1.

Financial Markets – An Overview

2. Fund Raising Mechanism by Corporates –
Private Equity
for
Power Grid Corporation of India Ltd., Bangalore
by
Prof Chowdari Prasad
November 11, 2008
  Worlds largest democracy
 GDP growth rate for 2006-07: 9.2%
 Rising young population
 Parliamentary form of Government
 World-class recognition in IT and bio-

technology
 Services sector contributing
approximately 55.1% to GDP
 Largest English speaking nation in
the world
 India-China, rising powers in Asia
 India could emerge as the world's
fastest growing economy by 2020
 Bold and independent judiciary

PGCIL ABS CP 111108 2

 Financial System
 An institutional framework existing in a country to
enable financial transactions
 Two Financial Systems – Formal and Informal
 Three main parts
1. Financial Assets (loans, deposits, bonds, equities, etc.)
2. Financial Institutions (banks, non-banks, mutual funds,
insurance, housing finance companies, MFIs, etc.)
3. Financial Markets (money market, capital market (equity &
debt), forex market, gold market, commodities, etc.)
 Regulation of the Financial System (MoF, RBI,
SEBI, IRDA, NABARD, PFRDA/EPFO, NHB)

PGCIL ABS CP 111108 3

 Financial Assets / Instruments

 Enable channelising funds from surplus units to

deficit units
 There are instruments for savers such as deposits,
equities, mutual fund units, etc.
 There are instruments for borrowers such as loans,
overdrafts, etc.
 Like businesses, Governments too raise funds
through issuing of Bonds, Treasury Bills, etc.
 Instruments like PPF, KVP, etc. are available to
savers who wish to lend money to the government
PGCIL ABS CP 111108 4
 Financial Institutions

 Includes Institutions and mechanisms which

1. Affect generation of savings by the community
2. Mobilisation of savings
3. Effective distribution of savings
 Institutions are banks (Commercial & DFIs),
NBFCs, insurance companies, mutual
funds- promote / mobilise savings
 Individual investors, industrial and trading
companies- borrowers

PGCIL ABS CP 111108 5

Financial Markets
A Market is a place where buyers and sellers
come together to exchange something
 Financial Markets are where financial
Instruments / products are exchanged.
 A Financial Market is known by type of
product traded in it

PGCIL ABS CP 111108 6

Different Financial Markets

FINANCIAL MARKETS

Money Debt Forex Capital

Market Market Market Market

PGCIL ABS CP 111108 7

 Financial Markets
 Money Market- for short-term funds (less than a
year)
1. Organised (Banks)
2. Unorganised (money lenders, chit funds, etc.)
(Treasury Bills, Commercial Bills, Call Money Market, CP, CoDs)
 Capital Market- for long-term funds
 Domestic / International Markets
 Primary Issues / Private Placement Market
 Stock Market
 Bond Market
(BSE, NSE, OTCEI, ISE and other Regional Exchanges facilitate)

PGCIL ABS CP 111108 8

 Organised Money Market
 Call Money Market
 Bill Market
 Treasury bills
 Commercial bills
 Bank loans (short-term)
 Organised money
market comprises RBI,
banks (commercial and
co-operative)

PGCIL ABS CP 111108 9

Purpose of the money market
 Banks borrow in the money market to:
 Fill the gaps or temporary mismatch of funds
 To meet the CRR and SLR mandatory
requirements as stipulated by the central bank
 To meet sudden demand for funds arising out of
large outflows (like advance tax payments)

 Call money market serves the role of

equilibrating the short-term liquidity position
of the banks
PGCIL ABS CP 111108 10
Call money market (1)
 Is an integral part of the Indian money market
where day-to-day surplus funds (mostly of
banks) are traded
 The Loans are of short-term duration (1 to 14
days). Money lent for one day is called ‘call
money’; if it exceeds 1 day but is less than
15 days it is called ‘notice money’. Money
lent for more than 15 days is ‘term money’
 The borrowing is exclusively limited to banks,
who are temporarily short of funds
PGCIL ABS CP 111108 11
Call money market (2)
 Call loans are generally made on a clean basis- i.e.
no collateral is required
 The main function of the call money market is to
redistribute the pool of day-to-day surplus funds
of banks among other banks in temporary deficit of
funds
 The call market helps banks economise their cash
and yet improve their liquidity
 It is a highly competitive and sensitive market
 It acts as a good indicator of the liquidity
position
PGCIL ABS CP 111108 12
Call Money Market Participants
 Those who can both borrow and lend in the
market – RBI (through LAF), banks and
primary dealers
 Once upon a time, select financial institutions
viz., IDBI, UTI, Mutual funds were allowed in
call money market only on the lender’s side
 These were phased out and call money
market is now a pure inter-bank market
(since August 2005)
PGCIL ABS CP 111108 13
 Developments in Money Market

 Prior to mid-1980s participants depended heavily on

the call money market
 The volatile nature of the call money market led to
activation of Treasury Bills market to reduce
dependence on call money
 Emergence of market repo and Collateralised
Borrowing and Lending Obligation (CBLO)
instruments
 Turnover in the call money market declined from Rs.
35,144 crore in 2001-02 to Rs. 14,170 crore in
2004-05 before rising to Rs. 21,725 crore in 2006-07
PGCIL ABS CP 111108 14
 Bill Market
 Treasury Bill market- Also called the T-Bill market
 These bills are short-term liabilities (91-day, 182-day, 364-
day) of the Government of India
 It is an IOU of the Government, a promise to pay the stated
amount after expiry of the stated period from the date of issue
 They are issued at discount to the face value and at the end of
maturity the face value is paid
 The rate of discount and the corresponding issue price are
determined at each auction
 RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills
and 364-day T-Bills on a fortnightly basis on behalf of the
Central Government

