Edition 5

July–September 2010

Private Equity roundup

India

Foreword
Backed by strong economic fundamentals, PE activity in India gathers upward momentum

The improvement in India’s economic environment has been encouraging. GDP growth is
Private Equity Roundup is back on track after slowing considerably in 2009. Some of the leading economic indicators —
a quarterly newsletter on industrial production, auto sales, loan growth, merchandise exports and indirect tax
trends and perspectives collections — have improved. And, the leading stock market index, Sensex, crossed the 20,000
related to private equity (PE) mark this quarter for the first time since 2008, aided by strong foreign inflows.
activity in India. However, inflation still remains an area of concern for economic growth and in a step toward
containing inflation, Reserve Bank of India raised the leading interest rates in September 2010.
In this issue:
3Q10 saw the best PE deal quarterly performance of the last eight quarters, with total deal value
Foreword........................................01 of US$2.1b. The significant increase was due to nine large-sized PE deals (greater than US$50m)
cumulatively worth US$1.2b. These deals were driven by the global PE firms, who in line with the
Overview........................................02
trend seen during the past few quarters, were the major investors.
Deal spotlight.................................04
Fund-raising remains challenging in India, as it is globally. While US$9b in funds were announced
Investment analysis........................06 for investments in India during the third quarter of 2010, actual funds raised were a fraction of
Analysis by deal size that number and were much lower than the previous two quarters in 2010.

Analysis by sector
Special feature...............................12
Fund focus ....................................14
Exits..............................................15
Tax and regulatory..........................17
Outlook..........................................19
Methodology..................................20
The improvement in the Indian stock markets has resulted in several PE-backed companies
coming out with their initial public offerings (IPOs) - nine in this quarter. Eight out of those nine
IPOs were listed at a price higher than the respective offer price. If the stock markets remain
stable, this should provide greater confidence for increased PE-backed IPOs in the future.
Going forward, strong domestic fundamentals are expected to drive the economic growth in the
country. However, concerns regarding the continuing sluggishness of the global economy and
inflation in the domestic economy may still remain. The coming months are expected to see a
rising trend in PE deal activity, as global investors look for attractive investment opportunities
in the emerging markets, especially India and China. In some cases, investors have even agreed
with their limited partners to re-allocate investment focus to the emerging markets. Finally, a
distinct sign of revival across sectors is likely to broaden the investment spectrum considerably
and offer more options for PE investors in the near future.
Overview

Indian PE deal activity experiences

a steady rise
In the third quarter of 2010 (3Q10), 81 PE deals, cumulatively
valued at US$2.1b, were completed in India. This is an increase of
nearly 118% from the same period in 2009 and 46% from 2Q10.
In addition, after a subdued 2009, where total deal value reached
US$3.5b across 180 deals, PE deal activity for the first three
quarters of 2010 has already surpassed last year’s value by 58%.

Continuing a recent trend, global PE firms were actively involved

in eight of the top 10 PE deals in 3Q10.

Figure 1: Trend in private equity investments

3,000 83 90
79 81
80
Deal value (US$m)

2,759
Number of deals

64 70
2,000 2,243 53 57 60
50 51 2,107
2,048 50
41 38
1,448 40
1,000 974 967 950 30
813
645
20
10
0 0
2Q083Q084Q081Q092Q093Q094Q091Q102Q103Q10

Deal value Number of deals

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets

2 Private Equity roundup

Figure 2: Top 10 deals announced in 3Q10

Value
Date Target Investor(s) Sector
(US$m)
August 2010 Viom Networks Macquarie SBI Infrastructure Fund 304 Telecommunications
August 2010 Moser Baer Projects The Blackstone Group 300 Infrastructure
July 2010 Infrastructure Development Khazanah Nasional Berhad (through 179 Financial services
Finance Company (IDFC) Sipadan Investments) and Actis LLP
July 2010 Panchshil Realty’s hospitality The Xander Group 110 Real estate, hospitality
division and construction (RHC)
August 2010 World One HDFC Venture Funds 107 RHC
August 2010 Sadbhav Infrastructure Project Norwest Venture Partners, Xander 86 Infrastructure
Group
July 2010 REI Agro The Blackstone Group, Moore 64 Retail and consumer
Capital, Wellington Management products
July 2010 Monnet Power The Blackstone Group 60 Infrastructure
September 2010 Emerald Estates and Palm Terraces Kotak Realty Fund 54 RHC
July 2010 Bhilwara Energy FE Clean Energy, International 50 Infrastructure
Finance Corporation (IFC)

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets and Ernst & Young research

