Contributed by Ishani Chakrabarty, Symbiosis Law School, Pune
Private Equity (PE) Basics
The first step in a private equity deal would be to assemble potential investors interested in the desired company. This may prove to be the most difficult step as most companies are ambiguous with their decisions regarding whether they wish to contribute to the said Private Equity deal.
Once this step is completed, the next step would be to approach a banker. In most probability, the amount required to buy said company would be more than the accumulated sum from all the investors.
As soon as the investors have discussed upon the various aspects of the P.E., they must decide upon its execution.
What is Buying out in a PE Deal?
On acquisition of the desired company, they have the option of stripping it down completely and building it up from scratch. This process is called ‘buying out’ and may include employing new staff and selling off assets.
After a certain period of time, they have the option of selling the built company for a potential profit. This helps in repayment of any bank loans previously taken.
Growth of PE Deals
2018 was a record-setting year, with P.E. exits reaching $26 billion, almost equal to the value of exits in the previous three years combined. The sharp rise was mainly due to the mega deal of Walmart buying a controlling stake in Flipkart for $16 billion from investors including Tiger Global[1]. Other highlights include record deal value pushed by large investments, strong tech flow, and very large exits.[2]
Both Open Market Exits and P.E.-backed initial public offerings (IPOs) saw significant declines due to unstable stock markets. 2018 recorded $1.7 billion in open market exits across 56 deals- more than 70% decline by value and over 56% drop by volume.
A series of laws govern P.E. deals in India. The important laws include-
- The Companies Act, 2013: Where an investor approaches a company, questions regarding the procedure of the investment and in what manner rights can be granted to the investor come to surface. Depending on the manner as mutually agreed upon between the Company and the Investor, the P.E. Investment is made in a company. Accordingly, statutory compliances that the companies need are ascertained. These statutory compliances can further be subdivided into those which relate to a) the transaction related to the investment and b) other conditions precedents to the investment.[3]
- Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Where a Company is willing to raise funds through private placement of securities, the provisions of Section 42 need to be complied with. Private Placement means any offer of securities or invitation to subscribe to securities made to a group of persons selected by the company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42.
[1] 2018 was the best year for PE/VC exits in India: Report, livemint – https://www.livemint.com/Companies/c6DalEPnDt9bfW7xI0xiEI/2018-was-the-best-year-for-PEVC-exits-in-India-Report.html
[2] Private Equity in Asia-Pacific 2019, Bain & Company – https://www.bain.com/insights/apac-pe-2019-infographic/
[3] Private Equity in India: The Legal Perspective, Apurv Sardeshmukh, legallyindia – https://www.legallyindia.com/private-equity-unleashed/private-equity-in-india-the-legal-perspective-20180327-9205