PGCIL ABS CP 111108 15

Money Market Instruments (1)
 Money market instruments are those which
have maturity period of less than one year.
 The most active part of the money market is
the market for overnight call and term
money between banks and institutions and
repo transactions
 Call money/repo are very short-term money
market products

PGCIL ABS CP 111108 16

Money Market Instruments(2)
1. Certificates of Deposit
2. Commercial Paper
3. Inter-bank participation
certificates
4. Inter-bank term money
5. Treasury Bills
6. Bill rediscounting
7. Call/notice/term money
8. CBLO
9. Market Repo

PGCIL ABS CP 111108 17

Certificates of Deposit (CDs)
 CDs are short-term borrowings in the form of UPN issued
by all scheduled banks and are freely transferable by
endorsement and delivery.
 Introduced in 1989
 Maturity of not less than 7 days and maximum up to a year.
FIs are allowed to issue CDs for a period between 1 year and
up to 3 years
 Subject to payment of stamp duty under the Indian Stamp
Act, 1899
 Issued to individuals, corporations, trusts, funds and
associations
 They are issued at a discount rate freely determined by the
market/investors

PGCIL ABS CP 111108 18

Commercial Papers (CPs)
 Short-term borrowings by corporates, financial institutions,
primary dealers from the money market
 Can be issued in the physical form (Usance Promissory
Note) or demat form
 Introduced in 1990
 When issued in physical form, are negotiable by
endorsement and delivery and hence, highly flexible
 Issued subject to minimum of Rs. 5 lacs and in the multiple
of Rs. 5 lacs after that
 Maturity is 7 days to 1 year
 Unsecured and backed by credit rating of the issuing
company
 Issued at discount to the face value
PGCIL ABS CP 111108 19
Market Repos
 Repo (repurchase agreement) instruments enable
collateralised short-term borrowing through the
selling of debt instruments
 A security is sold with an agreement to repurchase
it at a pre-determined date and rate
 Reverse repo is a mirror image of repo and reflects
the acquisition of a security with a simultaneous
commitment to resell
 Average daily turnover of repo transactions (other
than Reserve Bank) increased from Rs.11,311 crore
during April 2001 to Rs. 42,252 crore in June 2006
PGCIL ABS CP 111108 20
Collateralised Borrowing and
Lending Obligation (CBLO)
 Operationalised as money market instruments by
the CCIL in 2003
 Follows an anonymous, order-driven and online
trading system
 On the lenders side, main participants are mutual
funds, insurance companies, etc
 Major borrowers are nationalised banks, Primary
Dealers (PDs) and non-financial companies
 The average daily turnover in the CBLO segment
increased from Rs. 515 crore (2003-04) to 32,390
crore (2006-07)
PGCIL ABS CP 111108 21
 Indian Banking System
 Central Bank (Reserve Bank of India)
 Commercial banks (over 70,000 brs and 30,000 ATMs)
 Co-operative banks

Banks can be classified as:

1. Scheduled (Second Schedule of RBI Act, 1934) - 173
2. Non-Scheduled - 4
 Scheduled banks can be classified as:
1. Public Sector Banks (SBI + 6 Asso + 19 PSBs + IDBI =27)
2. Private Sector Banks (15 Old and 7 New = 22)
3. Foreign Banks (28)
4. Regional Rural Banks (96)
5. Local Area Banks (4)
PGCIL ABS CP 111108 22
 Development Oriented
Banking
 Historically, close association between banks and
some traditional industries- cotton textiles in the
west, jute textiles in the east
 Banking has not been mere acceptance of deposits
and lending money; included development banking
 Lead Bank Scheme- opening bank offices in all
important localities
 Providing credit for development of the district
 Mobilising savings in the district under ‘Service
Area Approach’
PGCIL ABS CP 111108 23
Progress of banking in India (1)
 Nationalisation of 14 banks in 1969; again 6 in
1980 & merged two (PNB & NBI)...now 19 PS banks
 Branch expansion: Increased from 8,260 in 1969
to 71,177 in 2006
 Population served per branch has come down
from 64,000 in 1969 to 16,000 (despite increase in
population from 35 to over 100 crores now)
 A rural branch office serves 15 to 25 villages within
a radius of 16 kms – Service Area Approach
 However, at present only 32,180 villages out of 5
lakh have been covered fully......(Financial Inclusion)
PGCIL ABS CP 111108 24
Progress of banking in India (2)
 Deposit mobilisation:
 1951-1971 (20 years)- 700% or 7 times
 1971-1991 (20 years)- 3260% or 32.6 times
 1991- 2006 (11 years)- 1100% or 11 times
 Expansion of bank credit: Growing at 20-30%
p.a. thanks to rapid growth in industrial and
agricultural output
 Development oriented banking: priority sector
lending to Agriculture and SMEs, SBEs, etc
PGCIL ABS CP 111108 25
Progress of banking in India (3)
 Diversification in
banking: Banking has
moved from deposit
and lending to
 Merchant banking and
underwriting
 Mutual funds
 Retail banking
 ATMs
 Internet banking
 Venture Capital funds
 Factoring
PGCIL ABS CP 111108 26
 The Indian Capital Market (1)
 Market for long-term capital. Demand
comes from the industrial, service sector and
Government
 Supply comes from individuals, corporates,
banks, financial institutions, etc.
 Can be classified into:
 Gilt-edged market
 Industrial securities market (new issues and stock
market)
PGCIL ABS CP 111108 27
 The Indian Capital Market (2)
 Development Financial
Institutions
 Industrial Finance
Corporation of India (IFCI)
 State Finance Corporations
(SFCs)
 Infrastructure Development
Finance Corporation (IDFC)
 Financial Intermediaries
 Merchant Banks
 Mutual Funds
 Leasing Companies
 Venture Capital Companies
PGCIL ABS CP 111108 28
 Primary Markets Secondary Markets
When companies need financial The place where such securities are
resources for their expansion, they traded by these investors is known as
borrow money from investors through the secondary market
issue of securities
Securities issued Securities like Preference Shares and
b) Preference Shares Debentures cannot be traded in the secondary
market
c) Equity Shares
d) Debentures
Equity shares are issued by the under-writers Equity shares are tradable through a private
and merchant bankers on behalf of the broker or a brokerage house
company