Private Equity roundup 3

Deal spotlight

Macquarie SBI Infrastructure Fund

invests in Viom Networks
Viom Networks, a joint venture between Quippo Telecom
Infrastructure and Wireless TT Infoservices, raised US$304m
from Macquarie SBI Infrastructure Fund in August. According
to the terms of the deal, the fund has acquired approximately
an 11% stake from Quippo Telecom. The company plans to
use the proceeds from the stake sale to reduce its debt.
The Indian telecom sector is one of the fastest-growing in
the world, growing at more than 25% Compounded Annual
Growth Rate (CAGR) for the past three years. Currently,
the Indian telecom tower market is dominated by operator-
owned companies, namely Indus Towers, Reliance Infratel
and BSNL. In the past few years, a trend of tower sharing
has emerged, with several telecom players spinning out their
operations. In addition, several major telecom operators
have spun off their tower-related businesses into entities.
Therefore, tower infrastructure sharing and hiving off tower-
related business has resulted in significant reduction in costs
for the operators. According to Ernst and Young’s Wireless
infrastructure sharing in India1, operators across the industry
can expect to have capital expenditure savings ranging between
US$7b and US$12b over the next four years, during which
the number of towers in India is expected to rise by 60%.
With such high growth potential, PE investors have been actively
involved in this segment, investing close to US$3.3b across 14
deals since January 2006. During this period, the largest PE deal
was an investment of US$1b in Bharti Infratel, a leading passive
telecom infrastructure service provider and a subsidiary of Bharti
Airtel. Investors included AIF Capital, Citigroup Venture Capital
International, Goldman Sachs, India Equity Partners, Investment
Corporation of Dubai, Macquarie and Temasek Holdings Advisors.
Going forward, with rapid growth in the number of mobile
phone subscriptions in the country coupled with the roll-
out of third-generation (3G) services, demand for passive
telecom network infrastructure, such as towers, is expected
to increase further (as new mobile providers opt for leasing
infrastructure to reduce costs and roll out services faster). This
should provide PE firms opportunities to invest in the sector.

Figure 3: Top five PE deals in telecom tower companies (January 2006–September 2010)

Value
Date Target Investor(s)
(US$m)
December 2007 Bharti Infratel AIF Capital, Citigroup Venture Capital International, Goldman Sachs, India 1,000
Equity Partners, Investment Corporation of Dubai, Macquarie and Temasek
Holdings Advisors
July 2007 Reliance Telecom DA Capital, Fortress Capital, Galleon Partners, GLG Partners, HSBC Principal 347
Infrastructure Investments, New Silk Route Advisors and Soros Fund Management
August 2010 Viom Networks Macquarie SBI Infrastructure Fund 304
2
February 2010 TowerVision India Quadrangle Group Asia led consortium 300
August 2009 Quippo Telecom IDFC Private Equity, Oman Investment Fund, SREI Infrastructure Finance 224
Infrastructure

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets and Ernst & Young research

1
Wireless infrastructure sharing in India, Ernst & Young, 2009
2
Second round of funding in Towervision. The first investment of US$300m was
made by Morgan Stanley Private Equity Asia during February 2008.

4 Private Equity roundup

The Blackstone Group invests in
Moser Baer Projects
Moser Baer Projects Private Limited (MBPPL), a developer
of power generation facilities, raised US$300m from The
Blackstone Group in August. MBPPL plans to utilize the
proceeds to augment the capacity of its power projects to
5,000MW by the end of 2016, including 4,000MW of thermal,
500MW of solar and 500MW of hydro-electric capacity.
Blackstone has been actively looking at investment opportunities
in the Indian power sector, and this is its second such investment.
In July 2010, Blackstone acquired a 12.5% stake in another
power player, Monnet Power Company, for US$60m. Blackstone
also plans to invest up to US$1b in India’s power sector in the
next three to five years and is in active dialogue with several
other power project developers for further investments
in India.3 In addition to these Indian power investments,
Blackstone announced the acquisition of Dynegy, an American
independent power producer, for US$4.7b in August 2010.
PE firms have invested close to US$2.6b across 41 deals
in the Indian power sector from January 2006 through
September 2010, with nearly 50% of the aggregate PE
funding in the nine months to September 2010.
India’s power generation capacity stood at 164.5GW as of
August 2010. However, the increase in the country’s power
generation capacity has not kept pace with the growth in
demand, resulting in shortage in power supply. The peak deficit
was 10.7% in August 2010. To bridge the increasing demand-
supply imbalance, power companies in the country are ramping
up their capacities to meet the Eleventh Five Year Plan target
of 62,374MW. In addition, the Government of India is also
undertaking various initiatives to bridge the supply deficit.
As India‘s economy continues to grow, the demand for power
will further increase. A large part of this capacity growth is
being developed in the private sector, and significant capital
will be required. Separately, the existing power supply shortage
has led to the development of an attractive merchant market
yielding high returns for the power generation companies.
These factors are attracting PE investors to the sector and
providing them with multitude of investment opportunities.

