Private Equity

in 33 jurisdictions worldwide
Contributing editor: Casey Cogut

2011
Published by Getting The Deal Through in association with: Advokatfirmaet Steenstrup Stordrange DA Advokatfirman Delphi Appleby Beiten Burkhardt Borenius & Kemppinen Bowman Gilfillan Broseta Abogados Carey Olsen Dalgalarrando, Romero & Ca Abogados Esin Law Firm Gilbert + Tobin Gowling Lafleur Henderson LLP HJM Asia Law & Co LLC Homburger Kennedy Van der Laan NV Hamelink & Van den Tooren NV Kromann Reumert Latournerie Wolfrom & Associs Lee & Ko Lima Netto, Campos, Fialho, Canabrava Advogados Loyens & Loeff Luxembourg Lydian Narasappa, Doraswamy & Raja OMelveny & Myers LLP Proskauer Rose LLP Salomon Partners Simpson Thacher & Bartlett LLP Slaughter and May Wiesner & Asociados Ltda WongPartnership LLP Yangming Partners

CONTENTS

Private Equity 2011

Contributing editor: Casey Cogut Simpson Thacher & Bartlett LLP Business development managers Alan Lee George Ingledew Robyn Hetherington Dan White Marketing managers Ellie Notley Sarah Walsh Marketing assistants Alice Hazard William Bentley Subscriptions manager Nadine Radcliffe Subscriptions@ GettingTheDealThrough.com Assistant editor Adam Myers Editorial assistant Nina Nowak Senior production editor Jonathan Cowie Chief subeditor Jonathan Allen Senior subeditor Kathryn Smuland Production editor Anne Borthwick Subeditors Chloe Harries Davet Hyland Editor-in-chief Callum Campbell Publisher Richard Davey Private Equity 2011 Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 7908 1188 Fax: +44 20 7229 6910 Law Business Research Ltd 2011 No photocopying: copyright licences do not apply. ISSN 1746-5524
The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyerclient relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. Although the information provided is accurate as of March 2011, be advised that this is a developing area.

Global Overview Casey Cogut, William Curbow, Kathryn King Sudol and Atif Azher Simpson Thacher & Bartlett LLP

3 7 13 21 28 34 40 47 54 61 67 75 80 86 93 101 107 115 122 127 134 141 150 157 163 168 174 178 184 192 197

FUND FORMATION
Australia Adam Laura & John Williamson-Noble Gilbert + Tobin Bermuda Sarah Demerling (ne Moule) Appleby Brazil Luciano Fialho de Pinho, Clara Gazzinelli de Almeida Cruz and Bruno Ribeiro Carvalho Lima Netto, Campos, Fialho, Canabrava Advogados British Virgin Islands Michael J Burns, Valerie Georges-Thomas, James McConvill and Christian Victory Appleby Canada Myron B Dzulynsky, Vince F Imerti and Bryce A Kraeker Gowling Lafleur Henderson LLP Cayman Islands Bryan Hunter and Richard Addlestone Appleby Chile Felipe Dalgalarrando H Dalgalarrando, Romero & Ca Abogados China Caroline Berube HJM Asia Law & Co LLC Denmark Lisa Bo Larsen Kromann Reumert England & Wales Bob Barry Proskauer Rose LLP Finland Paulus Hidn and Sanna Lindqvist Borenius & Kemppinen Germany Thomas Sacher, Steffen Schniepp and Michael Hils Beiten Burkhardt Guernsey Ben Morgan, Geoff Ward-Marshall and Emma Penney Carey Olsen India Siddharth Raja and Chitra Raghavan Narasappa, Doraswamy & Raja Jersey Robert Milner and James Mulholland Carey Olsen Luxembourg Marc Meyers Loyens & Loeff Luxembourg Netherlands Louis Bouchez, Floor Veltman and Maurits Bos Kennedy Van der Laan NV Jan van den Tooren and Reinier Noort Hamelink & Van den Tooren NV Singapore Low Kah Keong WongPartnership LLP Spain Julio Veloso and Javier Morera Broseta Abogados Sweden Anders Lindstrm, Anders Bjrk and Peter Sjgren Advokatfirman Delphi United States Thomas H Bell, Barrie B Covit, Jason A Herman, Jonathan A Karen, Glenn R Sarno and Michael W Wolitzer Simpson Thacher & Bartlett LLP

TRANSACTIONS
Australia Peter Cook and Rachael Bassil Gilbert + Tobin Belgium Peter De Ryck Lydian Brazil Luciano Fialho de Pinho and Flvio Santana Canado Ribeiro Lima Netto, Campos, Fialho, Canabrava Advogados Canada Harold Chataway, Daniel Lacelle, Ian Macdonald and Jason A Saltzman Gowling Lafleur Henderson LLP Cayman Islands Stephen James, Simon Raftopoulos and Samuel Banks Appleby Chile Felipe Dalgalarrando H Dalgalarrando, Romero & Ca Abogados China Caroline Berube HJM Asia Law & Co LLC Colombia Mauricio Rodrguez and Eduardo A Wiesner Wiesner & Asociados Ltda Denmark Bent Kemplar and Vagn Thorup Kromann Reumert