People who apply for these securities are: Securities that are traded are traded by the
b) High networth individuals retail investors
c) Retail investors
d) Employees
e) Financial Institutions
f) Mutual Fund Houses
g) Banks

One time activity by the company

PGCIL Helps
ABS CP 111108 in mobilising the funds for the
29
investors in the short run
Industrial Securities Market
 Refers to the market for shares and
debentures of old and new companies
 New Issues Market- also known as the
primary market- refers to raising of new
capital in the form of shares and debentures
 Stock Market- also known as the secondary
market. Deals with securities already issued
by companies

PGCIL ABS CP 111108 30

Financial Intermediaries (1)
 Mutual Funds- Promote savings and mobilise funds
which are invested in the stock market and bond
market
 Indirect source of finance to companies
 Pool funds of savers and invest in the stock
market/bond market
 Their instruments at saver’s end are called Units
 Offer many types of schemes: growth funds, income
funds, balanced funds, etc
 Regulated by SEBI

PGCIL ABS CP 111108 31

Financial Intermediaries (2)
 Merchant banking- manage and underwrite new
issues, undertake syndication of credit, advise
corporate clients on fund raising
 Subject to regulation by SEBI and RBI
 SEBI regulates them on issue activity and portfolio
management of their business
 RBI supervises those merchant banks which are
subsidiaries or affiliates of commercial banks
 Have to adopt stipulated capital adequacy norms
and abide by a code of conduct
PGCIL ABS CP 111108 32
Foreign Exchange Market
 Foreign Goods & Services
 Receipts and Payments in Foreign Currency
 Forex Market – Remittances, Investments, Payments, etc.
 Participants
 Government, Banks (Authorised Dealers / RBI), Brokers,
Businessmen (Importers & Exporters), Consultants, etc.
 Payments for Imports
 Repayment of Loans
 Importers
 Exchange Rates – One Currency in terms of other
(Eg. 1 US Dollar = 45 Rupees)
 Bid Rate & Offer Rate or Buying & Selling Rate
 Spot Rate & Forward Rate
PGCIL ABS CP 111108 33
 Conclusion
 There are other financial intermediaries such
as NBFCs, Venture Capital Funds, Hire
Purchase and Leasing Companies, etc
 India’s financial system is quite huge and
caters to every kind of demand for funds
 Banks are at the core of our financial system
and therefore, there is greater expectation
from them in terms of reaching out to the vast
populace as well as being competitive
PGCIL ABS CP 111108 34
 Questions please?

Thank you
PGCIL ABS CP 111108 35
2. Fund Raising Mechanism by
Corporates – Private Equity

 An introduction to Private Equity

PGCIL ABS CP 111108 36

Phases of Indian Economy
1947-1980
 Command and Control Economy
 Allocation of resources by the Government
(budgetary grants)
 Government took active part in setting priorities
for the economy
 Self-Reliance was the buzz word
 Nationalisation of Banks
 Limited scope for private participation

PGCIL ABS CP 111108 37

 Phases of Indian Economy
1991-2000
 Liberalization and Globalization of Indian
Economy
 Increased emphasis on private sector
participation
 Limited extent of FDI participation
 Gradual improvement in the enabling environment

PGCIL ABS CP 111108 38

 Phases of Indian Economy
post 2000
 PoliticalCoalitions have started providing
stable governments
 Government to get out of owning and
managing businesses: Disinvestment Policy
 Gradual relaxation in the FDI Policy

PGCIL ABS CP 111108 39

Progressive Liberalisation
Pre- FDI was allowed selectively up to 40% under FERA
This period was dominated by the Congress party
1991

1991 35 high priority industry groups were placed on the Automatic Route for FDI up
to 51%
Minority Congress government: Initiated economic reforms in a big way

1997 Automatic Route expanded to 111 high priority industry groups up to 100%/
74%/ 51%/50%
United Front Government: Inclusive of ‘left parties’, was perceived as
traditionally opposed to FDI, but continued with the reforms.

2000 All sectors placed on the Automatic Route for FDI except for a small negative
list : BJP coalition government:(coalition of Left and Right wing parties) was
traditionally seen as opposed to FDI, but continued with economic reforms.

Post Many new sectors opened to FDI; viz., insurance (26%), integrated townships
(100%), mass rapid transit systems (100%), defence industry (26%), tea
2000 plantations (100%), print media (26%).
Sectoral caps in many other sectors relaxed;
PGCIL BJP coalition government:ABSpursued
CP 111108 reforms vigorously and initiated second
40
generation reforms.
 Present Picture
 India: Fourth largest economy in terms of
Purchasing Power Parity
 Tenth most industrialized economy
 GDP growth rate of 8.1% - Second highest in the
world.
 Considerable improvement in FDI inflows
 FII inflows:
 For the period, July 2003 – Jan 2004 FII inflow has
exceeded USD 7 bn, which is more than the cumulative
FII inflow in the last five years.
 Still a big gap between India and China
PGCIL ABS CP 111108 41
Introduction
 Economic Reforms in India since June 1991
 Changes in Investment Climate

 Deregulated Interest Rates

 Controlled Inflation Rate

 Increase in FDI, FII, FEX reserves, etc...