Figure 4: Top five PE deals in power companies (January 2006–September 2010)

Value
Date Target Investor(s)
(US$m)
March 2010 Asian Genco Morgan Stanley Infrastructure Partners, General Atlantic, Goldman Sachs, 425
Norwest Venture Partners, Everstone Capital and Others
February 2008 Sophia Power Farallon Capital Management, LNM Internet Ventures 404
(Indiabulls Power)
August 2010 Moser Baer Projects The Blackstone Group 300
October 2007 Adani Power 3i Group 230
4
March 2010 GMR Energy Temasek Holdings 200

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets and Ernst & Young research

3
“Blackstone to invest US$300m in Moser Baer Projects,” Reuters News, 18 August
2010, via Dow Jones Factiva, © 2010 Reuters Limited.
4
During the second round of funding in GMR Energy, aggregate of US$102m was
invested by Argonaut Ventures, Ascent Capital and IDFC Private Equity in May 2010

Private Equity roundup 5

Investment analysis

Analysis by deal size

Small-size deals continue to rule the
volumes

The average PE deal size for 3Q10 was US$29.3m, in line with There were nine large-sized PE deals in 3Q10 (greater than
2Q10. As in past quarters, the current quarter was dominated by US$50m), more than double that of 3Q09, signifying that the
small-sized PE deals (worth less than US$10m), accounting for appetite and availability for such large-sized PE deals is returning.
about 43% of total deal volume.

Figure 5: Trend of average PE deal size of announced Figure 6: Composition of total PE deal volume by deal size
deals (US$m)

50 100%
Average deal size (US$m)

4 6 8 7 9
Number of deals

41.2
40 36.6 80% 7 6 13 14
35.6 14
30.8 29.3 60% 2 10 15
30 27.8 29.3 10 5
21.1 40%
19.4 20 23 35
20 16.1 20% 25 21
0%
10 3Q09 4Q09 1Q10 2Q10 3Q10
0
2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 Less than US$10 m US$11–20 m
US$21–50 m Greater than US$50 m
Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
and Ernst & Young research
Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
and Ernst & Young research

6 Private Equity roundup

Analysis by sector
Infrastructure attracted the highest
amount of PE funding; RHC sees a revival

Infrastructure continues to attract significant PE investments, In terms of deal volume, technology attracted the highest number
accounting for nearly 30% of past PE deal value in 3Q10. RHC, of PE deals in the current quarter (13), closely followed by
after remaining quiet for the past few quarters, saw a revival in the infrastructure (11) and RHC (10).
investors’ interest during the current quarter.

The financial services sector has also seen consistent PE activity

over the past few quarters.

Figure 7: Composition of total PE deal value by sector (US$m)

1,000
Deal value (US$m)

626 668
502
500 412
364 349 274 339 301
233 228
159166 168 198
60 3026 114116 78
0 36 50 0 0 0 0
0
Infrastructure RHC Telecommunications Financial Retail and Professional Others
services consumer products services

2Q09 3Q09 2Q10 3Q10

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
and Ernst & Young research

Figure 8: Composition of total PE deal volume by sector

30
24 24
21
19
20
Number of deals

13
10 11 10
7 8 8 8 7
10 5 6 5 5
4 4 4 4 3 3
1 1 2
0 0
0
Technology Infrastructure RHC Financial Professional Education Others
services services

2Q09 3Q09 2Q10 3Q10

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
and Ernst & Young research

Private Equity roundup 7

Infrastructure
Power sectors attracts maximum
PE funding

In 3Q10, infrastructure saw 11 PE deals, collectively worth
US$626m. Moser Baer Projects, a company engaged in power
generation, was the largest infrastructure deal of the quarter,
attracting US$300m from The Blackstone Group (see Deal
Spotlight on page 5).
The power subsector continues to remain a favorite with PE
investors. Year-to-date, PEs have announced 11 power deals
worth a total of US$1.236b. Other notable PE deals in the power
sector include Blackstone Group’s US$60m investment in Monnet
Power; FE Clean Energy and International Finance Corporation’s
US$50m funding in Bhilwara Energy; and Macquarie SBI
Infrastructure Fund’s US$27.1m investment in a thermal power
project in Jamshedpur, promoted by Adhunik Power and Natural
Resources.
Figure 9: PE investment trends in infrastructure
800 41.6 30.3 71.5
700
Deal value (US$m)
Roads and highways also attracted PE investment as Norwest
Venture Partners and Xander Group made an investment of
US$86m for a 22% stake in Sadbhav Engineering’s wholly owned
subsidiary, Sadbhav Infrastructure Project. The company is
engaged in road and highway construction and plans to use
the proceeds to fund its existing road projects and bid for new
national and state highway development programs.
The road sector is becoming increasingly popular with PE
investors, as it is high on the government’s agenda. According
to industry sources, an investment of approximately US$75b
is expected in the road sector over the next 4 to 5 years, with
an opportunity of approximately US$5b likely to be used in the
next 6 to 12 months to upgrade and strengthen the existing road
network in the country.5 This should present tremendous growth
opportunities for private companies, which are expected to
require growth capital funding for expansion purposes.
According to the Ernst and Young’s Structuring construction6,
the government has recognized the need for better and improved
infrastructure facilities and has stepped up its infrastructure
102.9 56.9
spending as a percentage of GDP from 4% in 2000 to 6.5% in
14
2009. The government also plans to increase its infrastructure
626

11 12
Number of deals

600 573 spending as a percentage of GDP to around 9% by 2014.

