presupposes the promoter having sufficient money at that point of time. This is because they would want their invested money back, along with a mark up of around 20% or 30%. The third option is to sell to a 3rd party.
There are a lot of experts around, who will tell PEs where to invest. Secondly, how do you exercise control? This again, is relatively easy to address, because here you are using a global model. The third part regarding the exit is the most crucial part. “In India, there are a lot of controls, as well as multiple agencies and ministries exercising control. Rules introduced at some point, and are reversed in no time. Then, there is also the matter of rules being introduced by an authority, and later overruled by other rules by some other authority. All these things actually put off investors”, concludes Desai.
This is where a confluence of minds that could add value to the whole process and help in making the process smoother would come handy. The conference is underway even as we go to press. In our following issue, we would bring in many more interesting bytes on what was discussed there.
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