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February 28, 2007

Tax proposal 173 in Budget '07-08: Impact on Indian Private Equity

At the Venture Intelligence APEX'07 event, an executive from a Fund-of-Funds that invests in India-based Private Equity (PE) funds remarked that his firm did not find much incentive to invest in Indian Venture Capital (VC) firms - as against later-stage PE firms - unless there were some specific tax breaks for the former. While the Finance Minister was unable to attend the event himself, someone from the ministry seems to have heard the LP's remarks - at least, partially.

As PE and VC firms are considered pass through vehicles under SEBI regulations, they do not usually find a mention in the Indian government's budget. Which is why, I was taken by surprise when journalists started calling me for comments on the impact of the 2007-08 budget on the Indian PE industry.

Tax proposal 173 in Mr. Chidambaram's budget speech says the following:
Venture capital funds are a useful source of risk capital, especially for start-up ventures in the knowledge-intensive sectors. Since such funds enjoy a pass-through status, it is necessary to limit the tax benefit to investments made in truly deserving sectors. Accordingly, I propose to grant pass-through status to venture capital funds only in respect of investments in venture capital undertakings in biotechnology; information technology relating to hardware and software development; nanotechnology; seed research and development; research and development of new chemical entities in the pharmaceutical sector; dairy industry; poultry industry; and production of bio-fuels. In order to promote business tourism, I also propose to allow this benefit to venture capital funds that invest in hotel-cum-convention centres of a certain description and size.


The move has "sent out shock waves to the venture capital community", according to leading corporate law firm Nishith Desai Associates.

Extract from NDA's interpretation:
Currently, any income of a VCF set up to raise funds for investments in Venture Capital Undertakings (“VCUs”) is exempt from taxation. A VCU is defined as an Indian company, which is not listed on any stock exchange. With a view to restrict this tax exemption only to certain truly deserving sectors, the exemption shall now be available only to income from Indian unlisted companies engaged in the (sectors named in the budget).

The changes in the VCF regime were not necessary as the investors paid tax on distribution received from the VCFs in any case. At least completed transactions should have been “grand-fathered” from these adverse changes. In most countries, venture capital investments are pooled into tax transparent entities. Absence of such tax transparent entities in India would make it challenging for the Indian companies to attract venture capital funding.

Let me now try and break up the impact by type of PE/VC firm:

Large foreign PE firms - like Warburg Pincus, Temasek, Citigroup, ChrysCapital, etc. - who invest in India as either FIIs/via their entities registered in Mauritius and are not registered with SEBI: NIL.

This is borne out by this extract from an Economic Times report:
Foreign funds, which are registered in Mauritius and only have an asset management arm in India, will remain unaffected from this restriction. “It does not impact us; it only impacts the domestic venture capital. The FM is concentrating on sunrise sectors since other sectors are already mature and have seen enough attention from big PE and VC players,” says Ajay Relan, managing partner, Citigroup Venture Capital International (CVCI).

Early-stage VC firms registered in India - like APIDC VC, SIDBI VC's IT-focused first fund, etc. - which invest in sectors named in the budget: NIL.

Other VC firms registered in India - including sector agnostic late-stage firms (like ICICI Venture and IIML) and growth-stage firms (like UTI Venture, Kotak PE, India Value Fund, etc.) as well as VC firms (including the early-stage focused GVFL and SIDBI VC's new SME Growth Fund) - that dabble in sectors beyond those named in the budget: Maximum irritation value.

More voices from the ET report which confirm this:
“It is an ill-advised move. The government has not understood the VC industry. Worldover, governments never interfere in VC funding. The move will kill industries in which pass-through status is not allowed, like BPOs. All global VCs are setting up funds in India. As this is applicable to only India-based funds, it will create a rift between foreign and domestic funds,” said Saurabh Srivastava, chairman of Indian Venture Capital Association.

“The incentive to register in India as a VC fund is lost,” says Nitin Deshmukh, head (private equity), Kotak Mahindra Bank.