11 10
500
412 8
400
303 8 6
300
4
200 4
166 4
100 2
0 0
3Q09 4Q09 1Q10 2Q10 3Q10

Deal value Number of deals

Average deal size for announced transactions in US$m

Sources: Asian Venture Capital Journal and Ernst & Young research

5
“PE players make a beeline to tap infra sector,” Financial Express, 23 August
2010, via ISI Emerging Markets.
6
Structuring construction, Ernst & Young, 2010.

8 Private Equity roundup

Real estate, hospitality and
construction
Deal flow sees a revival

RHC witnessed a total of 10 PE deals cumulatively worth Figure 10: PE investment trends in real estate, hopitality
US$364m in this quarter. The largest PE deal in the sector was and construction
The Xander Group’s acquisition of the hospitality division of Pune-
based Panchshil Realty. The deal was worth US$110m. Currently,
400 30 10 23 9 36 12
Panchshil Realty is developing seven hotels in India under the US
hotel brand Marriott and plans to use the proceeds to develop 350 10
Deal value (US$m)

Number of deals
2,500 hotels in the next four years. 300 8 10
250 8
Other notable PE deals include HDFC Venture Funds’ US$107m 200 6
investment in World One, the world’s tallest residential tower, 150 4
4
from Lodha Developers and Kotak Realty Fund’s US$54m 100
investment in Emerald Estates and Palm Terraces, two residential 1 1 2
50 26
10 160 364
projects in Gurgaon, Haryana. 0 30 0
3Q09 4Q09 1Q10 2Q10 3Q10
Indian real estate, after experiencing steep corrections during
the economic downturn, is now witnessing some vibrancy and Deal value Number of deals
upbeat market sentiments. According to the Federation of Indian
Chambers of Commerce and Industry (FICCI)-Ernst & Young’s Average deal size for announced transactions in US$m
Realty decoded – Investing across borders7, India ranks fifth on
the overall country index for future real estate investments (after
China, the US, the UK and Singapore). Economic growth and Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
rising income levels have increased the demand for quality real
estate in the country, but the supply is still not adequate. Within
the sector, the residential housing segment has experienced an
upward trend in demand and is likely to be at the forefront to
attract investors. This is largely due to the improving economic
situation, the launch of affordable housing projects and price
rationalization by the developers.

7
Realty decoded - Investing across borders, FICCI-Ernst & Young Real Estate
Report, 2010.

Private Equity roundup 9

Telecommunications
Investments made across telecom
sub-segments

The telecommunications sector saw four PE deals worth Figure 11: PE investment trends in telecommunications
US$349m in 3Q10. Macquarie SBI Infrastructure Fund acquired
11% of Viom Networks, a telecom infrastructure company, for
US$304m. Another notable deal was a co-investment of US$44m
500 117 8 93 1 87 10
by Sandstone Capital and Sequoia Capital in one of India’s largest
450 9
domestic handset makers, Micromax Informatics. This is a second
Deal value (US$m)

400 8

Number of deals
round of PE funding for Micromax Informatics; the company 350 6 7
raised US$45m from TA Associates in January 2010. 300 6
250 4 4 4 5
The telecommunications sector continues to be a popular 200 4
destination for PE investment in India. From telecom operators to 150 3
100 1 2
passive infrastructure providers, handset manufacturers to value- 50 1
233 31 464 1 349
added service providers, PE firms have invested across a variety 0 0
of sub-segments of the Indian telecom sector. 3Q09 4Q09 1Q10 2Q10 3Q10

Over the years, the sector has charted an impressive growth Deal value Number of deals
trajectory and is growing at more than 25% Compounded Annual
Growth Rate in the past three years. The overall tele-density Average deal size for announced transactions in US$m
was recorded at 58.17% at the end of July 2010. In addition,
the current wireless subscriber base of over 652m is expected
to reach 1b mark by 2014. Even at this growth, the urban-rural Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
digital divide is significant — while urban areas are reaching and Ernst & Young research

saturation, the tele-density in rural areas is still quite low.

Going forward, declining tariffs, reduced handset prices, rapidly

increasing network coverage and diminishing network equipment
costs are likely to drive the growth of the telecom market in India.
Also, the rapidly growing mobile user base is expected to drive
demand for mobile handsets, which is likely to result in more
mobile handset manufacturers coming into the industry. This will
present ample investment opportunities for PE investors.

