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December 24, 2005

Global telecom equipment makers looking at manufacturing in India

Businessworld has a cover story on how and why global telecom equipment firms are beginning to manufacture in India.
One of the driving factors behind this growing interest is, without a doubt, India's emergence as the fastest growing telecom market in the world (in absolute numbers, China still takes the cake). India got that distinction in early 2004 when its telecom market growth touched 67.73 per cent compared to 26.75 per cent for China, which it relegated to second place.

Equally significant has been the role played by Dayanidhi Maran, the Union minister for communications and information technology. Over the past 12 months, he has been hotfooting around the globe, and positioning India as a telecom manufacturing destination amongst investors.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

Bennett Coleman portfolio crosses 40

The tally of companies in which Bennett, Coleman & Co. (BCCL), the publishers of Times of India and Economic Times, has acquired stakes has crossed 40, according to a Businessworld article.



In fact, it has become one of the biggest portfolio investors with Rs 700 crore already deployed in a clutch of companies that will earn it a neat packet when they go for their IPOs. And it's still buying.


The article goes on to explain how BCCL's "private treaties" work:

In the portfolio investments, BCCL seems to be picking high-growth SMEs headed for IPOs. They need media space to build their brand and corporate image. BCCL, says Rajshekhar, is "helping emerging companies realise the power of advertising". He heads a division called 'private treaties'. The typical deal is a cash payment for a small equity stake, say, 5-10 per cent. The deal size varies from Rs 9 crore-100 crore. So far, BCCL is dipping into its considerable cash reserves of Rs 2,379 crore to strike these deals. This money is then spent by the investee company on buying media space in BCCL brands. In effect, the money comes back to BCCL. Plus, BCCL stands to make a stash when it exits. Nice accounting move. But why not get companies to advertise straightaway? Rajshekhar reckons these companies are in their growth phase and have other working capital priorities. To convince them about the power of advertising, private treaties works best.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

New Seed Funds: Right time, Right Place, Right Model

On Monday (Dec 19), I attended the soft launch of Mentor Partners, a unique technology-focused seed fund, in Bangalore. The firm plans to initially invest $1 million each in 10 product-focused companies in the IT and telecom space: around $500,000 as seed investment or "bridge loan" and the remaining as part of the first round investment along with other Venture Capital firms.

With two partners on the ground in Bangalore (Ravi Narayan who earlier co-founded Nextone Communications in the US and V.Prabhakar, a co-founder of Bangalore-based software testing services firm RelQ), Mentor Partners will help its investee companies get access to top companies in India, the US and other markets via its about 35 other members in its network. The network includes those who are either operating managers (like Vish Narayanan, Head of Telecom Operations at General Motors in Chicago) or "been there, done that" entrepreneurs (like Rosen Sharma who has founded several start-ups like Solidcore, VxTreme, Ensim, Stratum8 and Green Border).

While the number of entrepreneurs with good products ideas is growing rapidly in Bangalore and other cities, the bane of genuine early-stage investments in recent years has been lack of ability and willingness on the part of VCs to provide seed capital (a typical VC firm cannot invest less than $3 million) and more importantly, play a hands-on role in growing start-ups.

Mentor Partners plans to raise its corpus from high-net worth individuals and Silicon Valley venture firms. (Several Sand Hill Road firms have recently made similar investments into local VC firms in China. There are several reasons why it makes sense for Silicon Valley firms to make such indirect investments-despite the issues it create with respect to “double carry fees” for their own investors. For instance, they don’t have to prematurely invest in setting up a full-time team and office in these developing markets. Plus, they get proprietary deal flow for making follow-on investments.)

A key source of strength for Mentor Partners is that there are enough follow-on investors (including some two dozen Silicon Valley VC firms and strategic investors either already on the ground or very keen to invest in India) who can invest $3 million or more into their portfolio companies - when they are ready for it. Plus, as B.D.Goel, a member of the Mentor Partners network, points out, "success" for such a seed fund would be in validating the business models of their investee companies and helping them access name-brand investors as part of the first round. Mentor Partners will then rely on the follow on investors to take its investee companies to the next level, rather than having to hand-hold companies all the way to an exit. For entrepreneurs too, this is much better than having a larger fund invest $1-3 million when their products are still being built and then, just when they seem to be getting their marketing act together, start pushing towards a premature exit.