These firms typically have several investments in sectors that have been deemed as "desirable" (for continuing to grant pass-through status) by the FM. But, they also have quite a few investments in new growth sectors like Auto Components manufacturing, Textiles & Garments, Retail, etc.

Here are some (potential and real) irritants that these players will have to ponder:

1. When we create new funds in the future, do we create different vehicles to invest in those sectors that enjoy pass-through status and separate ones for "other" sectors? How will the LPs react?

2. What about our existing investments? How will our existing funds - which have mixed investments - be treated?

According to a report in the new business paper, The Mint, "Caught off guard by the announcement, venture capitalists call the change an exercise in futility." "The VC industry cannot be restricted to certain sectors, risk capital must flow to any start-up that has promise,” Vishnu Varshney, Managing Director of Gujarat Venture Fund, says in the report.

From a macro-perspective, what is this FM signalling? According to the ET report, the government wants to disincentivise funds from foraying into areas away from the "desirable" sectors:
The government has rapped the domestic venture capital and PE funds registered with the Securities and Exchange Board of India (Sebi) on their knuckles for trying to behave in an ‘opportunistic’ manner.

The FM is clear about punishing funds which are registered with Sebi, but has not touched foreign funds at all. Domestic funds like ICICI Venture, Gujarat Venture Capital, IL&FS VC Fund, Kotak VC Fund and IDFC Private Equity could get affected.

But I'm not convinced. Why would the Indian government want to irritate domestic firms like SIDBI Venture, GVFL, UTI Venture, ICICI Venture, IIML, etc. - some of which were actually floated by government-sponsored institutions and let foreign funds get away without any impact?

Let me now wear my thinking/speculation hat and see if there are other answers.

Maybe the answer lies offshore and its true impact will be felt down the line when the double taxation treaty with Mauritius comes up for review? To take this line of thought further, let us examine how the impact of the new rules will change if - hypothetically - Mauritius-based companies no longer enjoyed tax-free status in India.

Early-stage VC firms registered in India which invest in the "desirable" sectors: NIL.

Other VC firms registered in India that dabble in sectors beyond the "desirable" ones: Medium since they would, presumably, have had time to restructure their investment vehicles to invest differently in the "desirable" and other sectors.

Large foreign PE firms who are not registered with SEBI: Maximum Impact. These firms will have to begin paying tax in India. If they register, they would get tax exemption as long as they invest in the "desirable" sectors.

Hmmm...kind of makes sense, right?

Anyways, time will tell.



Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 25, 2007

Will the $6-B Novelis buyout drag down Hindalco?

Announced as it was between the $10 billion plus Vodafone-Hutch and Tata-Corus deals, the Birla Group's $6 billion offer for Canada-based aluminium-rolled products maker Novelis has not received much attention. Businessworld however has a critical analysis of the deal.
There are two parts to the deal. First, Hindalco is to buy 100 per cent of Novelis equity at $44.93 per share. That adds up to almost $3.6 billion...With a debt-equity ratio of 7.23:1, (Novelis) can’t borrow any more. So, the Birlas were unable to do a leverage buyout. To buy the $3.6 billion worth of Novelis’s equity, Hindalco is now borrowing almost $2.85 billion (of the balance, $300 million is being raised as debt from group companies and $450 million is being mobilised from its cash reserves). “We estimate the interest costs on this $2.85 billion will be between Rs 700 crore-800 crore,” says Uberoi. That is almost a third of the Rs 2,500 crore net profit Hindalco may post in 2006-07. (It has reported a net profit of Rs 1,843 crore for the first three quarters of this year.)

...The second big concern is Novelis’s valuation. Analysts believe the Birlas are paying too high a price for a company that incurred a loss of $170 million for the nine months ended 30 September 2006. In its latest guidance, the Novelis management has indicated a loss of $240 million-285 million for the whole of 2006. Even in 2005, when Novelis had made a $90-million net profit, its share prices never crossed $30. So, why is Hindalco paying $44.93 a share for a loss-making company?