10 Private Equity roundup

Financial services
PE activity maintains momentum

The financial services sector saw eight PE deals this quarter, Figure 12: PE investment trends in financial services
cumulatively worth US$274m. The Khazanah Nasional Berhad
and Actis’s US$179m investment in Infrastructure Development
Finance Company (IDFC) was the largest deal.
12 5 29 45 39
Other notable PE deals in 3Q10 include Baring Private Equity 400 10
Partners and Matrix Partners India’s US$34m investment in 350 10 8 8 9
8
Deal value (US$m)

300

Number of deals
Muthoot Finance, and a US$32m investment in non-banking 7
finance company Cholamandalam Investment & Finance by a 250 6
consortium of investors. Investors included Aquarius Investment 200 4 5
150 3 4
Advisors, Amansa Capital, The India Capital Fund, India Capital 3
Opportunities, International Finance Corporation and Reliance 100
2
50 36 1
Banking Fund. 21 235 228 274
0 0
PE investments in the sector have considerably improved 3Q09 4Q09 1Q10 2Q10 3Q10
over the past year. In 2009, the sector attracted 18 PE deals
cumulatively worth US$277m, compared with 26 deals worth Deal value Number of deals
US$737m from January through September 2010.
Average deal size for announced transactions in US$m

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets

Private Equity roundup 11

Special feature

PE in non-banking financial
companies (NBFC)
PE firms banking on non–banking
financial companies

In India, non-banking financial companies (NBFCs) are defined

as firms that perform a variety of financial intermediation
services, including but not limited to granting loans and advances,
leasing and hire purchase. During the past decade, NBFCs
in India expanded their resource profile by diversifying their
funding avenues. Moreover, their improving asset quality and
overheads, coupled with the use of innovative borrowing tools
such as securitization, has resulted in their improved profitability.
Currently, NBFCs account for 9.1% of the assets of the total
financial system in India.

Traditionally, NBFCs relied on borrowings from banks, bonds,

debentures or commercial papers and fixed deposits as sources of
funds. However, NBFCs are now increasingly looking to PE to raise
funds. And with India’s financial sector poised for growth, driven
by increased domestic consumption, PE firms are interested in
the space as well. In fact, PE firms have invested approximately
US$2.3b in 62 PE deals, with an average deal size of US$39m
from January 2006 through September 2010.

Figure 13: PE deals in NBFC

1200 18 20
16 18
1000 16
Deal value (US$m)

Number of deals

800 14
11
12
600 9 10
8
8
400 6
200 4
357 1,027 609 60 325 2
0 0
2006 2007 2008 2009 Jan-Sept
2010

Deal value Number of deals

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets
and Ernst & Young research

12 Private Equity roundup

A number of factors have encouraged PE investment in NBFCs.
NBFCs in India have recently moved to a new, less complicated
collections system. The rural location of these companies, coupled
with strong distribution networks and low default rates, is also
attractive to PE investors.
In many cases, NBFCs have also created a niche for their
offerings. For example, HDFC provides mortgage loans, IDFC
provides infrastructure loans and Mahindra Finance and Shriram
Transport Finance provide commercial vehicle (CV) finance. PE
has invested across this diverse set of players, with the top five
PE investments having been in companies involved in housing,
infrastructure and general finance.
The largest deal was a US$650m investment by The Carlyle Group
in Housing Development Finance Corporation (HDFC), India’s
leading non-banking finance company and the parent company
of HDFC Bank, one of the largest private banks in the country and
HDFC Standard Life, one of the largest private insurer in India.
Later in 2008, Carlyle made another investment in a NBFC; this
time, US$28m in Chennai-based Repco Home Finance, a company
operating in the housing finance segment. Other global PE firms
that have invested in this sector are TPG Capital in Shriram City
Union Finance, Standard Chartered Private Equity in Mahindra &
Mahindra Financial Services and Baring Private Equity Partners in
Muthoot Finance.
The NBFC sector has seen several successful exits as well. With
the rise in valuations in the current quarter, PE investors including
ChrysCapital and Standard Chartered PE sold part of their stakes
in Mahindra and Mahindra Financial Services.

Figure 14: Top five PE deals NBFC (January 2006–September 2010)

Value
Date Target Investor(s)
(US$m)
May 2007 Housing Development Finance Corporation Carlyle Asia 650
September 2008 Shriram City Union Finance TPG Capital 210
July 2010 Infrastructure Development Finance Khazanah Nasional Bhd and Actis LLP 179
Company8
June 2006 Indiabulls Financial Services Farallon Capital Management 106
January 2008 Mahindra & Mahindra Financial Services Standard Chartered Private Equity, TPG-Axon Capital 106

Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets and Ernst & Young research

8
This is the second round of funding in IDFC. Khazanah Nasional Bhd had also
invested US$186m during March 2007. July 2010 funding includes preferential
allotment and qualified institutional placement.

Private Equity roundup 13

Fund focus

Significant fund announcements in

the quarter but the actual amount
raised has been modest

Thirty India-focused PE/VC funds have either been announced

or raised in 3Q10. There were a total of US$9.4b of funds
announced and US$560m of funds raised during the quarter
(India-specific funds of US$260m9 in this quarter compared
with US$1b in Q210 and US$650m in Q110). Infrastructure
remained the dominant sector in 3Q10 as well, accounting for
around US$3.5b of the total funds either announced or raised.

The highlight of the period has been the announcement of

plans for two colossal government-backed PE/VC funds.
The Government of India announced that it would set up a
US$2.1b VC fund for investments in the pharmaceuticals
sector to support drug discovery and research. In addition
to this, the government of Gujarat is considering setting up
a PE fund of US$1.1b to invest in infrastructure projects.