Finland Maria Carlsson, Andreas Doepel, Antti Hemmil, Ari Kaarakainen, Sanna Lindqvist, Jukka Leskinen and Timo Seppl Borenius & Kemppinen 202 France Pierre Lafarge, Jean-Luc Marchand, Claire Langelier, Jennifer Sourisse and Maxime Boh-Masson Latournerie Wolfrom & Associs Germany Thomas Sacher, Steffen Schniepp and Michael Hils Beiten Burkhardt Hong Kong Benita Yu and Clara Choi Slaughter and May India Siddharth Raja and Neela Badami Narasappa, Doraswamy & Raja Indonesia Joel Hogarth OMelveny & Myers LLP Korea Je Won Lee and Geen Kim Lee & Ko Netherlands Louis Bouchez, Fenna van Dijk, Floor Veltman and Maurits Bos Kennedy Van der Laan NV Jan van den Tooren and Reinier Noort Hamelink & Van den Tooren NV Norway Robert Sveen and Odd Erik Johansen Advokatfirmaet Steenstrup Stordrange DA Russia Anton Klyachin and Igor Kuznets Salomon Partners Singapore Wai King Ng and Liam Kheng Tay WongPartnership LLP South Africa Lele Modise and David Anderson Bowman Gilfillan Spain Julio Veloso, Javier Morera and Juan Manuel Prez Broseta Abogados Sweden David Aversten, Michael Juhlin, Peter Sjgren, Clas Romander and Emma Dansbo Advokatfirman Delphi Switzerland Dieter Gericke, Reto Heuberger and Jrg Frick Homburger Taiwan Robert C Lee and Claire Wang Yangming Partners Turkey Ismail G Esin Esin Law Firm United States William Curbow, Kathryn King Sudol and Atif Azher Simpson Thacher & Bartlett LLP 208 215 220 227 234 240 245 252 257 262 268 277 283 291 297 303 309

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Narasappa, Doraswamy & Raja

INDIA

FUND FORMATION

India
Siddharth Raja and Chitra Raghavan Narasappa, Doraswamy & Raja
Formation and terms operation
1 Forms of vehicle What legal form of vehicle is typically used for private equity funds formed in your jurisdiction? Does such a vehicle have a separate legal personality or existence under the law of your jurisdiction? In either case, what are the legal consequences for investors and the manager?

Private equity or venture capital funds (PE or VC funds) in India are typically set up as private, specific and revocable trusts under the Indian Trusts Act, 1882 (Trust Act) or as a company incorporated in accordance with the Indian Companies Act, 1956 (Companies Act). Trusts are not regulated or administered to the extent that companies are, and, consequently, this affords the fund a fair amount of operational flexibility. India has enacted the Limited Liability Partnership Act, 2008 (LLP Act), thereby permitting the establishment of limited liability partnerships (LLPs). In terms of the LLP Act, an LLP is a body corporate incorporated under the LLP Act. LLPs are not the preferred form of a private equity vehicle since tax is levied on the LLP at the entity level and the income of the LLP is not taxed in the hands of the individual partners. Companies and LLPs enjoy separate legal status independent of their shareholders and partners, respectively. Consequently, the liability of the shareholders of companies and the partners of LLPs is limited to the extent of their capital contribution. However, trusts do not enjoy a separate legal status it is the trustees who are entitled to sue and be sued in their names. Further, the liability of the trustees is unlimited for breach of fiduciary obligations, fraud, etc. Please see questions 5 and 6 regarding the consequences and liabilities of investors and fund managers.
2 Forming a private equity fund vehicle What is the process for forming a private equity fund vehicle in your jurisdiction?

governance requirements than category (i). Private companies in India are exempt from the applicability of several provisions of the Companies Act. A minimum capitalisation of 100,000 rupees is required to incorporate a private company, and in the case of a public company the minimum capitalisation is 500,000 rupees. A private company is required to be incorporated with a minimum of two shareholders and two directors, while a public company is required to be incorporated with a minimum of seven shareholders and three directors. A company is required to make an application for approval of the name to the jurisdictional registrar of companies (registrar), pursuant to which an application in Form 1 is required to be made to the registrar accompanied with, inter alia, the memorandum and articles of association of the company and a certificate from a company secretary or director certifying that all requirements pertaining to the incorporation under the Companies Act have been met. The registrar will, upon being satisfied that all requirements of the Companies Act have been met, issue a certificate of incorporation. The process of incorporating a company takes approximately three to four weeks.
LLPs

Trusts

The process of establishing a trust is fairly simple, inexpensive and quick. A trust is created by a trust deed that names the author or settlor, the trustees and the beneficiaries. There is no requirement for a minimum capitalisation or corpus to be settled or contributed as the trust property in order to establish the trust. Applicable stamp duty and registration charges (which will depend on the state in which the trust is formed) would be payable on the trust deed, depending on the initial corpus with which the trust is settled. The trust deed would have to be registered with the jurisdictional sub-registrar who is a revenue authority. It takes approximately three weeks to establish a trust.
Companies

An LLP can be incorporated with a minimum of two partners, who may be individuals or body corporates, entering into the limited liability partnership agreement. There is no limit on the maximum number of partners that may be admitted to an LLP. An LLP is incorporated by filing the incorporation document (LLP agreement) with the jurisdictional registrar, along with a statement, in the prescribed form, from a chartered accountant or a company secretary who is engaged in the formation of the company and one partner named in the LLP agreement, stating that all requirements pertaining to the incorporation under the LLP Act have been met. The registrar is required to register the LLP and issue a certificate of registration within 14 days of being satisfied that all requirements of the LLP Act pertaining to incorporation have been met. The certificate so issued by the registrar is conclusive evidence of the existence of the LLP. The process of incorporating an LLP takes approximately three to four weeks. A company secretary is typically appointed for the incorporation of a company or an LLP. Company secretaries typically charge between 20,000 rupees to 30,000 rupees to incorporate a company or an LLP. Please see question 20 regarding the organisational taxes that are payable.
3 Requirements Is a private equity fund vehicle formed in your jurisdiction required to maintain locally a custodian or administrator, a registered office, books and records or a corporate secretary, and how is that requirement typically satisfied?