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Second time lucky?

Business Today article on how companies like Morepen Laboratories, Himachal Futuristic Communications (HFCL), Pentamedia Graphics and Silverline Technologies - that had "climbed meteoric heights on the bourses and then come crashing down" - are now resurrecting.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

India's new gas pipeline policy

Business Today has an article on the new gas pipeline policy.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

More on Marketing to Rural India

Business Today has an in depth article on rural marketing.
India's rural population, at 742 million-larger than the population of the EU and the US put together-lives in six lakh-plus villages. A lakh of these hold 50 per cent of the rural population and 60 per cent of its total wealth. Clearly, the fortune for marketers may be at the bottom of the pyramid but-with due apologies to C.K. Prahalad-the wealth in rural India, as Kashyap points out, is at the top of the pyramid and not at the bottom.

The upshot? Roughly 320 million of the population residing in five lakh villages are not target customers for marketers, simply because it isn't viable to cater to them. Most of these villages, like Horapalli, have a population of less than 2,000, and every marketer's mojo -'critical mass'-is tough to attain. As Ali Harris, Britannia's Brand Manager for Tiger Biscuits, says: "If I go to a shop in Mumbai, I will sell Rs 5,000 worth of stock and my cost to reach that outlet is next to nothing. If I need to reach an interior village, I would have to hire a van from the nearest town, and then probably sell Rs 50 worth of stock in the village."

The other reason for brands not being able to penetrate the rural boondocks has got to do with the sheer physical effort involved. According to a nationwide survey conducted by consultants McKinsey & Co, of 593 rural districts, 248 are "deprived" and lack basic infrastructure like all-weather roads.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 24, 2007

The Subhiksha Story

Rediff.com has an interview with R.Subramanian, an IIT and IIM grad who is the Founder & CEO of discount retail chain Subhiksha which is today India's largest organized retail chain with over 500 stores.
We allocated a Rs 5 crore (Rs 50 million) corpus to it and entered the retail business. There was a lot of thought process behind it. We wanted to attract not the top end customer but the aam aadmi.

From our research of three months, we found that consumers prefer buying groceries from closer home. So, we decided to set up 1,000 sq ft shops all across the city and not a 10,000 sq ft big store at one location in Chennai.

The next question was why would he come to our store abandoning the existing store? It had to be the price, because ultimately there is no difference between the branded products like say Boost or Surf or such things. So, we decided to sell branded products at a lower price.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 20, 2007

VC Market - Feb 21, 2007

The following companies are seeking capital for starting-up / expanding their operations:

07-02-21-1: Real Estate firm is looking for Rs. 10 crores (about $2.2 million) for setting up an IT Park and Integrated Township in Kolhapur, MH and a Group Housing Scheme in Nipani, Karnataka.

07-02-21-2: Bangalore-based software firm requires $2 million for implementing smart card-based solution for corporate reimbursements (for employee medical, restaurant bills, etc.)

07-02-21-3: California, USA- and Delhi, India-based Accounting BPO company - currently supporting over 100 accounting firms – seeks expansion capital.

07-02-14-4: Kolkata-based Yellow Pages publisher seeks $100,000 - $1,000,000

07-02-21-5: Delhi-based startup focused content repurposing in Integrated Digital Secure Environment seeks $100,000 - $1,000,000.

For more information about any of these companies, investors can email the company code to vcmarket@ventureintelligence.in

Are you an entrepreneur seeking capital? List your company in the Venture Intelligence VC Market using the form here

February 19, 2007

Why JP Morgan's distressed asset fund is in India

Economic Times has an interview with Sanjai Vohra is the managing director for JP Morgan Chase’s Asia special situations group.

Why is there a sudden interest in the NPL space? Does it have anything to do with the ongoing real estate boom?
I don’t think so, because NPLs should be viewed as a different asset class. They offer investors a different risk-return spectrum and not everyone can conduct this business. Specialised skill sets are required to manage an NPL portfolio.