 Dramatic Changes in Capital Market

 Changes in Legal Environment,

Technology...
 GDP Growth Rate at around 9%
PGCIL ABS CP 111108 42
 Incentives for Investment in
Power Sector
 New Legal Regime: Electricity Act, 2003
 The Act provides for: Multiple Buyer Model,
Independent Regulatory Body, Open Access,
Power Trading as an independent business,
delicensing of generation
 100% FDI Automatic Route in:
 Hydro-electric power plants;
 Coal/lignite based thermal power plants;
 Oil/gas based thermal power plants.

PGCIL ABS CP 111108 43

 Incentives for Investment in
Power Sector
 Other investment incentives:
 New Power Projects eligible for 100% tax holiday in
any block of ten years, within first fifteen years of
operation.
 The Deadline for income tax exemption for new
power projects extended from 2006 to 2012.
 Various indirect tax incentives:
 Concessional rate of import duties
 Special project import scheme
 Deemed export benefit for certain categories of
power projects.
PGCIL ABS CP 111108 44
 Opportunities in Public Sector Undertakings
(PSUs)

 Top 42 listed PSUs make up the BSE-PSU index and have a combined market cap exceeding
US $210 billion
 Impressive operational gains post liberalization (1991 to 2007)
→ Average revenue per employee up 10 times
→ Average profit per employee up 16 times
 Room for further efficiency gains – up to 60 percent in BSE-PSU companies and perhaps more
in other PSUs
 Recent investments from Actis in Punjab Tractors and from Mittal Steel in HPCL refinery are
examples of Private participation in state owned enterprises
Key Challenge
 Most PSUs are hierarchical and bureaucratic in nature, and do not like external advice

PGCIL ABS CP 111108 45

 Sources of Finance
 Equity (common stock, preferred stock)
 Loans: long term, short term
 Lease finance
 Inter corporate deposits
 Bank cash credit and overdraft limits
 Debentures
 Fixed deposits
 Grants from government agencies
 Supplier credit and deferred payments
 Credit cards

PGCIL ABS CP 111108 46

 Modes of Acquisition
 Primary market:public issue, rights issue
(flotation costs)
 Secondary market (listing costs)

 Private placement (individual or institution)

 Banks and mutual funds

 Pension funds, insurance companies

 Debenture issue

 Fixed deposits

PGCIL ABS CP 111108 47

 Forms of Financing
Equity Capital
Capital Debt
Markets,
“Public Equity” LARGE BUSINESSES Term loan of
“Private Banks/ FIs
Equity”
Mezzanine
SMEs Debt and quasi-
Venture Capital equity (VC)

MICOBUSINESSES Microcredit
Family & Friends, Family & Friends,
“Angel” Investors Relatives

Incubation Funds IDEAS

PGCIL ABS CP 111108 48

 VC Fund Raising Process
 Introduction (phone call, e-mail, referral)
 Submit business plan / executive summary
 Presentation
 Company visit
 Due diligence (management reference checks,
customer calls, market analysis)
 More meeting(s)
 Term sheet
 Legal / Closing

PGCIL ABS CP 111108 49

 How to compare various sources ?
 Holding period (Duration)

 Repayment terms

 Interest rate

 Other strings attached

 Pledges and collaterals

 Finance marketing costs and lead time

PGCIL ABS CP 111108 50

What is Private Equity?

Essentially private equity is an alternative

way of owning a company

PGCIL ABS CP 111108 51

 What is Private Equity?
 Private Equity is a sub-set of Venture Capital
 Is medium to long-term finance provided in
return for an equity stake in potentially high
growth unquoted companies
 Venture Capital covers all stages, and is
synonymous with “Private Equity”
 In USA, “VC” refers only to investments in early
stage and expanding companies
 Private Equity broadly refers to any type of
equity investment in an asset in which the equity
is not freely tradable on a public stock market
PGCIL ABS CP 111108 52
Private Equity around the Globe

 PE in UK originated in late 18th century

 Entrepreneurs found wealthy individuals to
back their projects on an ad-hoc basis.
 This informal method of financing became an
industry in late 1970s and early 1980s when
a number of PE firms were founded.
 PE is now a recognized asset class

PGCIL ABS CP 111108 53

Private Equity around the Globe...1
 PE funding is about 50 years old in USA

 In 1970s, regulatory and tax law changes

allowed US Pension Funds to enter the field

 PE became accepted as an institutional asset

class. During the decade of 90s, there was a
tremendous boom in the PE industry, with the
emergence of brand name firms managing
multi-billion dollar sized funds.
PGCIL ABS CP 111108 54
Private Equity around the Globe...2

 Pool of US PE funds has grown from $5.0

Billion in 1980 to over $203 Billion in 2005,
outpacing the growth of almost every other
financial asset class.