The Companies Act differentiates between (i) a private company, (ii) a public company and (iii) a private company that is a subsidiary of a public company. Categories (ii) and (iii) are subject to more corporate
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It is not mandatory for a PE or VC fund to appoint a custodian or an administrator. It is mandatory for a company to appoint a company

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secretary if it has an authorised share capital exceeding 50 million rupees. Companies and LLPs are required by law to have a registered office to which all communications and notices may be addressed and received. In respect of a trust, the trustees are under an obligation to keep clear and accurate accounts of the assets and financial condition of the trust property and allow the beneficiaries to inspect and examine such accounts. Under the Companies Act, companies are required to: maintain and regularly update statutory registers such as the registers of members, directors, share transfers and charges such records and registers are required to be maintained at the registered office; and make regular filings with the registrar, including with regard to issuances of securities, change in directors, creation of charges and annual reports, all in the prescribed form and within the prescribed period. Similarly, LLPs are also required to maintain proper books of account and file a statement of accounts and an annual return with the registrar in the prescribed form and within a specified time period. Further, in accordance with the SEBI (Venture Capital) Regulations, 1996 (VCF Regulations), every PE or VC fund is required to maintain, for a period of eight years, books of accounts, records and documents that shall give a true and fair picture of the state of affairs of the PE or VC fund, and inform the Securities and Exchange Board of India (SEBI), in writing, about the place where the same are being maintained.
4 Access to information What access to information about a private equity fund formed in your jurisdiction is the public granted by law? How is it accessed? If applicable, what are the consequences of failing to make such information available?

Narasappa, Doraswamy & Raja

The consequences of trusts, companies and LLPs not making the requisite corporate filings and furnishing all requisite information to the registrar and the SEBI are set out below:
Trusts

There are no consequences under the Trusts Act, as there are no statutory filings to be made by private trusts.
Companies

Under the Companies Act, the company is punishable with fine of up to 500 rupees for every day during which the default continues.
LLPs

Under the LLP Act: the LLP shall be punishable with a minimum fine of 25,000 rupees, which may increase to 500,000 rupees; and every designated partner (managers) of the LLP shall be punishable with a minimum fine of 10,000 rupees, which may increase to 100,000 rupees.
PE or VC funds

Depending on the nature of the non-compliance the SEBI may, inter alia: suspend or cancel the certificate of registration; prohibit the PE or VC fund from entering into any new assignments, contractors or launching a new scheme; debar a principal officer of the PE or VC fund; issue a warning to the PE or VC fund.
5 Limited liability for third-party investors In what circumstances would the limited liability of third-party investors in a private equity fund formed in your jurisdiction not be respected as a matter of local law?

Trusts

Trusts

Information pertaining to trusts established under the Trusts Act is not directly accessible by the public. Under the Trusts Act, a trustee is only obligated to make available information to persons who have interest in such trust property, ie the settlor, author and the beneficiaries.
Companies and LLPS

Investors that are beneficiaries of the trust will not be liable for the actions of the trust or trustees.
Companies

Shareholders (investors) may be held personally liable in exceptional cases where the corporate personality of the company is being used by the shareholders to shield fraud or illegal conduct.
LLPs

As regards public listed companies, all information pertaining to such companies is freely available to the public from the stock exchanges and under the SEBI Corporate Filing and Dissemination System, which serves as a single interface to the public to access all information and filings pertaining to public listed companies. However, the public does not have direct access to information of a private company or an LLP. Any member of the public may, by making payment of the applicable fees, access records of private companies and public unlisted companies, which would include information about the shareholders, directors, share capital of the company and corporate filings made by such companies with the registrar. Under the LLP Act, the names of the partners, statement of accounts and solvency and annual returns may be accessed by the public from the registrar upon payment of the applicable fees. Under the VCF Regulations, the disclosure of the identity of the investors by the PE or VC fund is not mandatory, unless specifically required by the SEBI. However, in their quarterly reports filed with the SEBI, PE or VC funds are required to disclose, inter alia, funds committed by the investors, capital contributed by the investors, categorisation of the investors (whether they are foreign venture capital investors (FVCIs), residents, non-residents, etc) and the sectors in which investments have been made by the PE or VC fund. Such information is not directly available to the public, unless the PE or VC fund is a listed entity.

Investors, as partners, will not be liable to any person as a result of any wrongful act or omission by the partners in the course of the business of the LLP or acting with the authority duly conferred upon such partners, and all such liabilities shall be incurred by the LLP. However, a partner is personally liable for any liability arising on account of fraudulent acts committed by such partner.
6 Fund managers fiduciary duties What are the fiduciary duties owed to a private equity fund formed in your jurisdiction and its third-party investors by that funds manager (or other similar control party or fiduciary) under the laws of your jurisdiction, and to what extent can those fiduciary duties be modified by agreement of the parties?

Trusts

The Trusts Act imposes on the trustees (the fund manager) the duty of administering the trust on the initial instructions of the author or settlor and in the best interests of the beneficiaries. Trustees, in addition to having a fiduciary duty towards the beneficiaries (the investors), are required to treat the trust property as if it were their own and deal with such trust property as a reasonable person would. The trustees are severally liable under the Trusts Act for breach of such duties.