More than underlying asset play, which is basically an effort to generate returns through foreclosures, the current buoyancy is a function of the changed regulatory environment.

Today, with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFESI) Act and the Asset Reconstruction Companies (ARC) Act, things are better and businesses are simplified to a great extent.

Moreover, banks are recognising that with strong credit growth, it probably makes more sense to leave NPLs to the specialists and focus on the business of making advances. In other words, banks are playing to their strengths.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 18, 2007

VC investing in Internet-based Services and Mobile VAS

Venture Intelligence, the leading provider of research and networking services to the Private Equity and Venture Capital ecosystem in India, is organizing Internet & Mobile Connect, a roundtable event on Venture Capital investing in the Internet-based Services and Mobile Value Added Services sectors. The event will be held on March 15 in Mumbai.

The Online Services and Mobile VAS sectors have emerged as among the favorite sectors among Venture Capitalists, accounting for almost 50% of all VC investments in the IT & ITES industry. However, there are several significant challenges facing these sectors – including business models, valuations, quality of management, etc. In this context, leading VC investors and top executives from Online Services and Mobile VAS companies will come together at Venture Intelligence Internet & Mobile Connect to network, discuss and share best practices.

The key themes to be addressed include “Internet Businesses: Is the boom for real this time?”, “Mobile VAS: Time to look beyond Ring Tones and Wallpapers?” and “Raising & Leveraging Venture Capital”.

The panels at Internet & Mobile Connect feature discussions between investing and operating executives on the following issues:

• How are these sectors going to shape in the next few years?
• What are the business models that have worked in other markets? Will they work in India?
• What are some of the India-specific opportunities?
• How can investors differentiate the winners from the crowd?
• What are the challenges for investors in these sectors?
• Where are the exit opportunities?

The first panel consisting of experienced investors and entrepreneurs – including Alok Kejriwal of Contests2win.com, Ashish Gupta of Helion VC, Anurag Dod of Guruji.com and Avnish Bajaj of Matrix Partners - will discuss the opportunities and challenges before the Internet-based businesses in India. The second panel – including Sanjay Swamy of mChek, Sandeep Singhal of Nexus India Capital, Arvind Rao of OnMobile and Rajesh Sawhney of Reliance Entertainment - will discuss what the future holds for the Mobile VAS sector with a special focus on new business models. The final panel – including speakers like Nitish Mittersain of Nazara Tech, Probir Roy of Paymate and Ravi Adusumalli of SAIF Partners - will throw light on what VC investors are looking for from Internet-based Services and Mobile VAS companies and what it takes to be a VC-backed company in these sectors.

The event is targeted at executives from Venture Capital funds, Internet-based Services and Mobile VAS companies planning to raise VC financing, and related service providers. For more information about this event, Click Here or email info@ventureintelligence.in

Real Estate funds: How long will the boom sustain?

Businessworld had an article on the rash of Real Estate funds that have entered the market.
Click Here for a list of new RE funds in the market.

The pertinent question at this point is, how will this deluge of funds change the real estate sector? Kapoor says that institutional money will make the industry much more organised. Adds Mehta: “Funds coming to India look at appropriate and efficient routes.” He sees funds coming in larger quantities and possibly through these routes only. Funds have also started investing in infrastructure development as infrastructure is a constraint and may hamper growth of real estate to some extent. If opportunities are rightly identified, it will boost real estate. As Edelweiss’s Mathew says: “Private equity investments in real estate will also need to be complemented by investments in infrastructure creation. It should also support redevelopment of metros along with growth of tier-II and tier-III cities.”

Yet, experts say that the unabated rush of capital may not continue for long. As mentioned earlier, expected returns are currently high because demand for quality commercial space is outstripping supply. But current investments are being deployed in developing land, which will ultimately turn into actual supply in 2-3 years. Mathew says that once supply stabilises, investments in the sector will taper out.



Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Profile of Indo Shell Mould

Businessworld has a profile of Coimbatore-based auto components maker Indo Shell Mould, which recently raised funds from SIDBI Venture Capital.

The company, which hopes to close this fiscal with Rs 200 crore in revenues, attributes 40 per cent of them to two-wheeler castings, 30 per cent to hydraulic valve bodies, and the remainder to tier-1 clients such as Delphi, Piaggio, Audi and other high-end automobile makers. Its products find their way into cars, trucks, two-wheelers, refrigerators and sewing machines. The infrastructure boom has also helped Indo Shell, driving a strong demand for earth-moving equipment components — catered for by its hydraulic valve bodies. Today, the company churns out a staggering 3,500 tonnes of shell moulded ferrous castings per month; half the industry total of nearly 7,000 tonnes per month.

Balaji Jagadeesan, deputy managing director (commercial), Indo Shell Mould, saw just how much of an impact the move had: “Though the castings business is big, there are many players. So, we expanded to precision and hydraulic castings. The quality levels in the company have risen and this has helped increase sales and exports.” Almost 30 per cent of its products are exported to countries such as the US, Europe, Japan and even Brazil and China. All in all, this spread of products and customers has resulted in the company registering uninterrupted turnover growth in the past decade (see ‘Unstoppable Rise’).

This rising profile has not gone unnoticed. Small Industries Development Bank of India (SIDBI) venture capital took a stake for Rs 15.72 crore in this closely held unlisted company last year, unlocking funds to drive further expansion and growth.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 17, 2007

K@W on KPO

Knowledge@Wharton has an article on the Indian BPO industry's move towards higher value-added outsourcing services.

Some extracts:
In another corner of India's outsourcing industry, a much smaller firm created a niche "spot market" for knowledge services. Yet another Indian outsourcing service provider built a platform of expertise to provide patent-related legal resolution support services -- several notches above the patent writing functions that were considered high-end assignments until recently.

...Although 65% of India's 180,000 outsourcing services work force is involved in transaction-intensive services like call-center support or check processing, the industry as a whole helps its clients save $1.5 billion annually, according to a recent research paper, "Offshoring: Beyond Labor Cost Reduction," by the Boston Consulting Group (BCG).

Aron's third illustration of high-end KPO work is Pipal Research of Chicago, which was founded five years ago. The company employs about 100 analysts, with most of them based in New Delhi. Until recently, the bulk of its assignments came from equity research, fixed-income asset research and asset pricing-related work. A year ago, it carved out a division called PipalAnswers that functions like a "quasi spot- market for knowledge." These are essentially one-off assignments tailored to service occasional requirements of clients, unlike Office Tiger, which has dedicated long-term client relationships.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 13, 2007

VC Market - Feb 14, 2007

The following companies are seeking capital for starting-up / expanding their operations:

07-02-14-1: Chennai-based Mobile Technology company that provides Enterprise Data across multiple communication channels for enhancing productivity of mobile enterprise users seeks $5 million.

07-02-14-2: Hyderabad-based manufacturer of packaging materials, which already has established good relationships with a few consumers in USA, Europe and Australia with regular flow of orders, is looking for expansion capital.

07-02-14-3: Australia based entrepreneur plans to launch an online travel company - currently in development phase - in the current year (in Bangalore).

07-02-14-4: Mumbai-based entrepreneur who is aiming to create a premier Internet domain monetization/parking service which will help registrars and domain holders monetize their unused and expiring domains.

07-02-14-5: Delhi-based company that designs, develops, and manufactures RF, microwave, and digital communications systems and subsystems. The company specializes in helping international clients achieve quick market entry with custom hardware and software products.

