VCCircle

Indian market regulator Securities and Exchange Board of India has issued foreign investment norms for venture capital funds who have registered with the body. First, the SEBI-registered VC funds are allowed to invest only in those companies which have an Indian connection, for example, the companies which have back office operations in India. Besides, the funds cannot invest more than 10 per cent of their corpus in these companies. So if you are $150 million fund, you can't invest more than $15 million in an American company which uses India as a back office.

And SEBI will allow only a total of $500 million a year to be invested abroad. So VC funds have to approach the regulator for approval, and they will be given permission on a first cum first basis till they exhaust the $500-million limit. The guidelines were issued on Thursday. These norms apply only to those funds who are registered with SEBI, and not for those come via Mauritius or Cyprus.

In April, India's central bank Reserve Bank of India (RBI) had approved the proposal of VCFs investing in equity and equity-linked instruments in offshore venture capital undertakings (companies) subject to an overall limit of $500 million and applicable SEBI regulations.

Currently, there are some about 90 domestic and 80 foreign venture capital funds registered with SEBI.

See the full announcement below:

Here are a few private equity backed IPOs hitting the capital market. The latest is by Motilal Oswal Financial Services (MOFSL), an institutional and retail broking firm, backed by private equity funds New Vernon Private Equity and Bessemer Venture Partners. Motilal Oswal has priced its IPO at a price band between Rs 725 and Rs 825. It intends to sell 2.98 million equity shares of Rs 5 each through a 100 per cent book building process. The Mumbai-based company will raise about Rs 216 crore at lower price band and Rs 245 crore at the higher band. The issue will constitute 10.5 per cent of the post-issue paid-up equity capital of the company.

How much money will the private equity funds make on the basis of the IPO price? New Vernon and Bessemer had picked up 9.47 per cent stake in the company last year for Rs 518.9 a share. The PE funds are in the money at an appreciation of 40-50 per cent already in MOFSL.

MOFSL is the holding company of four businesses - Motilal Oswal Securities Ltd (broking business), Motilal Oswal Commodities Brokers, Motilal Oswal Investment Advisors (investment banking business) and Motilal Oswal Venture Capital Advisors (venture capital advisory). Citigroup Global Markets India is the book running lead manager and Intime Spectrum Registry is the registrar to the issue.

Comment: This issue is likely to do well since there is an appetite for financial services stocks. The stock isn't cheap, though.

Another PE-backed IPO is that of Coimbatore-based textile company KPR Mills. The company is backed by Blue River Capital, Brandot International, Argonaut Private Equity (who together invested Rs 105 crore in December 2006), and Peterson Partners, who invested $3 million in February 2007.

The issue, which closed on August 7, was priced within a band of Rs 225-265, about 12-14 times its 2006-07 per-share earnings. On an expanded equity base, the multiple stood at 15-17 times. The issue constituted 15.69 per cent of the fully diluted post issue paid-up capital of the company. At the lower band, the company would raise Rs 133 crore and at the higher band Rs 156.6 crore. Kotak Mahindra Capital Company Ltd. and and ICICI Securities were managers for the issue.

Comment: The issue got just about subscribed 1.19 times. The retail portion was undersubscribed at 0.6 times. Some HNIs and institutions saved the issue, which has been priced at lower end of the price band - Rs 225 a share.

UTI Ventures and Argonaut Private Equity-backed Zylog Systems had a great close of its IPO recently. The Rs 126 crore IPO was oversubscribed 76.4 times last month. The issue, which was priced in the band of Rs 330-350, received 275.45 million bids compared to the issue size of 3.60 million shares. Zylog is a Chennai-based company in areas like web application, mobile computing, and enterprise infrastructure management. UTI Venture and Argonaut had invested $10 million the company in March 2007.

Comment: Zylog is expected to have a good opening (rumoured to be 40 per cent) when it lists in the next few days.

Reliance Communications (RCOM) has finally announced the list of investors in its tower arm Reliance Telecom Infrastructure Ltd (RTIL). They include Fortress Capital, HSBC Principal Investments, Galleon Group, New Silk Route, GLG Partners, Quantum Fund (George Soros) and DA Capital. The breakup of the investments is not provided. The seven investors have picked up 5 per cent in the company for $337.5 million, valuing the company at $6.75 billion or Rs 27,000 crore.

A communication to the stock exchange said that the "sales proceeds from the transaction amounting to Rs 1,400 crore have been received in full, and the capital gains of Rs 1,200 crore ($289 million) have been booked and will be reflected in the results of Reliance Communications Group in the current quarter, i.e. Q2 2007-08."