Another interesting trend was visible during 3Q10, as foreign firms

were seen tying up with Indian corporate houses to launch PE
funds for investments in India, e.g., Tata Capital–Mizuho Securities
and Reliance Industries–DE Shaw PE fund. The current quarter also
saw leading Indian corporate houses launching their own PE/VC
funds. Examples include Lanco Infratech’s infrastructure-focused
fund and Godrej’s Omnivore Capital focused on agri businesses.

Figure 15: Top 10 PE funds announced during 3Q10

Name Status Focus sector Geography Fund size (US$m)

Government of India’s VC fund Announced Pharmaceuticals India 2,141.4
Government of Gujarat’s infrastructure fund Announced Infrastructure India 1,079
Reliance Industries–DE Shaw Announced Infrastructure India 700–800
Enam group's Infrastructue fund Announced Infrastructure India 750
Asian Giants Infrastructure Fund Announced Infrastructure India and China 500
Tata Capital–Mizuho Securities Announced NA India 400–500
Exponentia Capital Announced Sector–agnostic India 350–400
Evolvence India Fund II Announced NA India 400
Everstone Capital Announced Warehouses India 350
Accor, InterGlobe Enterprises, Pacifica Partners Announced Hospitality India 325
Sources: Dow Jones Factiva; ISI Emerging Markets; Preqin and Ernst & Young research

9
Faering Capital (US$160m) and Banyan Tree growth Capital Fund (US$100m) were
the two India-specific funds raised during this quarter.

14 Private Equity roundup

Exits

PE-backed IPOs
PE firms cash in on Sensex bull-run

In 3Q10, nine PE-backed IPOs in India raised US$890m (see figure Figure 16: Trend of PE-backed IPOs
17 for list). This was significantly higher than in 2Q10, which
saw only two PE-backed IPOs. With the stock markets gaining
12 1,000

PE - backed IPOs (number)

837

PE- backed IPOs value (in US$m)

momentum, PE firms cashed in on soaring valuations by opting 890
900
to exit from their investments via IPO. With three months left in 10 800
683 646
2010 and a good IPO pipeline, the total value of exits may reach 8 11 9 700
record highs, provided the equity markets remain steady. The 600
Sensex hit 20,069 at the end of 3Q10 compared with its closing 6 500
400
at 17,701 at the end of 2Q10.10 4
4 300
130
2 200
2 100
2
0 0
3Q09 4Q09 1Q10 2Q10 3Q10

PE-backed IPOs (number) PE-backed IPOs value (in US$m)

Sources: Dow Jones Factiva; ISI Emerging Markets; company filings; Prowess and
Ernst & Young research

Figure 17: PE-backed IPOs during 3Q10

Amount
Investee Offer Offer price Opening
PE investor Sector raised
company date (INR) price (INR)
(US$m)
Ashoka Buildcon IDFC PE Infrastructure 45.0 24 Sep 10 324 333.5
Tecpro Systems Metmin Investments, Avigo Capital Industrial products 51.3 23 Sep 10 355 399.4
VA Tech Wabag ICICI Venture Infrastructure 25.0 22 Sep 10 1,310 1,655
Electrosteel IL&FS Investment Management, Industrial products 73.8 21 Sep 10 11 12.3
Integrated Franklin Templeton PE
Orient Green Olympus Capital, Bessemer Infrastructure 180.0 21 Sep 10 47 45.7
Power Venture Partners
Ramky IL&FS Investment Management, Infrastructure 106.0 21 Sep 10 450 450
Infrastructure Sabre Capital
Career Point Volrado Venture Partners, Franklin Education 23.0 16 Sep 10 310 461
Infosystems Templeton PE
Gujarat Pipavav IDFC PE, IL&FS Investment Infrastructure 100 23 Aug 10 46 56.2
Port Management, Jacob Ballas Capital,
AMP Capital
SKS Microfinance Sandstone Capital, Sequoia Capital, Microfinance 285.5 1 July 10 985 1,036
Kismet Capital, SVB Capital
Sources: Asian Venture Capital Journal; Dow Jones Factiva; ISI Emerging Markets; Bombay Stock Exchange (BSE) website and Ernst & Young research

10
Sensex number for each quarter is the index closing number on the last trading
day of each quarter.

Private Equity roundup 15

PE exits (excluding IPOs)
Secondary buyouts on the rise

There were six PE exits during 3Q10, the largest being Citi
Venture Capital International selling its stake in Emaar MGF Land
back to the promoters for US$60m. Barring the Emaar MGF Land
deal, all the remaining PE exits (excluding IPOs) were secondary in
nature. Secondary PE deals have picked up speed during the past
few months as many PE funds are looking to exit from their 2004-
2006 vintage investments. Also, the availability of a large pool of
“dry powder” is pushing up the market for secondary PE exits.