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Companies

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investor governance rights on matters such as removal of the manager or early termination of the vehicle, and limitations on the number of investors, are usually governed by the contribution agreement between the PE or VC fund and the investors. Investments and profits earned in India may be freely repatriated by foreign investors, except where such repatriation is specifically locked in, such as foreign investments in construction and development projects and the defence sector. Further, shares of an Indian company may be transferred by a resident to a non-resident, or vice versa, subject to the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and the regulations framed thereunder. As regards regulatory restrictions: under the Companies Act, there is no restriction on the number of shareholders of a public company and the shares of a public company are freely transferable. In contrast, the number of shareholders of a private company is limited to 50 and the shares of a private company are not freely transferrable; there is no limit on the number of beneficiaries of a trust; and there is no limit on the number of partners in an LLP. There are no specific provisions for conversion of either a trust into a company or LLP or vice versa, or the conversion of an LLP to a company. Further, there are no provisions that permit redomiciling of trusts and companies in India. The LLP Act permits the conversion of companies into LLPs. Further, the LLP Act also permits the redomiciling of foreign LLPs by filing certain documents with the jurisdictional registrar, including the LLP agreement. Modifications to the LLP agreement of such foreign LLP would be required only to the extent that such agreement is inconsistent with Indian laws.
9 Fund sponsor bankruptcy or change of control With respect to institutional sponsors of private equity funds organised in your jurisdiction, what are some of the primary legal and regulatory consequences and other key issues for the private equity fund and its general partner and investment adviser arising out of a bankruptcy, insolvency, change of control, restructuring or similar transaction of the private equity funds sponsor?

FUND FORMATION

In the case of companies and LLPs, the directors and the partners (persons managing the PE or VC fund, respectively) have, inter alia, a fiduciary duty to act in the best interests of the company and LLP, respectively. Directors must act honestly, without negligence and in good faith in the bona fide interest of the company. They must show more than ordinary care towards the shareholders, and act as a person of similar skills and expertise would do.
SEBI Regulations

In accordance with the SEBI (Intermediaries) Regulations, 2008 (Intermediaries Regulations) and the SEBI (Portfolio Managers) Regulations, 1993 (Portfolio Managers Regulations), intermediaries, including portfolio managers, are required to follow the code of conduct prescribed, which, inter alia, requires them to: act in a fiduciary capacity with regard to the clients funds; make all efforts to protect the interests of investors and render the best possible advice to their clients, having regard to the clients needs and his or her own professional skills; and ensure that they and their key management personnel, employees, contractors and agents shall, in the conduct of their business, observe high standards of integrity, dignity, fairness, ethics and professionalism. Any breach of this code of conduct renders the intermediary liable under the applicable provisions of the Intermediaries Regulations, Portfolio Managers Regulations and the SEBI Act, under which every officer in default shall be liable to a fine, imprisonment, or both. Modification of the duties of trustees, directors, partners and portfolio managers is permissible to the extent that such modifications are not contrary to law. Please see question 10 regarding definitions of intermediaries and portfolio managers.
7 Gross negligence Does your jurisdiction recognise a gross negligence (as opposed to ordinary negligence) standard of liability applicable to the management of a private equity fund?

While Indian tort law does not specifically recognise gross negligence as opposed to ordinary negligence, it does recognise varied degrees of negligence. The degree of duty of care attributable is that of an ordinary and reasonable prudent person, except in cases where a person holds himself or herself out as being specifically competent to do things requiring professional skill; in such event, he or she will be held liable for negligence if he or she fails to exhibit the care and skill of one ordinarily an expert in that business. Indian contract law would apply in cases where the relationship between a PE or VC fund and its (independent) fund manager is contractual. The agreement with the fund manager will typically provide for liquidated damages payable to the PE or VC fund in the event of breach by the fund manager of its duties, including negligent acts of the fund manager. Indian contract law recognises liquidated damages stipulated in contracts to be a reasonable and genuine estimate of the compensation payable for a breach of a contract, and such liquidated damages will be payable irrespective of the degree of negligence.
8 Other special issues or requirements Are there any other special issues or requirements particular to private equity fund vehicles formed in your jurisdiction? Is conversion or redomiciling to vehicles in your jurisdiction permitted? If so, in converting or redomiciling limited partnerships formed in other jurisdictions into limited partnerships in your jurisdiction, what are the most material terms that typically must be modified?

Bankruptcy or insolvency, change of control, restructuring or similar transactions will not result in the automatic dissolution of the PE or VC fund, or its fund manager or investment adviser. The VCF Regulations provide that a fund may be wound up, inter alia, if the trustees and directors (which may or may not be in consultation with the fund manager) are of the view that it is in the best interests of the investors to wind up the fund; or if 75 per cent of the investors pass a resolution at a meeting of the unit holders to wind up the scheme. In the event of such winding-up, the VCF Regulations provide that the assets of the scheme or fund shall be liquidated, and the proceeds accruing to investors shall be distributed to them subject to satisfying the liabilities of the PE or VC fund. Contribution agreements may also structure such events as events of default attracting consequences under such contribution agreements.
Regulation, licensing and registration
10 Principal regulatory bodies What are the principal regulatory bodies that would have authority over a private equity fund and its manager in your jurisdiction, and what are the audit and inspection rights available to those regulators?

Restrictions on transfers and withdrawals, restrictions on operations generally, modifications to ensure fiscal transparency, special
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The SEBI is the principal regulatory body regulating PE or VC funds. Further, the SEBI also regulates fund managers who fall within the definition of portfolio managers under the Portfolio Managers Regulations, ie, any person who advises its client or manages or administers the funds of client with respect to investment of such funds in listed securities. Intermediaries are all intermediaries regulated by

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the SEBI, including portfolio managers, but excluding venture capital funds and FVCIs. Under the VCF Regulations, the SEBI (Foreign Venture Capital Investor) Regulations, 2000 (FVCI Regulations) and the Intermediaries Regulations, the SEBI has the power to call for any information, at any time, from PE or VC funds, FVCIs or intermediaries, as the case may be, with respect to any matter relating to any of their respective activities. Further, under the aforesaid regulations, the SEBI has been conferred the right to, suo moto or on the receipt of information or complaint, inspect or investigate the conduct of affairs of PE or VC funds, FVCIs and intermediaries for the following reasons: to ensure that the books of account and all records are being maintained in accordance with the applicable regulations; to inspect complaints received from investors, clients or any other person having a bearing on the activities of the PE or VC fund, FVCI, intermediaries and portfolio managers, as the case may be; to ascertain compliance with the SEBI Act and the applicable regulations; and to inspect or investigate suo moto into the affairs of a PE or VC fund, FVCI and intermediaries, as the case may be, in the interest of the securities market or the investors.
11 Governmental requirements What are the governmental approval, licensing or registration requirements applicable to a private equity fund in your jurisdiction? Does it make a difference whether there are significant investment activities in your jurisdiction?