Mentor Partners' model-including its relatively small fund size and its unique partner network-is a welcome addition to the Startup-VC ecosystem in India. What's even better is that there are more similar seed funds that are either up and running or being raised. While Bangalore has seen the launch of the $3 million Erasmic Incubation Fund, Mumbai-based angel investor Mahesh Murthy has teamed up with Pravin Gandhi (a co-founder of Infinity Venture) to raise a $10 million fund to be called, well, “Seed Fund”.

Here's hoping that these seed funds-which are filling an increasingly obvious and large gap in the eco-system-will close their funds quickly and invest in creating some very exciting technology companies out of India in 2006.

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

December 10, 2005

What ails buyouts in India?

Why is it that despite several months of trying, large buyout funds have not been able to close any significant deals in India? The answer seems to be the lack of a strong “theme’ favoring deals in this segment, plus the inability to include leverage (debt) as part of buyout deals.

Industry experts believe that privatization-of both Central and regional government companies-in China will be a predominant theme that is set to accelerate buyout activity in that country. In India however, beyond the now-on-now-off privatization attempts as well some shedding of non-core businesses by old business houses, there is no dominant theme that favors buyout activity. "Partnering Indian companies wanting to acquire overseas is the only theme we see in India. Everything else is just opportunistic," said Anurag Mathur, Principal of CCMP Capital Asia (formerly JP Morgan Partners Asia), at a panel discussion on buyouts at the recent Asian Venture Capital Journal (AVCJ) forum in Mumbai. CCMP is looking at "control buyout deals with an equity ticket size of at least $100 million".

As part of the same panel, Puneet Bhatia, Managing Director of Newbridge Capital, pointed out how Australia has a booming market in buyouts, primarily due to the fact that the regulations in that country allow leverage. India also poses a problem it that it has a very limited universe of target companies that global buyout firms seek – typically, companies with over $200 million in revenues.

Manish Kejriwal, Managing Director of Temasek’s Indian operations, said he was focsing on building strong relationships with family owned businesses in India through its PE investment activities. He believes such relationships will help create buyout opportunities for Temasek from these groups in the long term.

Overall, the panelists agreed that given the strong growth in the Indian economy, we are set to witness several “growth buyouts” here. They expect to witness deals next year in the pharmaceuticals, automobile and auto components, banking and textiles industries. The action is also likely spill over into the cement and telecom industries.


Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.

December 03, 2005

Are India's listed cos. prepared for Clause 49?

Knowledge@Wharton has an article on how India's public companies must meet a January 1, 2006, deadline to comply with sweeping new corporate governance standards.

Extracts:

The reforms, ordained by the Securities and Exchange Board of India (SEBI), are laid out in amendments to Clause 49 of the companies' listing agreement with Indian stock exchanges, a section that pertains to corporate governance.

...Infosys pays its directors one of the highest annual retainers in India -- nearly $45,000 a year. In return, it demands a lot of its directors, including requiring them to participate in a peer review and an annual self-assessment of their contributions to the company.

...Harbir Singh says that one key area in which Indian companies generally lag the best international standards is in "the amount of disclosure of strategies and priorities" to shareholders. He attributes that to a corporate culture in which Indian chief executives have greater longevity and therefore wield more influence than their Western counterparts. A shorter tenure, or at least the fear of it, encourages more accountability. Singh also cites the relative lack of influence exerted by institutional shareholders. There just aren't that many yet.

..And what about that alleged shortage of candidates for independent directorships? Under the new Clause 49, one-third of the board must be composed of independent members if the chairman of the board is not also an executive of the company, and half of the board membership must be independent if the chairman is an executive. According to rough estimates, just the top 500 listed companies, with an average of nine members on their boards, will need to find 2,500 new board members. They would qualify as independent only if they have no material financial relationship with the company and were not employed by the company in the previous three years.

Godrej says he is not concerned about the lack of qualified people to fill the post of independent directors. A website has been set up to recruit independent directors. The effort has been sponsored jointly by the Bombay Stock Exchange, the National Stock Exchange and the Confederation of Indian Industry. It already has identified about 3,000 candidates, Godrej says, and "more are being listed each week."

Arun Natarajan is the Founder of Venture Intelligence India, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of Venture Intelligence India newsletters and reports.