Private equity and venture capital in India

2017 has been one of the biggest years for venture capital and private equity investments in India with total investment value in 2017 surpassing investment values in 2016 and 2015. E-commerce and financial services were the leading sectors in terms of investment values on the back of Softbank’s investments in Flipkart and Paytm. The IT/ITeS sector was the top sector in terms of the number of deals in 2017. Growth stage investments reached a new high. It was also the best year for exits driven by both primary and secondary transactions. The IT/ITeS and financial services sectors lead exits by industry.

2018 is expected to continue the momentum of PE and VC funds investing in India. Increasing efforts by the Government of India to ease doing business in India is expected to boost investor sentiment. The Government has already introduced various amendments to the foreign investment policy and regulations with the aim of creating a more investor friendly atmosphere. Some of these amendments include:

• Earlier, foreign direct investment (FDI) in single brand product retail trading (SBRT) entities beyond 49% required prior Government approval. Now up to 100% FDI in SBRT is permitted through the automatic route (a route where foreign investment is allowed without Government approval).
• Previously, the issue of equity shares against non-cash consideration was permitted only with Government approval. Now, the issue of equity shares against non-cash consideration, such as the import of machinery, is permitted under the automatic route in sectors falling under this route.
• Earlier, the FDI Policy allowed FDI up to 100%, with Government approval in companies engaged only in the activity of investing in the capital of other Indian companies or limited liability partnerships, and in core investing companies. To bring the conditions governing these sectors in line with ‘other financial services’, the Government has now decided that if any financial sector regulator regulates the activities of such companies, FDI up to 100% will be allowed under the automatic route.
• The newly issued Foreign Exchange Management (Transfer and Issue of Security by a Person Resident Outside India) Regulations, 2017 eliminates several redundancies and clarifies a plethora of interpretational issues that plagued the old regime on the same subject. Foreign venture capital investors are now expressly permitted to invest in non-convertible instruments. The language under the previous regulations was ambiguous on this aspect. Transfer of capital instruments by a non-resident Indian to a non-resident no longer requires approval of any Indian regulator. The applicability of pricing guidelines and reporting of transactions involving Foreign Owned and Controlled Indian Companies has also been clarified. Operational matters involving deferred consideration, post-closing escrows and indemnity have also been expressly clarified, amongst other amendments.

The slew of measures towards liberalization of the foreign investment policy and ease of doing business in India is only expected to increase PE/VC investments in 2018. Moreover, PE/VC funds are sitting on sufficient dry powder. Additionally, the good exits for funds in 2017 will only make investments more attractive. The FinTech, consumer goods and disruptive technologies sectors are expected to attract a lot more attention in the future.

BTG Legal’s PE/VC team is familiar with various stages of an investment cycle and understands the diverse interests and demands of all the parties involved in a transaction. We offer a partner-led, commercially focused service. We act for clients ranging from VC and PE funds to seed and angel investors, growth companies, entrepreneurs and promoter management teams. Our expertise includes structuring and identification of the investment instrument, drafting of investment documentation and advising on various legal issues from incubation to exit for investors and promoters.

Seema Sukumar, Partner, BTG Legal