Narasappa, Doraswamy & Raja

intermediaries and prescribe the obligations, procedure and limitations insofar as the common requirements are concerned. The term intermediaries includes trustees of trust deeds, investment advisers and portfolio managers associated with the securities market (ie, listed securities) in any way but excludes, inter alia, PE or VC funds and FVCIs. The SEBI had introduced a draft of the SEBI (Investment Advisers) Regulations, 2007 with a view to regulate investment advisers. However, these have not yet come into force.
13 Fund manager requirements Are there any specific qualifications or other requirements imposed on a private equity funds manager, or any of its officers, directors or control persons, in your jurisdiction?

There are no legal or regulatory differences between private equity funds and venture capital funds, and the VCF Regulations and FVCI Regulations seek to regulate all PE or VC funds irrespective of such difference in their nomenclature. Consequently, trusts, companies and LLPs desirous of establishing a private equity fund are required to register themselves with the SEBI as venture capital funds to undertake private equity and venture capital activities, irrespective of whether the investment is a significant investment or not. The minimum contribution required to be made by investors to a registered fund is 500,000 rupees. Further, each scheme or fund set up by a registered PE or VC fund shall have a firm commitment from the investors for a contribution of at least 50 million rupees before the start of operations. The application process includes making an application in the prescribed form along with the submission by the proposed fund of its incorporation documents, the duly registered trust deed in the case of trusts or the appropriate government approval in the case of bodies corporate such as LLPs, as the case may be, which contain a clear indication of the main objects, purposes for which the funds may not be put to use and information pertaining to the directors, trustees and partners, as applicable, and such other information as may be required by the SEBI. Currently, the application fee payable to the SEBI is 100,000 rupees and the registration fee payable is 1 million rupees.
12 Registration of investment adviser Is a private equity funds manager, or any of its officers, directors or control persons, required to register as an investment adviser in your jurisdiction?

There are no specific qualifications or other requirements of fund managers of PE or VC funds that are not investing in listed companies. However, a portfolio manager, under the Portfolio Managers Regulations, is required to have a net worth of at least 20 million rupees. Further, the SEBI, while considering applications for registration under the Intermediaries Regulations read with the Portfolio Managers Regulations, will consider certain factors, including whether: the applicant has the necessary infrastructure such as office space, equipment and manpower to effectively discharge its activities; the principal officer (an individual who has been designated in the application as such) of the applicant has either a professional qualification in finance, law, accountancy or business management from a university or institution recognised by the Central/ State Government or a foreign university, or experience of at least 10 years in related activities in the securities market, including as a portfolio manager, stock broker or fund manager; the applicant has in its employment a minimum of two persons who, between them, have at least five years of experience in related activities in portfolio management or stock-broking or investment management, or in the areas related to fund management; and the applicant is a fit and proper person, which includes, inter alia, integrity, reputation and character, absence of convictions and restraint orders and competence, including financial solvency and net worth.
14 Political contributions Describe any rules or policies of public pension plans or other governmental entities in your jurisdiction that restrict, or require disclosure of, political contributions by a private equity funds manager or investment adviser or their employees.

Investment advisers and fund managers of PE or VC funds are not required to be registered with the SEBI, except where the fund manager qualifies as a portfolio manager. Where the fund manager falls within the definition of portfolio manager, such fund manager would have to be registered with the SEBI in accordance with the Intermediaries Regulations. The Intermediaries Regulations seek to consolidate the common requirements (including registration, fees, general obligations, inspection rights and code of conduct) under the various SEBI regulations and is a comprehensive set of regulations that apply to all

Under the Companies Act, companies, other than government companies and companies that have been in existence for less than three financial years, may make political contributions in one financial year of any amount not exceeding 5 per cent of the average of its net profits in three preceding financial years to be calculated in accordance with the provisions of the Companies Act. Such contributions may be made to a political party registered under the Representation of the People Act, 1951 or for political reasons to any person. Companies are required to comply with accompanying disclosure obligations pertaining to such contributions, including a disclosure of all such political contributions in the companys profit and loss account, giving particulars of the total amount contributed and the name of the political party to which such amount was contributed. Further, in terms of the Foreign Contribution (Regulation) Act, 1976 (FCRA), inter alia, political parties and candidates for elections are prohibited from receiving foreign contributions, which refers to any donations, transfer or delivery made by any foreign source of articles (excluding gifts) whose market value exceeds 1,000 rupees,
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Indian or foreign currency and any foreign security. A foreign source is defined in the FCRA to include: a foreign company or a company that is a subsidiary of a foreign company or a multinational corporation; a company (as defined in the Companies Act) if more than one half of the nominal share capital of such a company is held either singly or in aggregate by: a government of a foreign country or territory; citizens of a foreign country or territory; trusts, societies and other associations (whether incorporated or not) registered in a foreign country or territory; or corporations incorporated in a foreign country or territory; and foreign trusts or foreign foundations, citizens of foreign countries, societies, clubs or other association of individuals.
15 Use of intermediaries Describe any rules or policies of public pension plans or other governmental entities in your jurisdiction that restrict, or require disclosure by a private equity funds manager or investment adviser of, the engagement of placement agents, lobbyists or other intermediaries in the marketing of the fund to public pension plans and other governmental entities.