 Asia-Pacific, Middle East and South

American economies also caught up with PE
funding in last two decades

PGCIL ABS CP 111108 55

Figure 1: Private Equity Capital
Commitments by Year (in $ Bns)

PGCIL ABS CP 111108 56

General Terms and Brief
Overview
 PE funds are companies that are formed and managed by PE
firms
 PE funds are private investment vehicles that permit investors to pool their capital for investment
 Increases purchasing power in the marketplace

 Managers of PE funds are known as the general partners (GPs)

 Investors are known as the limited partners (LPs)
 Reflects limited liability status
 Cannot lose more than their investment
 LPs include government and corporate pension funds, investment banks,
insurance companies, and high net worth individuals
 PE funds do not exist in perpetuity
 Except for “evergreen” funds

PGCIL ABS CP 111108 57

General Terms and Brief
Overview
 Typically fund life is between 8 and 12 years
 10 years is the average life
 GPs must realize all investments before close of fund (the
“harvest”)
 Harvest through IPO
 Harvest through merger or acquisition (M&A)
 LPs must adhere to GP “capital calls”
 Explicit requests for funds
 Funds are not distributed to the GPs at the onset of the fund
 Limited Partner Agreement (LPA) binds the GP and LP

PGCIL ABS CP 111108 58

General Terms and Brief
Overview
 GPs receive management fees for investing LP’s capital
 Standard fee between 1.25% and 3% of committed capital
 Fee typically decreases with fund size
 Average fee of 2%
 GPs also receive carried interest (“carry”)
 Portion of profits GPs will retain
 Carried interest typically between 15 and 25%
 Average carry of 20%

PGCIL ABS CP 111108 59

General Terms and Brief
Overview

PGCIL ABS CP 111108 60

 What is Private Equity?
 Private Equity or PE in short, is the investment by specially created funds
into companies (usually unlisted) with good growth potential
 PE funds invest at various growth stages of the company with different
parameters
 PE backed companies have been shown to grow faster
 A combination of capital and experienced personal input from PE executives
 Validation of the business model by the investor
 Reduces the cost of further growth capital
 Better credibility for the company in international market and in case of an IPO
 Business opportunities within the network of the PE investor
 Corporate governance established

Source: o3 Capital
PGCIL ABS CP 111108 61
Private Equity Value Chain

Investor Deal Screening Structuring Portfolio

Exit
Relations Sourcing & Selection & Execution Management

 Industry  Industry  Data gathering  Legal  Organization  Legal

expertise and analysis structuring & corporate structuring
 Structured
credibility governance
 Market problem  Organizationa  Financial
 Networking intelligence solving l structuring  Process & structuring
operations
 Communication Contact  Communicatio  Financial  Documentatio
Core & presentation manageme n structuring  Management n
Skills nt accounting
 Trust building  Industry  Documentatio  Process
analysis n management
 Responsivenes
s  Company  Process
analysis management
 Financial
analysis &
modeling
 Process
management

PGCIL ABS CP 111108 62

Sources: Start Consult Analysis

Fund Structure

 PE funds are limited-life entities

PGCIL ABS CP 111108 63

Investors in Private Equity Funds
(in %ages)
S No. Investor Type % Share

01 Banks 8
02 Insurance Companies 7
03 Corporate Non / Pension 13
04 Private Pension Funds 13
05 Public Pension Funds 9
06 Family / Individuals 14
07 Endowments / Foundations 17
08 Intermediaries 7
09 Others 12
10 Total 100
PGCIL ABS CP 111108 64
Regulatory Guidelines &
Framework for VC in India
 Milestones from 1975 onwards

 VCF guidelines

 Public, Private and Foreign Funds set up

PGCIL ABS CP 111108 65

 Milestones : PE & VC in India
 1975 – Risk Capital Foundation (RCF) by IFCI
 DFIs – IDFI, ICICI, IFCI and SFCs

 1984 – ICICI allocates VC type funds

 1986 – ICICI encourages start-up ventures

 1988 – TDICI set up for private sector units

 1988 – GOI announces guidelines for VCFs

 1988 – RCF converted into Risk Capital and

Technology Finance Corporation of India Ltd
PGCIL ABS CP 111108 66
Milestones : PE & VC in India...1

 1989 – APIDC VCL in AP, GVFL in Gujarat

and Canbank Venture Capital set up
 1989 – First Private Sector fund – Credit
Capital Venture Fund (India) Ltd set up by
Lazard Credit Capital in association with ADB
and CDC
 ANZ Grindlays (now Standard Chartered) set
up India Investment Fund using foreign funds

PGCIL ABS CP 111108 67

Milestones : PE & VC in India...2
 1995-2000 – Several PE/VC firms like Baring PE
Partners, CDC Capital, Draper International,
HSBC PE and Warburg Pincus entered India
 ChrysCapital, WestBridge Capital set up by
managers of Indian origin with foreign capital...
 VC arms of Intel and GE also became active

 Their main focus is on Information Technology

and Internet related investments

PGCIL ABS CP 111108 68

Milestones : PE & VC in India...3
 1995 – Overseas Investment in VC permitted.
Tax incentives allowed. VC funds can be
floated by firms other than Banks & FIs
 1996 – SEBI issues VCF Regulations