Figure 18: Trend of PE exits

Target company Acquirer Seller Amount (US$m) Sector

Emaar MGF Land Emaar MGF Land Citi Venture Capital 60 RHC
International (CVCI)
Dr. Lal Pathlabs TA Associates Sequoia Capital 35 Health care
Unifi Capital Unifi Capital Peepul Capital 7 Financial services
Servals Automation Grass Roots Business Fund Aavishkaar Goodwell NA Industrial products
Shree Kamdhenu Electronics Grass Roots Business Fund Aavishkaar Goodwell NA Industrial products
CREMICA Group Motilal Oswal Private Equity Advisors Goldman Sachs 15.6 Retail and
consumer products
Sources: Dow Jones Factiva; Thomson ONE Banker; mergermarket and Ernst & Young research

16 Private Equity roundup

Tax and regulatory
The Indian tax and regulatory environment has witnessed
substantial legislative developments in this quarter with the High
Court ruling in the long-awaited case of Vodafone and revisions in
the foreign direct investment regime in India.
Tax update
Direct Tax Code 2010 (DTC 2010)
placed before Parliament of India after
an approval from the Cabinet
After much deliberation and consultation, DTC 2010 was placed
before the Parliament of India on 30 August 2010. Following
approval from both houses of the Parliament and the President’s
assent, DTC 2010 would be enacted as law. The proposed
effective date is 1 April 2012.
Key proposals impacting private equity investors envisaged under
the Revised Discussion Paper vis-à-vis residency rule of foreign
company, treaty override, minimum alternate tax and CFC, among
others, as highlighted in our last quarter’s edition, have been
retained in DTC 2010.
Bombay High Court (HC) decided
on jurisdiction issue in the case of
Vodafone
HC in the case of Vodafone International Holdings B.V (Vodafone)
held that Indian tax authorities have the jurisdiction to tax the
transaction (Hong Kong-based Hutchison group selling its stake in
its Cayman Island entity, which indirectly owned more than 50% of
controlling interest in Indian entity, to Vodafone).
HC held that there should be an apportionment of the income
between the part that has a nexus with India and the part
that does not. The HC did not rule on the manner in which the
consideration should be apportioned.
To Vodafone’s dismay, the Supreme Court (SC) did not stay the HC
ruling. However, Vodafone can still approach the SC to argue on
the merits of the case.
Private Equity roundup
Implications
Indian tax authorities, in recent times, have attempted to tax
capital gains arising on transfer of shares of a foreign holding
pany of an Indian subsidiary on the premise that such transfer
involves an indirect change in the controlling interest of the
Indian subsidiary. The Vodafone case is the first such matter to be
litigated before a HC.
While the HC ruling in Vodafone seems to suggest that the
Indian tax authorities have jurisdiction to tax such transactions,
it appears that same is based on specific facts, circumstances
and specific legal arrangements put in place for consummating
the transaction. The ruling does not seem to propose a general
principle for taxing all offshore shares transactions that indirectly
involve Indian assets.
However, the investors would need to consider the implications
arising from this ruling while structuring their cross-border M&A
transactions involving India.
SC rules that no withholding in India
when there is no income chargeable to
tax
The Karnataka HC ruled that any payment resulting in an income
in the hands of non-resident regardless of its chargeability to tax
on India, would be subject to withholding tax in India. This ruling
had led to serious concerns from the payors regarding the extent
of their withholding tax obligations on payments made to
non- residents.
However, SC, reversing the stand adopted by the Karnataka HC,
held that any sum remitted to a non-resident that not taxable
under the provision of the Income-tax Act, 1961 (the Act) does
not require the payor to deduct tax at source. It is also held that
no application is required to be filed with the Indian tax authority
for determining the amount chargeable, if the payor believes that
the payment is not taxable in India.
The present SC ruling has a binding effect on all courts in India.
17
This means that any income earned by PE investors, including
capital gains on exit, would not be subject to withholding tax in
India if such income is not taxable in India. This would also provide
relief and certainty to the payors of such income, unlike earlier,
when they would have had to approach the income tax authorities
every time they wanted to make a payment to the PE investors
without withholding taxes.
Lower Dutch dividend withholding
tax rate
The tax treaty between India and the Netherlands provides for a
dividend withholding tax of 15%. While concluding the treaty, the
two nations agreed to a Most Favored Nation (MFN) clause. The
MFN clause states that if India concludes a tax treaty with another
OECD member with a more favorable treatment for dividends, this
same dividend treatment will be applicable for India-Netherlands
Treaty.
India and Germany concluded a tax treaty in 1995. This treaty
contains a dividend withholding tax rate of 10%. As a result of the
MFN clause in the India-Netherlands treaty, this lower dividend
withholding tax rate was also applicable for dividends paid by
Dutch companies to Indian companies.
Later in 2003, India concluded a tax treaty with Slovenia. This tax
treaty contains dividend withholding tax rate of 5% for dividends
paid by a Slovenian company to an Indian company, if the Indian
company holds directly at least 10% of the capital of the Slovenian
company. The MFN clause in the India-Netherlands treaty was not
applicable, since Slovenia was not an OECD member.
Recently, Slovenia has signed an accession agreement with
the OECD. The accession process would be concluded upon the
Slovenian National Assembly's ratification of the accession treaty.
This ratification is expected in the coming months.
Once Slovenia is an OECD member, the 5% dividend withholding
tax rate should also be applicable on dividends paid by a Dutch
company to an Indian company that directly holds at least 10% of
the capital of the Dutch company.
As a result of the above, delaying dividend distributions to India
could provide for cash flow advantages.
18 Private Equity roundup
Regulatory update
Revised listing norms
As mentioned in the Regulatory Section (Securities law updates)
of Private Equity roundup for the quarter ended June 2010, listed
companies in India were required to maintain a minimum public
shareholding of 25%. On 9 August 2010, the rules were further
amended, reducing the minimum public shareholding requirement
for public sector companies to 10%. The rules have also been
amended to provide that existing listed companies having a
minimum public shareholding of less than 25% should bring
the public shareholding to 25% within a period of three years.
However, the manner of the increase in public shareholding is yet
to be specified by Securities Exchange Board of India (SEBI).
Consolidated Foreign Direct
Investment (FDI) policy 201011
On 30 September 2010, the government revised the consolidated
FDI policy released on 31 March 2010. The key provisions in the
revised FDI policy include:
1. The government has clarified that instruments such
as share warrants, partly paid shares that are not
considered as capital, can be issued to non-resident
investor only after obtaining approval from the
Foreign Investment Promotion Board (FIPB).
2. The government has further clarified that
investment by way of share swap can be made
only after obtaining FIPB approval.
3. In the absence of clarity, it was noticed that several
companies (owned and/or controlled by non-resident
entities) had started accessing the government approval
route for downstream investments through internal
accruals. To resolve this, the government has specifically
permitted the foreign-owned Indian companies to make
downstream investment through internal accruals.
11
Circular number 2 of 2010
Outlook