RTIL's equity valuation of Rs 27,000 crore ($ 6.75 billion) translates into approximately Rs 135 per RCom equity share. RCOM's remaining 95 per cent stake in RTIL is valued at $6.40 billion (Rs 26,000 crore). But what is important is RCOM plans to further unlock value in RTIL. The statement says the company plans to "pursue opportunities for further unlocking of value through an IPO or strategic sale at an appropriate time".

(In the picture: RCOM chairman Anil D Ambani)

Related:

Reliance Communications Sells 5% In Tower Business For $338 Million

Export Development Canada (EDC) has made its first equity investment in India. EDC has invested $7.14 million (CAD 7.5 million) in the second SME fund of the Indian private equity firm Avigo Group. The Delhi-based fund will invest these funds in Indian companies that have "the potential to strategically match the expertise of Canadian exporters in key industries", a release said.

Eric Siegel, President and CEO of EDC, said. "The small and medium enterprises supporting India's booming market are developing at a significant rate and EDC must find new ways to help Canadian exporters take advantage of these tremendous opportunities."

Avigo was founded in 2003, and its founding members include Achal Ghai, a former Director - Western Canada, at CIBC. The Avigo SME Fund I was launched in 2004, from which five investments were made in the manufacturing, auto components and pharmaceuticals sectors. The fund was fully invested in 2005.

Avigo is in the process of completing fund raising for its second fund, the $125 million Avigo SME Fund II. It will have both international and domestic investors like EDC. It will fund SMEs at growth stage, pre-IPO stage and buyouts with an average investment size between $2 million and $7 million.

EDC is Canada's export credit agency, which works with some 6,400 Canadian companies, who export to some 200 countries.

The buzz is global buyout fund Blackstone Group may be looking to invest $100 million in publicly listed apparel maker Gokaldas Exports. Business Standard reports that Blackstone is looking to pick up 10-15 per cent stake, which will value the company at around $900 million to $1 billion. NDTV Profit also reported last week that Blackstone is a frontrunner for a deal with Gokaldas Exports. Although it's still in the realm of speculation, if the deal goes through, this can become one of the largest deals in apparel sector. Last year, Koutons Retail had raised $22 million from UTI Ventures and Argonaut Private Equity in two deals, which could be the biggest yet in apparel business. A few weeks ago, Avigo Capital Partners invested $5 million in Spykar, a Mumbai-based fashion retail company. They were comparatively smaller.

The Rs 1,000 crore-Gokaldas has a 400-acre special economic zone in Kanakpura, near Bangalore. It works with some 46 factories spread across Karanataka, and employs about 60,000 people directly and indirectly.

Another leading apparel exporter, Delhi-based Orient Craft said in May last year that it would raise private equity and also float an IPO to raise Rs 330 crore in four months. We haven't heard anything after that, though.

Baring Private Equity India will come up with an open offer for a 20 per cent additional stake from JRG Securities shareholders. Baring had recently acquired a 45 per cent stake in the Kochi-headquartered stock broking firm for $35 million. The open offer is mandatory if one acquires more than 15 per cent stake in a listed company.

If the open offer is successful, Baring will be the largest shareholder in the broking firm with 65 per cent stake. It may also be possible that the open offer is not subscribed fully. In any case, Baring is most likely to be the majority owner of a stock broking firm.

Earlier Citigroup Venture Capital International had reportedly acquired an 85 per cent stake in retail broking firm Sharekhan for Rs 470-480 crore (the company is yet to announce the deal officially).

Related:

Baring Picks Up 45% In Kochi Broking Firm JRG Securities For $35 Million

(This guest column is written by Arun Duggal. He is the Vice Chairman of International Asset Reconstruction, a company that manages non-performing assets. He has earlier held the position of CEO of Bank of America in India. He is currently on the board of about a dozen companies like Patni Computers, LNG Petronet, Matrix Labs, Info Edge, and Fidelity Fund Management in India. He was also involved in a few large private equity deals in India such as the $125-million investment by Temasek and NewBridge Capital in Matrix Labs and ChrysCapital's investment in Shriram Group, among others.)

After growing rapidly from around $1 billion in 2004, private equity flows into India grew to $7 billion in 2006 and will probably exceed $10 billion this year. In addition to its traditional functions of providing smart capital to fuel the entrepreneurship of non-traditional businessmen and boosting managerial efficiency, PE is slated to enter into new areas such as leveraged buy-outs, distressed assets and infrastructure. We could also witness some public offers from PE firms.

At present, there are over 100 PE firms seeking to deploy $20 billion in India. The PE Industry has been able to attract talented professionals from major consulting firms, investment banks and industry in India and overseas. Some of the large deals have been KKR’s investment of $900 million in Flextronics, and the recent Carlyle investment of $600 million in HDFC.

