The Reserve Bank of India (RBI) has relaxed regulations for overseas private equity and venture capital funds, and will now allow those to directly invest into secondary transactions. The circular from India’s banking regulator states that these foreign investors can buy the stake held by other VC/PE funds in both private and public companies, and also invest in secondary transactions on stock exchanges.
PE/VC funds are registered as venture capital funds (VCFs) or Foreign Venture Capital Investment (FVCI) with the market regulator Securities & Exchange Board of India (SEBI).
“It has now been decided to allow FVCIs to invest in the eligible securities (equity, equity-linked instruments, debt, debt instruments, debentures of an IVCU or VCF, units of schemes/funds set up by a VCF) by way of private arrangement/purchase from a third party,” states the RBI circular issued last week. “It is also being clarified that SEBI-registered FVCIs would also be allowed to invest in securities on a recognised stock exchange.”
Existing rules say that FVCIs (read foreign VC/PE funds) cannot buy shares in a secondary transaction from another venture capital fund, either domestic or foreign. Transactions till date only allowed FVCIs to buy primary shares, either in listed or unlisted firms. Earlier, secondary deals were structured around these regulations and required FIPB approval for each and every transaction. But now, RBI’s new rule will ensure hassle-free investments for VC/PE funds in these sectors, as provided in FVCI guidelines.
According to experts, there will be other advantages as well, as FIIs investing through FDI cannot buy more than 10 per cent in a company while FVCIs can buy over 10 per cent. FVCIs are also exempt from entry and exit pricing restrictions and don’t have a lock-in on the shares of their portfolio companies going for initial public offerings.
This will make FVCI the more favoured route rather than FIIs, which is being used by several private equity and venture capital funds at this point of time.
However, the RBI ruling also states that investments through market transactions will have to comply with provisions of the SEBI (FVCI) Regulations, 2000, which will need further clarification. Also, as investment by FVCIs is restricted in nine sectors, it remains to be seen how this percolates into actual benefit for the foreign PE/VC firms.
If implemented in its full form, the move is likely to have a significant positive impact on investments from FVCIs. According to VCCEdge, the financial research platform of VCCircle, there were 16 exits through secondary deals valued at $718 million in the entire CY2011. Till March 27, 2012, there have been eight secondary deals worth $545 million.
Secondary deals, in terms of stake transfer from one private equity firm to another, are expected to be a large market over the next three years as investors seek exit from 2006-2008 vintage deals while others are sitting on significant dry powder.
Private investments in public equities (PIPEs), either through public issues or direct purchases from the market, have also been on the rise after falling in 2009 post-Lehman crisis. Public market deals increased from 70 to 93 in volume from 2010 to 2011, while rising from $2.37 billion to $3.5 billion over the same period. Till March 27, 2012, there have been 23 PIPE deals worth $670 million.
Over the last 6-8 months, global private equity majors like the Carlyle Group, General Atlantic, Providence Equity Partners and the Blackstone Group have also picked up shares in listed company from the markets. In fact, most mid-market private equity firms in India have started investing in public markets opportunistically, but there are also some dedicated players like Nalanda Capital and WestBridge Capital.