INDIA
tax pass through status under section 115U of the IT Act, ie, the investors in the PE or VC funds are directly taxed on any income distributed by the PE or VC funds as though the investors have made direct investments in the portfolio companies. However, such tax pass through status is only applicable with respect to investments made by the PE or VC fund in certain specific sectors (such as nanotechnology, information technology relating to hardware and software development, seed research and development, biotechnology, research and development of new chemical entities in the pharmaceuticals sector, production of bio-fuels, the building and operating of certain hotel and convention centres with a seating capacity of more than 3,000 persons, the dairy and poultry industries or the development, operation and maintenance of certain infrastructure facilities). Further, in accordance with the IT Act, trustees are representative assessees of the beneficiaries (investors) and, consequently, income tax under the IT Act is levied on and recovered from the trustees of a PE or VC fund. However, the trustees are also entitled to recover such taxes paid from the beneficiaries (investors). Capital gains earned on the transfer of shares or other listed securities held for a period of 12 months or less are termed short-term capital gains and those held for more than 12 months are termed long-term capital gains. Capital gains tax levied on the transfer of listed and unlisted securities would depend, inter alia, on whether the gains are short-term or long-term capital gains, whether the investor is an Indian resident or a non-resident and whether or not such shares or securities are listed. Dividends earned from investments made in portfolio companies are exempt from tax in India. However, portfolio companies distributing dividends shall subject to a dividend distribution tax of approximately 16.609 per cent (including surcharges and cesses). PE or VC funds are exempt from withholding tax in respect of dividends distributed to their investors.
18 Local taxation of non-resident investors Would non-resident investors in a private equity fund be subject to taxation or return-filing requirements in your jurisdiction?

FUND FORMATION

Apart from the general disclosure obligations (to clients) under the Intermediaries Regulations and the Portfolio Managers Regulations, there is no specific law pertaining to the engagement of intermediaries for marketing funds to public pension plans and other governmental entities. Typically, such marketing engagements are governed by the contract between the investment adviser or fund manager and the client.
16 Bank participation Describe any legal or regulatory developments emerging from the 2008 financial crisis that specifically affect banks with respect to investing in or sponsoring private equity funds.

There are no specific regulatory developments emerging from the 2008 financial crisis, as the Indian banking system in India remained largely unaffected by it. Banks are generally subject to investment exposure norms (this includes investment in shares and debentures) prescribed from time to time by the banking regulator, the Reserve Bank of India (RBI). In terms of the Banking Regulation Act, 1949, no banking company shall hold shares in any company, whether as pledgee, mortgagee or absolute owner, of an amount exceeding 30 per cent of the paid-up share capital of that company or 30 per cent of its own paid-up share capital and reserves, whichever is less. Further, the aggregate exposure of a bank (including its subsidiaries) to the capital markets in all forms should not exceed 40 per cent of its net worth as on 31 March of the previous year. Within this overall ceiling, the banks direct investment in shares, convertible bonds or debentures, units of equity-oriented mutual funds and all exposures to venture capital funds should not exceed 20 per cent of its net worth.
Taxation
17 Tax obligations Would a private equity fund vehicle formed in your jurisdiction be subject to taxation there with respect to its income or gains? Would the fund be required to withhold taxes with respect to distributions to investors? Please describe what conditions, if any, apply to a private equity fund to qualify for applicable tax exemptions.

Non-residents and FVCIs are not entitled to any tax exemptions and are taxable on their income received, accrued or deemed to have been accrued or received in India, which would include dividends, interest and capital gains. However, if the non-resident or FVCI is an entity incorporated in a country with which India has signed a double taxation avoidance treaty (DTAA) then, in terms of section 90(2) of the IT Act, the non-resident or FVCI is required to pay tax in accordance with the IT Act to the extent that such tax is more beneficial to the non-resident or FVCI than the tax payable under the DTAA.
19 Local tax authority ruling Is it necessary or desirable to obtain a ruling from local tax authorities with respect to the tax treatment of a private equity fund vehicle formed in your jurisdiction? Are there any special tax rules relating to investors that are residents of your jurisdiction?

While advance tax rulings are not always necessary, such rulings are desirable since they provide certainty regarding the tax consequences of a particular transaction and assist particularly non-residents and FVCIs in structuring their investments in India. In some cases, posttransaction rulings are also obtained to expedite the assessment process. Tax rulings are binding only on the applicant and the tax authorities and only for the transaction pertaining to which the ruling is sought.

PE or VC funds registered with the SEBI, whether established as a trust or company, are entitled to tax exemptions under section 10(23FB) of the Income Tax Act, 1961 (IT Act) and have been accorded a

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Update and trends

The SEBI had introduced draft regulations called the Draft SEBI (Investment Adviser) Regulations, 2007, which sought to regulate persons not registered with the SEBI and rendering investment advice to specific clients without having any formal contract and without having discretion over and custody of client assets, including: entities that call themselves financial or investment consultants or advisers who are engaged in distribution of retail financial products; banks, certified financial planners, chartered accountants, tax consultants, etc; and entities not registered with the SEBI and rendering investment advice on publicly accessible media like television, newspapers, radio, internet, mobile phone services, etc. While the SEBI is particularly keen about regulating wealth managers under the Investment Advisers Regulations the new law, if enacted, will require the registration and regulation of all persons rendering investment advisory services to PE or VC funds pertaining to listed securities. It is also pertinent to note that the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India has recently issued a discussion paper soliciting views on whether foreign direct investment into LLPs should be permitted. If the government does indeed permit foreign direct investment in LLPs, there could be some favourable changes to the taxation structure of LLPs by according them a tax pass through status (as in the case of PE or VC funds set up as trusts or companies).