Globally, PE has seen an unprecedented boom, drawing in increasing amounts of institutional investment and private wealth by delivering superior returns. There are several global PE firms with over $50 billion of invested capital and a new fund size of $10 billion or more is not uncommon. Beijing’s $3 billion investment in Blackstone has created a new landmark. Sale of Chrysler to US PE fund Cerberus posits PE firms as a major force in the global market for corporate control. However, globally, PE investment is less than 4% of the total public market investments. In India, this figure is probably closer to 2%. There is still a lot of potential for growth of this alternative form of corporate ownership.

Thanks to its fast growth, the PE industry has attracted serious criticism in Europe and the US: they take on excessive leverage, restructure managements, slash jobs, strip assets, fail to invest for the long term and still enjoy unfair tax advantages.

PE supporters contend that it creates more value as compared to public ownership. The British PE and Venture Capital Association research has demonstrated that PE-backed companies have grown faster in sales and employment than others. What happens in India?

Contributing To The Economy

PE has contributed to economic growth by both providing smart capital and improving capital efficiency. In addition, it has encouraged entrepreneurship by supporting new ventures and promoting new industries such as BPOs. It was Warburg Pincus, a major PE firm, which gave Sunil Mittal early stage capital for Bharti Airtel and supported Mittal’s entrepreneurship, leadership and management skills to create one of the most successful companies in India. Of course in the process, Warburg Pincus delivered outstanding returns to its own investors.

More than two-thirds of the capital for the sunrise BPO sector came from PE firms. The young professionals who led Warburg Pincus, ChrysCapital, Actis, General Atlantic, Oakhill Partners, CVC, etc saw the potential of the sector and funded companies such as Spectramind, EXL, Daksh, WNS and Genpact, promoted by educated entrepreneurs who did not come from traditional business families. BPO firms supported by PE Investors have been far more successful both financially and in job creation than other BPOs.

PE investors have struck gold in financial services, pharmaceuticals, IT, construction, consumer products, engineering and even traditional industries such as textiles. Their success stories include Suzlon. According to a survey by Four-S, a research firm, the PE backed companies have shown compound annual growth of 37.1 per cent as compared to 19.1 per cent for other companies.

PE has, in short, made a major contribution to the growth of jobs, revenue and profits of their investee companies, and therefore, of India’s over all economic growth. Their superior returns attract much larger pools of capital to India.

Increasing Efficiency

What makes PE tick? PE firms have a clear Investment Thesis as to how they will create value — by additional capital, change of ownership/capital structure, strategy shift in terms of international markets, technology, manufacturing, etc. They also incentivise the management teams by giving them ownership stakes. PE investors then undertake detailed due diligence to confirm their thesis and have an appropriate investment contractual framework.

PE investors get involved, more or less, depending upon the scale of ownership, in operationalising their original investment thesis and ensuring proper corporate governance. Such active investment is superior to passive investing by mutual funds, etc. This is also more committed ownership as compared to hedge funds and other short-term investors. Since PE investors are sharply focused on value creation, the managements get challenged constructively and prune inefficiencies and outmoded practices. In some cases, some jobs are eliminated, but new jobs are created as well.

Even the public markets recognize the superior inputs of PE investors: generally, a listed company receiving funds from a major PE gets re-rated and stock price increase by 20%-30%.

The Outlook for India

So what is the outlook for PE Industry in India?

1. More venture fund flows into IT products, Telecom, particularly Mobile Telephony, Internet, Biotechnology, etc targeting domestic as well as global markets.

2. Larger PE firms will provide vital partnership, in terms of finance, strategy and other expertise, to Indian companies seeking large overseas acquisitions.

3. We could see large Infrastructure investments by PE firms in Roads, Ports, Airports, Power, Telecom infrastructure, etc.

4. Regulation is likely to turn more permissive vis-à-vis leveraged buyouts. After all, how long will we applaud the Tatas, Birlas, etc acquiring large firms abroad on the strength of debt finance, while denying international or Indian firms loans in India for making acquisitions in India? Perhaps, experienced foreign banks could take the lead in providing buyout credit Indian banks could follow.

5. We could see some Indian PE firms go public in India, and also tap Indian Institutional and High Net Worth capital.

6. Finally the distressed asset market in India will develop and the PE Industry will participate in that.

(This article first appeared in The Economic Times of July 25, 2007, and is republished here with permission.)

Is Cafe Coffee Day in another fund raising process? Amalgamated Bean Coffee Trading Company (ABCTC) - the company which owns CCD and currently backed by Sequoia Capital India and International Finance Corporation (IFC) - is looking to penetrate across the country, besides Europe and the Middle East. These efforts may be funded by a fresh financing of $50 million from a few foreign banks or PE funds. Business Standard reports that Deutsche Bank and Darby Overseas Investments, a part of Franklin Templeton Investments, could be investing in Cafe Coffee Day's expansion plans. It's not clear if it would be debt or equity.