 1996 – ILFS Ltd acquires Credit Capital

Venture Fund and renames as IIML
 1999 – SIDBI sets up SIDBI Venture Capital

 2000 – KB Chandrasekhar Committee

recommendations accepted and implemented
PGCIL ABS CP 111108 69
Milestones : PE & VC in India...4
 2000 - UTI sets up UTI Venture Funds
 2001-03 : Y2K, Recession, IT slowdown, Dotcom
crash, 9-11 in USA affects Indian VC
 2002 – IDFC sets up IDFC Private Equity
 2003 – ICICI Ventures and Actis are active
 2004 – Investment activity picks up
 2005 – Investors focus on Mfg, Healthcare, etc
 2005 – Silicon Valley VCs come back; SEBI allows
investments in Real Estate; Telecom, IT, Wind
Energy, others attract huge investments; highly
successful IPOs of PE backed companies; India a
destination for PE
PGCIL ABS CP 111108 70
PGCIL ABS CP 111108 71
Phased Development and
Sectoral Investment
 Phase I - Formation of TDICI in the 80’s and
regional funds as Gujarat Venture Fund Limited
& Andhra Pradesh Industrial Development
Corporation in the early 90s
 Phase II - Entry of Foreign Venture Capital funds
between 1995 and1999
 Phase III - Emergence of successful India-centric
VC firms (2000 onwards)
 Phase IV – Increasing appetite of investing in
India by US VCs / PE Companies (around 2003).
PGCIL ABS CP 111108 72
EVOLUTION OF PRIVATE EQUITY
FINANCE
TOTAL FUNDS: ($M)
30 125 2847

5239

PHASE I PRE-1995 PHASE II 1995-97

PHASE III 1998-2001 PHASE IV 2002-2005

PHASE I PHASE II PHASE III PHASE IV 2002-2005

PRE-1995 1995-97 1998-2001

NUMBER OF FUNDS 8 20 50 75

PRIMARY Seed, Early Development Seed, Early Growth/

STAGES stage & Diversified stage & Maturity-
& Development Development Diversified
SECTORS
Diversified Telecom & IT

Sources: TSJ Media, ICVA publications (various Years)

PGCIL ABS CP 111108 73
EVOLUTION OF PRIVATE EQUITY
FINANCE (cont.)
3500
3000
2500
2000
1500
($m)

1000
500
0
Phase I Phase III Phase IV
Phase II
World Bank, Overseas Overseas
Government
Government Institutional Institutional
Primary Sources of
Development 25 110 2168.1 3107 Funds

Growth / Maturity 21.9 1882

Seed/ Early stage 5 15 657 250

Phase I Phase II Phase III Phase IV

Pre- 1995 1995-97 1998-2001 2002-05
Data Sources: TSJ Media, ICVA publications (various Years)
PGCIL ABS CP 111108 74
EVOLUTION OF PRIVATE EQUITY
FINANCE (cont.)
Number of Transactions

Evolution of Private Equity Finance

600
500
400
300
200
100
0 Phase I World Phase III Phase IV
Phase II
Bank, Overseas Overseas
Government
Government Institutional Institutional
Primary Sources of
Seed Stage 10 20 273 58 Funds
Developmentstage 20 45 273 288
Growth/ Maturity Stage 0 0 2 100
Total Number of Transactions 30 65 548 446
Phase I Phase II Phase III Phase IV
Pre- 1995 1995-97 1998-2001 2002-05
Data Sources: TSJ Media, ICVA publications (various Years)
PGCIL ABS CP 111108 75
EVOLUTION OF PRIVATE EQUITY
FINANCE (cont.)
Evolution of Private Equity Finance (cont.)
PhaseI Phase II Phase III Phase IV

Overseas
World Bank, Governmen Overseas
Primary sources of Funds Instituti
Government t Institutional
onal

Seed/ Early stage ($m) 5 15 657 250

Number of transactions 10 20 273 58
Development ($m) 25 110 2168.1 3107
Number of transactions 20 45 273 288
Growth / Maturity ($m) 21.9 1882
Number of transactions 2 100

Total Number of transactions 30 65 548 446

Average Investments ($m) 1 2 5.2 11.75

Sources: TSJ Media, ICVA publications (various Years)

PGCIL ABS CP 111108 76

 VC IN INDIA
 Securities & Exchange Board of India (SEBI) regulates both Domestic
Venture Capital Funds & Foreign Venture Capital Investors &
Registration benefits
 Income passes through to investors without tax when Trusts are
registered under the Indian Trust Act & Venture Capital Companies
 FVCIs freely remit funds to India for investments in Indian venture
capital undertakings (VCUs) & SEBI registered DVCFs
 FVCIs are exempt from both the entry & exit pricing regulations that
otherwise apply to foreign investors, such as market-related pricing on
disinvestment
 Sale of shares by VCFs to company insiders post- listing is exempt from
SEBI takeover code
 VCFs automatically obtain (“QIB”) Qualified Institutional Buyer status,
which is useful in participating in new security placements
 Exemption from one year lock-in for disinvestment post-IPO for shares
purchased prior to the IPO
 VCFs do not get treated as promoters for purposes of IPO
PGCIL ABS CP 111108 77
WHAT IS INDIA WORKING ON?
 Securities & Exchange Board of India (SEBI) to:
 Obviate restriction on preferential offering
 Permit investment in projects/SPVs& surplus funds in bank
deposits etc.
 Mitigate restrictions of Substantial Acquisition & Takeover
Regulations
 Reserve Bank of India (RBI) to:
 Grant general permission under FEMA and clear inconsistencies
 Allow banks to value VCF investments on cost basis
 Allow investment in real estate
 Government of India:
 Revisit tax issues for greater participation
 Allow investments in VCF by pension funds
 Streamline regulations under companies act including winding up &
valuation guidelines
PGCIL ABS CP 111108 78
PE deals in India : Deal Tracker
(Grant Thornton)
YEAR NUMBER OF AMOUNT IN
DEALS BILLION DOLLARS
2004 60 1.1