20 Organisational taxes Must any significant organisational taxes be paid with respect to private equity funds organised in your jurisdiction?

Selling restrictions and investors generally

24 Legal and regulatory restrictions Describe the principal legal and regulatory restrictions on offers and sales of interests in private equity funds formed in your jurisdiction, including the type of investors to whom such funds (or private equity funds formed in other jurisdictions) may be offered without registration under applicable securities laws in your jurisdiction.

Appropriate stamp duty and registration charges will be levied on the initial corpus of the PE or VC fund in the case of funds set up as trusts. Further, as regards PE or VC funds incorporated as companies, appropriate incorporation fees will be payable to the registrar depending upon the authorised share capital with which the company is incorporated, and appropriate stamp duty would have to be paid on the incorporation documents.
21 Special tax considerations Please describe briefly what special tax considerations, if any, apply with respect to a private equity funds sponsor.

Management fees payable to a fund manager would attract service tax of 10.3 per cent (inclusive of surcharges and cesses) calculated on the gross amount charged by the service provider. Typically, such service tax is passed on to the recipient of the services (ie, the PE or VC fund). Further, carried interest would be taxed as any other income in the hands of the sponsor, in accordance with the IT Act.
22 Tax treaties Please list any relevant tax treaties to which your jurisdiction is a party and how such treaties apply to the fund vehicle.

India has signed over 80 DTAAs. As set out above, a non-resident or FVCI investor incorporated in a country with which India has signed a DTAA has the option of being taxed on any income accrued or received in India either in accordance with the DTAA or the IT Act, whichever is more beneficial. Most DTAAs provide that the business profits of a company resident in another country can be taxed in India only if such company has a permanent establishment in India.
23 Other significant tax issues Are there any other significant tax issues relating to private equity funds organised in your jurisdiction?

In addition to the above, there are many significant tax issues relating to PE or VC funds and their investors. This includes withholding tax levied on interest that accrues to a PE or VC fund on loans made to portfolio companies, which varies depending on whether the investor is an individual, corporate or foreign investor. Further, securities transaction tax is levied on transactions entered on a recognised stock exchange, which varies based on the kind of securities and their value.

In accordance with the VCF Regulations, PE or VC funds are permitted to raise monies from any investor, whether Indian, foreign or nonresident Indian, by way of issue of units. The minimum investment to be made by each investor is 500,000 rupees and a firm commitment is required from investors of not less than 50 million rupees before commencement of operations. While domestic investors may invest in PE or VC funds without registration, FVCIs (essentially foreign pooling vehicles) desirous of investing in PE or VC funds may do so subject to registering themselves as an FVCI with the SEBI in accordance with the FVCI Regulations and the RBI. A PE or VC fund may only raise funds through investments against private placement of its units. PE or VC funds are not permitted to issue any advertisement or document inviting offers from the public for subscription or purchase of its units. PE or VC funds may not invest more than 25 per cent of the corpus of the fund in one venture capital undertaking. PE or VC funds may invest the corpus of the fund in the following manner: at least 66.67 per cent of the investible funds shall be invested in unlisted equity shares or equity-linked instruments of venture capital undertakings; not more than 33.33 per cent of the investible funds may be invested by way of: an initial public offer of a venture capital undertaking whose shares are proposed to be listed; debt or debt instrument of a venture capital undertaking in which the PE or VC fund has made an investment by way equity; preferential allotment of shares of a listed company subject to a lock-in period of one year; equity shares or equity-linked instruments of financially weak companies (as defined in the VCF Regulations); and special purpose vehicles created by the PE or VC fund for the purposes of facilitating or promoting investment. Further, PE or VC funds are required to issue a placement memorandum that contains, inter alia, details of the investment strategy of the fund; key personnel; tax implications; period of maturity of the fund, if any; manner of distribution of benefits to the investors; details of the fund manager or asset management company, if any; the fees payable; and the investment strategy of the fund.

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25 Types of investor Describe any restrictions on the types of investors that may participate in private equity funds formed in your jurisdiction (other than those imposed by applicable securities laws described above).

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prior approval of the SEBI for continuing to act as an intermediary in the event of a change in status or constitution of the intermediary, including any change to such intermediarys managing director or whole-time director.
27 Licences and registrations Does your jurisdiction require that the person offering interests in a private equity fund have any licences or registrations?

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In terms of the Indian Governments Foreign Direct Investment Policy (FDI Policy), foreign direct investment into trusts (other than trusts registered with the SEBI under the VCF Regulations) and LLPs is not permitted without the prior permission of the RBI and the Foreign Investment Promotion Board (FIPB). Further, in accordance with the FDI Policy, overseas investors desirous of investing in funds in India, without the approval of the FIPB or the RBI, may do so subject to registering themselves with the SEBI as FVCIs, and may only invest in PE or VC funds registered with the SEBI. Any investment by overseas investors not registered as FVCIs may only be made pursuant to the approval of the FIPB and the RBI. It is pertinent to note that unincorporated entities or entities not registered under relevant statutes abroad (including unregistered trusts, partnerships and overseas corporate bodies) cannot make foreign direct investments in India.
26 Identity of investors Does your jurisdiction require any ongoing filings with, or notifications to, regulators regarding the identity of investors in private equity funds (including by virtue of transfers of fund interests) or regarding the change in the composition of ownership, management or control of the fund or the manager?