CCD may be in a hurry to capture the market especially when Starbucks has withdrawn its India plans for the time being. Also, CCD's main rival Barista has been acquired by Italy's Lavazza, and the competition in domestic market may just get tougher.

In July 2006, ABCTC raised $20 million from Sequoia Capital India. Around the same time IFC, the private equity arm of World Bank, provided an equity support of $5 million and a debt of $10 million (see IFC project summary). BS reports that CCD is looking at revenues of Rs 500 crore this year, about 33 per cent more than FY2006-07. CCD's divisions include Coffee Day Fresh n Ground (386 outlets), Coffee Day Xpress (500 kiosks), Coffee Day Take Away (7,000 vending machines), Coffee Day Exports and Coffee Day Perfect (packaged coffee).

The parent company ABCTC was set up by V G Sidhartha, a Bangalore-based entrepreneur, in 1993. He started his career as a stock broker - he set up Sivam Securities - in 1984. Sidhartha is also an angel investor, backing companies like MindTree and Ittiam Systems.

Related:

Sequoia Capital Invests $20 Million In Amalgamated Bean Coffee Trading

IFC Extends $15-Million Equity-cum-Debt Funding To Cafe Coffee Day

[Clarification: The earlier post erroneously reported that Pradeep Tagare is the fund manager of the $250-million India fund of Intel Capital. Sudheer Kuppam, the Managing Director of Intel Capital in India, Japan and Australasia, is indeed the fund manager of the $250-million fund. Tagare is part of six investment managers (2 in Bangalore and 4 in Mumbai). The error is regretted.)

Intel Capital, the venture capital arm of chip-maker Intel Corp, has appointed Pradeep M Tagare as a Director in its Mumbai office. He will be one of the six investment managers managing the $250 million India fund. He moved to Mumbai from Santa Clara, US, where he was a senior investment manager for Intel Capital. He joined Intel in 2003, and prior to that was with Xdrive Technologies Inc and Yopa.com.

I bumped into Tagare yesterday at CII's Cleantech Forum in Delhi. He said Intel Capital is going to invest in technology sectors in a broad sense, and they will follow a stage-agnostic approach - starting from seed to private equity (even private investment in public enterprises or PIPE) (see a VentureWood post of Tagare). That's a significant shift in strategy for Intel Capital since it has earlier adopted a "venture" focus. It currently has an active investment portfolio of 20 companies in India.

Earlier, Intel Capital appointed Sudheer Kuppam as Managing Director for India, Japan, Australasia and South-East Asia. Kuppam replaced Kumar Shiralagi, who left Intel Capital to join as MD of NEA IndoUS Vetures. Kuppam, based out of Bangalore, is responsible for Intel Capital investments in India, Japan, ANZ and SE Asia.

Related:

Sudheer Kuppam Appointed Managing Director Of Intel Capital In India, Asia Pac

Temasek Holdings has emerged as the largest private equity investor in India in terms of the investments made in the country. The Singapore government's money manager has put in more than $3 billion in Indian companies. Interestingly, a big chunk of it - $2 billion - came in only last month when the company picked up 4.99 per cent stake in Bharti Airtel (the promoters flipped this stake which was earlier owned by Vodafone).

Although Temasek has overtaken Waburg Pincus (its total investments in India are about $1.5 billion) to become the largest PE fund in India, the former is entering the Delhi telco Bharti a good three years after Warburg exited it at five times its money (it invested $300 million, and took out $1.6 billion).

So it doesn't matter who is big, what matters is who makes more money. Temasek entered India in 2004 with an investment in Matrix Laboratories along with TPG-Newbridge. The fund exited Matrix last year when Mylan bought over the Hyderabad-based pharma company for $736 million. Temasek had invested about $46 million in Matrix for about 13 per cent stake, and it took back $103 million in two year's time (see details here). Temasek has subsequently built up a portfolio of investments like Tata Teleservices, Mahindra & Mahindra, ICICI Bank, Tata Sky, INX Media, and so on.

Business Standard reports that Temasek plans to increase its investments in India to 10 per cent of its total portfolio. Currently, it's 3 per cent.

According to Mint, the top five PE funds in India according to investments are Temasek ($3 billion), Warburg Pincus ($1.5 billion), Citigroup Venture Capital International ($1 billion), ICICI Venture ($1 billion), and ChrysCapital ($1 billion).

According to Thomson Financial data (Via The Economic Times), the biggest PE deal in the first seven months of this year (it missed out on Temasek's investment in Bharti) was Carlyle's $416 million investment in HDFC for 5.6 per cent stake.