2005 124 2

2006 302 7.86

2007 386 17.14

PGCIL ABS CP 111108 79

High Growth Opportunities: Private Equity Outlook

PGCIL ABS CP 111108 80

Source: Evalueserve report
Small and Medium Enterprises in India
 The small and medium enterprises (SMEs) contribute
close to 9.0% of the India’s USD 1 trillion economy
 80% of industrial units are SMEs
 40% of the value addition in the manufacturing sector
is through SMEs
 Contribute nearly 35% in direct export and 45% in the
overall export from the country
 Is the second biggest employment-providing sector
after agriculture (providing employment to over 28.28
million people)
PGCIL ABS CP 111108 81
Capital Constraint for SMEs
 Last few years have seen SMEs register growth rates
in the range of 50-100%
 Sustaining these growth rates, the companies would
need to invest in capital expenditure and set up
expansion projects requiring significant growth capital
 Despite this contribution, one of the biggest barriers
faced is the access to affordable and easy terms of
credit
 Most SMEs are set up by professionals who have
limited personal resources
PGCIL ABS CP 111108 82
 Benefits of PE investing in a SME
PE INVESTMENT (PRIOR TO IPO)

 PE funds usually invest in unlisted entities and exit the company either via a
trade sale to a strategic buyer or another PE fund or via taking the company
public : IPO remains the most preferred exit route for a PE investor
 PE investment provides comfort to investors (both retail as well as
institutional) at the time of the IPO
 Business model that has been closely evaluated by a PE investor
 Validation of internal processes, systems and corporate governance practices
 Validation of capabilities of the management team
 Presence of a representative director of PE fund brings high credentials to the
Board of the company at the time of an IPO
 PE prepares the company to handle the ongoing regulatory filing
requirements : Also gives management an experience of managing
investors
Source: o3 Capital
PGCIL ABS CP 111108 83
 Benefits of PE investing in a SME
 Quick and affordable source of fund – PE investment do not require any
collateral for the investment as against a compulsory collateral requirement
for a loan : Though the return on investment is higher in the range of 20-
25% p.a., it still is affordable as, as the company grows, the promoter wealth
also increases in the same ratio as the PE investor, when compared to
getting no benefit despite paying 15-18% interest for a loan
 Patient money – PE investors are medium to long-term investors and hold
on to their investments through a complete business cycle
 Small capital – PE funds are in a position to offer small investments,
something that SMEs are very interested in
 Sales growth – A company with a PE investment shows a better sales
growth as compared to a non-PE backed company
 Job creation – PE often create significant number of jobs by growing the
sales and geographic reach of the company
Source: o3 Capital, Industry reports
PGCIL ABS CP 111108 84
PE in India Getting More Diversified
2000 2006
IT & ITeS Financial
66% Services
IT & ITeS 10% Manufacturing
Financial 28% 18%
Services
4%

Medical &
Healthcare
Manufacturing
Engineering & 10%
3% Others
Medical & 26% Construction
Others
Healthcare 8%
25%
2%

IT & ITeS Financial Services IT & ITeS Financial Services

Manufacturing Medical & Healthcare Manufacturing Medical & Healthcare
Others Engineering & Construction Others

 PE Investments in 2000 dominated by IT & ITES. Share of several other

sectors esp. manufacturing, financial services, and healthcare increasing
 New areas of investment include Engineering & Construction, Textiles,
Logistics, Food and Beverages, etc.
PGCIL ABS CP 111108 85
‘Key Industry Groups’ to Look
for…
Hi-tech Services and Products
 Includes:
→ IT/ITES
→ Drug Research
→ Clinical Research
Outsourcing (CRO)
→ Engineering Services
Outsourcing (ESO)
→ Telecom products and
services
 Expected to grow at
approximately 22% per year
during the next five years
 Likely to contribute about
1.3% out of a total growth of
13% per year
PGCIL
Domestic Services Sector
 Includes:
→ Retail
→ Travel and hospitality
→ Health care
→ Entertainment
→ Private education
→ Financial Services
 Expected to grow at
approximately 19% per year
during the next five years
 Likely to contribute about
2.7% out of a total growth of
13% per year
ABS CP 111108
High-end Manufacturing and
Infrastructure
 Includes:
→ Auto/Auto-components
→ Electrical/electronic goods
→ Specialty chemicals
→ Pharmaceuticals
→ Gems and Jewellery
→ Textiles
→ Construction/Real Estate
 Expected to grow at
approximately 19% per
year during the next five
years
 Likely to contribute about
2.5% out of a total growth
of 13% per year
86
Private Equity in India – The Story
So Far
400 8,000
7,460
350 7,000
299
300 280 6,000
Number of Deals

Value of Deals
250 5,000

(USD million)
200 4,000
146
150 3,000
107 110
2,183
100 71 2,000
1,160 311
60 56
50 500 591 1,650 1,000
18 80 250 937
5 20 470
0 0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Surce: Evalueserve, IVCA, Venture Intelligence India Number of Deals Value of Deals

 First started in 1975 by Risk Capital Foundation followed by other

domestic financial institutions
 After 1996, international VC and PE firms started investing in India
 Investments started surging in 2004
PGCIL ABS CP 111108 87
Private Equity in India – Future
Outlook
1,200 23,000 25,000
1,100
1,000 19,500
20,000
900
16,300
Number of Deals

800

Value of Deals
(USD million)
13,500 15,000
700
600
500 1,030
940 10,000
400 780
300
445 5,000
200
100
0 0
2007 2008 2009 2010

Number of Deals Value of Deals

 PE Investments of US $13.5 bn in 2007 to increase to US $23 bn by 2010

 366 PE firms currently operating in India and another 69 planning to start
their operations soon
 US $48 billion already earmarked for investment during the next three and
a half years
PGCIL ABS CP 111108 88
PE in India : Issues and Challenges
 No specific guidelines for PE funding like
procedure for Valuation, limits for Funding, etc
 Whether funding permitted in Listed and / or
Unlisted Companies?
 Funding is allowed in INR or Foreign Currency?
 Any concessions in Taxation, payment of
Dividends in Foreign Currency and repatriation of
Capital and related Capital appreciation?
 Whether ownership changes allowed?
 Regulated by RBI, SEBI, FIPB, CBDT, DIPP?