Other than registration of PE or VC funds, foreign investors as FVCIs and portfolio managers, there are no other licences or registrations required by persons offering interests in PE or VC funds.
28 Money laundering Describe any money laundering rules or other regulations applicable in your jurisdiction requiring due diligence, record keeping or disclosure of the identities of (or other related information about) the investors in a private equity fund or the individual members of the sponsor.

PE or VC funds are required to submit quarterly reports, in the prescribed format, to the SEBI, which include information pertaining to the total investments received by the PE or VC funds from domestic and overseas investors, the categories of investors (whether individuals, non-resident Indians, FVCI etc) and an industry-wise break-up of the total investments made by the VCFs in the relevant period. However, the identity of the investors of the PE or VC funds is not required to be disclosed as part of such reporting, except as may be specifically required by the SEBI. As part of the registration process under the FVCI Regulations, an applicant for FVCI status is required to disclose the names of the clients on whose behalf it proposes to invest in India. FVCIs are required to appoint domestic custodians who shall be responsible, inter alia, to furnish quarterly reports in the prescribed format to the SEBI. The reporting requirements pertain to the investments made by the FVCI (ie, whether in listed or unlisted companies) and an industry-wise break-up of such investments. There is no specific provision requiring disclosure of a change in the composition of ownership, management or control of the fund. As regards fund managers, the Intermediaries Regulations require all intermediaries (including portfolio managers) to obtain

India has enacted the Prevention of Money Laundering Act, 2002 (PML Act) in order to prevent money laundering (ie, directly or indirectly attempting to indulge or knowingly being involved in or assisting in any process or activity connected with the proceeds of crime and projecting it as untainted property). Under the PML Act and the rules framed thereunder (PML Rules), banks, financial institutions and all intermediaries (including trustees, fund managers and PE or VC funds) are required to maintain a record of all transactions and verify the identities of all clients. The PML Rules set out the documents required to be examined for the purposes of verifying the clients identity, and such requirements differ based on the whether the client is an individual, company, trust or body corporate. Further, banks, financial institutions and intermediaries are required to furnish monthly reports to the appropriate authority (established under the PML Act) containing the following information: all cash transactions of the value of more than 1 million rupees; all series of cash transactions integrally connected to each other that have been valued below 1 million rupees or its equivalent in foreign currency where such series of transactions have taken place within a month; all transactions involving receipts by non-profit organisations of a value of more than 1 million rupees or its equivalent in foreign currency; all cash transactions where forged or counterfeit currency notes or banknotes have been used as genuine or where any forgery of a valuable security or a document has taken place facilitating the transactions; and all suspicious transactions, whether or not made in cash.

Siddharth Raja Chitra Raghavan 8 Palace Road Cross 12th Main, Vasanthnagar Bangalore 560 052 India

siddharth@narasappa.com chitra@narasappa.com Tel: +91 80 4268 6029/30 Fax: +91 80 4268 6031 www.narasappa.com

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Exchange listing
29 Listing Are private equity funds able to list on a securities exchange in your jurisdiction and, if so, is this customary? What are the principal initial and ongoing requirements for listing? What are the advantages and disadvantages of a listing?

Narasappa, Doraswamy & Raja

30 Restriction on transfers of interests To what extent can a listed fund restrict transfers of its interests?

In terms of the VCF Regulations, PE or VC funds may list their units on any recognised stock exchange after the expiry of three years from the date of issuance of units by the PE or VC funds. The ability of PE or VC funds to list their units affords the investors of a fund an effective exit mechanism. However, only companies incorporated under the Companies Act are permitted to list equity shares and convertible instruments. Consequently, PE or VC funds established as trusts and LLPs would have to be converted to companies prior to such listing. The SEBI has issued the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations) in terms of which, inter alia: pricing of securities sought to be listed should be arrived at in consultation with the lead manager on the basis of certain parameters set out in the ICDR Regulations; promoters are required to hold a minimum of 20 per cent of the post-issue capital. The term promoter includes any person who is in overall control of the company and a person named in the prospectus as a promoter. Such minimum holding of promoters is locked in and cannot be disposed of for a period of three years; and the remaining pre-issue share capital, excluding the promoters minimum holding, is subject to a lock in of one year. However, shares held by FVCIs for a period of one year prior to the date of filing of the draft red herring prospectus with the SEBI are specifically excluded from this requirement.

Under the Companies Act, one of the fundamental features of a public company that sets it apart from private companies is that shares of a public company are freely transferable. In recent cases where parties have sought to enforce restrictions of pre-emptive rights and other restrictions on the transfer of shares of a public company, courts have held that any such restriction would be a fetter on the free transferability of shares of a public company, thereby deeming such restrictions illegal. Consequently, a listed fund may not restrict the transfer of its interests.
Participation in private equity transactions
31 Legal and regulatory restrictions Are funds formed in your jurisdiction subject to any legal or regulatory restrictions that affect their participation in private equity transactions or otherwise affect the structuring of private equity transactions completed inside or outside your jurisdiction?

Apart from what has already been set out above, it is pertinent to note that PE or VC funds registered with the SEBI may invest in equity and equity-linked instruments of offshore venture capital undertakings, subject to an overall limit of US$500 million and the prior approval of the SEBI. No permission from the RBI would be necessary in this regard.
32 Compensation and profit-sharing Describe any legal or regulatory issues that would affect the structuring of the sponsors compensation and profit-sharing arrangements with respect to the fund and, specifically, anything that could affect the sponsors ability to take management fees, transaction fees and a carried interest (or other form of profit share) from the fund.

There are no specific regulatory issues in this regard. Structuring of the sponsors compensation and profit-sharing arrangements, including management fees and transaction fees, are typically governed by the contribution agreement.

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