We expect increased PE activity in the short to medium term, power, roads, water, housing, construction, engineering and
driven by positive economic indicators, good monsoons driving the capital goods will likely see continued investment as well.
rural economy and strong entrepreneurial eco system. In addition,
Fund-raising continues to be challenging and is expected to
access to a significant amount of “dry powder” is also likely to
remain so the near term. However, the rebound in the Indian
drive activity in the foreseeable future. The global financial crisis
economy and increasing investor confidence is expected to
still looms, but investors are becoming increasingly confident of
support fund-raising activity in the medium to long term.
the sustainability of economic growth in India. Another concern
could be the continuing inflation in the domestic economy, With soaring stock markets, we are likely to see more PE
but the central bank seems confident this will be overcome. firms taking advantage of IPOs to exit investments. However,
any downward trend in the stock markets in the coming
From a sector perspective, investments are likely to be spread
months may dampen PE-backed IPOs. Also, the outlook for
across domestic, consumption-driven sectors such as consumer
secondary exits looks healthy, as PE firms continue to look
products, services, health care, education and financial services.
for ways to exit their 2004–2006 vintage investments.
Core infrastructure and infrastructure ancillary sectors such as

Private Equity roundup 19

Methodology

• Private Equity Roundup is based on Ernst & Young’s analysis of announced PE

deals as well as other PE-related news and information reported in secondary
sources and the Asian Venture Capital Journal (AVCJ).
• The PE deal values used in this document are based on those provided in
press releases pertaining to deal announcements. The conversion rate (INR
to US$) is based on the exchange rates prevalent on the dates of the deal
announcements.
• We have not considered open-market transactions to analyze PE exits or
investments.
• The deals have been reclassified, wherever required, based on Ernst & Young’s
sector-classification policy.
Appendix

Announced PE deals for 3Q10 (deal-count composition is based on the deal size for each sector)

Sector Up to US$11m– US$21m– More than Value not Total deal count Aggregate US$m
US$10m US$20m US$50m US$50m disclosed
Technology 9 2 2 13 73
Infrastructure 4 4 3 11 626
RHC 4 2 1 3 10 364
Financial services 4 2 1 1 8 274
Professional services 5 1 1 1 8 78
Education 5 1 1 7 41
Health care 3 1 1 5 116
Retail and consumer 2 1 1 1 5 43
products
Chemicals 2 2 4 349
Industrial products 1 2 1 4 69
Telecommunication 1 1 1 1 4 54
Automotive 1 1 17
Pharmaceuticals 1 1 3
Total 35 15 14 9 8 81 2,107
Sources: Dow Jones Factiva; ISI Emerging Markets; Preqin and Ernst & Young research

Private Equity roundup 21

About Ernst & Young in India
Ernst & Young is a global leader in assurance, tax, transaction and
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We help our clients achieve their potential through
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22 Private Equity roundup
We are leaders in the professional services space, and our
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Achievements
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*(The numbers include personnel from other member firms of Ernst & Young Global
in India)
Ernst & Young — Private Equity practice
At Ernst & Young, our Private Equity practice offers a comprehensive range of services to assist you and your investee
companies every step of the way — from your fund set-up to the transaction lifecycle.

Our teams work closely with you, offering incisive and proven industry experience coupled with integrated, objective
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Private Equity roundup 23

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