PGCIL ABS CP 111108 89

Future of Private Equity Funding
 Technology Boom and Knowledge Based
Industries on the raise
 Crude Oil Prices on the increase

 Industrialisation and Infrastructure development

 Increasing Foreign Exchange Reserves

 Surge in Stock Market operations

 Envisaged Growth Rate of about 10%

 RBI or SEBI to take up regulation of PE Funds

PGCIL ABS CP 111108 90

 Conclusions
 There has been a significant change in global and
Indian economy in particular that investment climate
has been conducive and attracting huge foreign and
domestic funds in the shape of PE.
 There appears to be a thin line of demarcation between
PE and VC funds.
 All the guidelines and regulations from Government of
India (Foreign Investment Promotion Board, Central
Board of Direct Taxes, Department of Industrial
Promotion and Policy, etc), Reserve Bank of India or
Securities Exchange Board of India generally define
and refer to VC funds (both domestic and foreign) with
regard to investment, mergers and acquisitions,
taxation, repatriation of funds in foreign exchange, etc.
PGCIL ABS CP 111108 91
 Conclusions... ... ...1
 PE funds seem to be taking benefit of guidelines
and operating in large scale investments
 Keeping in view the past experiences with South
East Asian financial crisis of 1997-98 and
subsequent dotcom bust in 2000, the Policy
makers and Regulators in India may have to
supervise the current boom in the PE funding
 Hot money appears to be entering the Indian
Stock Market as apprehended by National
Security Advisor of GOI
PGCIL ABS CP 111108 92
Recent Developments-1
 ET dt 17TH Dec 2007 : End in sight for Private
Equity’s unfettered freedom : Mythili Bhusnurmath
 Regulators, charged with the objective of
protecting investors, are waking up to the
potential risks posed by risking PE flows
 A Consultation Report (17 pages) of the Technical
Committee of IOSCO (Nov 2007) has identified six
broad issues: 1. Increasing Leverage, 2. Market
Abuse 3. Conflicts of Interest Management
4. Transparency 5. Market Efficiency and
6. Ownership of Economic Exposure :
Comments Invited from public – isabel@iosco.org
by Feb 20
PGCIL ABS CP 111108 93
Recent Developments-2
 Business Standard : 22/23 December 2007
 RBI is better placed to control PE funds: SEBI
 SEBI letter to Govt – RBI has information
 Monitoring of inflow and outflow of funds
 SEBI can control only listed companies info..
 PEs should ideally fund small companies that find
it difficult to access institutional funding...
 RBI – there should be a lock-in for PE; to be
restricted to sensitive sectors; through caps;
 GT – 386 PE deals with $17.14 bn in 2007
PGCIL ABS CP 111108 94
 THANK YOU

PGCIL ABS CP 111108 95

 Some recent PE deals in India
1. BCCL picks up 6.25% stake in IRL (Aug 2007)
2. IFC to invest $12 mn in Owens Corning
3. HDFC raised $800 million for a real estate
fund
4. Sun TV unit picks up 49% stake in Red FM
5. BCCL acquires stake in Travel Masti
6. DFJ to set up shop in B’lore, readies $75m
7. Apollo Health acquires Atlanta BPO for $170
m
Yes Bank to spin off PE syndication, M&A
8.PGCIL ABS CP 111108 96
 Some recent PE deals in India..2
 September 2007
 ADB`s Carbon Fund eyes projects in India
 India private equity not scared of global credit crunch
 India's Wipro to acquire Oki Electric's subsidiary
 Citigroup , Merrill acquired stakes in Multi Commodity Exchange
of India
 Deutsche Bank, Funds Invest $425 Million in Lodha
 NIIT Tech may sell majority stake
 PE investors eye captive power cos
 Four Interactive gets $10 mn to fund growth
 Del Monte Pacific picks up 40% in Bharti’s Field Fresh
 PE presence what’s in it for investors?
 PE majors, Carlyle & TPG eye stake in NIIT
 Tatas plans buyout of UK's Liberty
PGCIL ABS CP 111108 97
Some recent PE deals in India..3
 Google India boosts VC investments – Oct’07
 JPMorgan Starts $2 Billion India Infrastructure
Fund
 Cisco extends venture investment in India by
another 100 mln USD
 IFCI Venture launching PE fund for auto sector

 Private equity firms innovate in challenging India

 IFC to pick stake in Karnataka Bank

PGCIL ABS CP 111108 98

Some recent PE deals in India..4
 PEs take fancy to Pharma Cos with
outsourcing deals (Nov 2007)
 Nexus India Launches US$100 Mil. Fund
 Shell to buy BPCL's stake in Bharat Shell for
Rs 152.4 cr
 DE Shaw to invest $60 mn in Gemini Inds
 Securitas invests $17 mn in India's Walsons
 3i India infra fund invests $101 mn in Soma
Enterprise
PGCIL ABS CP 111108 99
Some recent PE deals in India...5
 Japan's ITOH acquires 5% in Jayant Ago
(Dec 2007)
 Temasek leads 'PE'cking order
 State Bank of Mauritius eyes stake in
Centrum Capital
 Funds to pick upto 15% stake in Dunlop
 Orient Global to pick up 6.48% in India
Infolline
 Visit www.indiape.com for more details

PGCIL ABS CP 111108 100