For more information about any of these companies, investors can email the company code to vcmarket@ventureintelligence.in

Are you an entrepreneur seeking capital? List your company in the Venture Intelligence VC Market using the form here

February 12, 2007

Blackstone's $275-M investment in Ushodaya

Businessworld has more details on the Blackstone Group's mammoth $275 million (over Rs 1,200 crore) investment commitment - in return for a 26% stake - in Hyderabad-based, Ramoji Rao-promoted Ushodaya Enterprises (UEL).
UEL is a notoriously closed company and Rao was, till we last met him, a major opponent of foreign money in media. So, there is delicious irony in the fact that the Blackstone-Eenadu deal is, probably, the single largest media deal in India, so far. The last big one was the Rs 360 crore Reliance-Adlabs in 2005.

The Rs 752-crore (March 2006) Hyderabad-based UEL owns most of the Ramoji Group’s publishing business (the Telugu Eenadu and magazines), its 12 TV channels and Priya Foods (its pickle business). Ramoji Film City, however, is not a part of UEL.

Blackstone has a five-year horizon on the UEL investment and expects returns to be in the mid-20s. “It could take longer because India is an emerging market,” says Akhil Gupta, senior managing director and chairman, Blackstone India. He expects Eenadu to be a stepping stone to more deals in media. Blackstone started talking to UEL about six months ago because “they are very interested in the regional media story”, says G. Srinivas, company secretary, UEL. The company, he explains, will use the money for ‘consolidation and restructuring’, and expansion, including the acquisition of Usha Kiron Movies, its TV software production arm (ostensibly from Rao himself) by UEL. The ‘expansion’ bit for now will focus on TV, the business that Srinivas reckons is growing faster than print. On the print side, Eenadu has no plans of venturing out of Andhra Pradesh for now, says Srinivas.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Legal due diligence: What PE firms need to watch out for

In an article in The Economic Times, Nitin Potdar, partner atcorporate law firm J Sagar Associates, points out areas that Private Equity firms need to watch out for when dealing with Indian companies.
In order to avoid any surprises after the closing, it is critical that following broad process is followed while conducting due diligence. Firstly, the PE firms should hold discussions with the members of the financial, legal and technical team and set clear objectives and deliverables. Do not rely on the standard check list for documents; ask the team to modify the same to case specific needs. Share industry specific issues or special areas of concern right in the beginning with the team of lawyers.

Take stock, at regular intervals, from the team so that they remain focused all throughout. Importance should be given to a short executive summary of issues rather than a bulky dd-report. Most critically, make technical, financial and legal teams interact with each other so that they all are on same page.

A lot of business dealings may not have been documented (for example customers, supply from vendors) and hence it’s critical that discussions are organised between the advisors and the key management team and the conduct of business is understood correctly. Fortunately, because of internet a lot of information about the target company, its products, management, industry, competition, etc., is largely available and hence efforts should be made to collect all that is available and share across the teams.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

The New Indian Consumer

Business Today's 15 year anniversary issue has an feature on the changing consumer landscape in India.
Unarguably, the set of consumers that a Jaeger LeCoultre caters to is minuscule; of the total 1.1 billion population, only 8-10 million comprise India's richie rich with a household income in excess of $100,000 (Rs 45,00,000) a year. Yet, what is prompting marketers across the globe to pitch their tents in India is, one, the fact that even this is not a small number to cater to, and two, a new-found confidence that this group is only going to swell in the future. Indeed, close on the heels of this exclusive set is yet another band of some 50-60 million consumers, living mainly in the metros, whose average annual household income hovers between Rs 3 lakh and Rs 10 lakh and following them is a group of some 250 million consumers with an annual household income of around Rs 45,000-2 lakh; this group represents India's real middle class that mostly lives in the country's top 27 cities. Says Naresh Gupta, National Head (Account Planning), Grey Worldwide: "Our research shows that a majority of consumers in the metros are as global in their orientation as those at the top-end of the consumption cycle. They are exposed to the best global consumption culture and have no qualms about indulging themselves." Another report by the market research agency acNielsen says that the consumers living in towns beyond metros are also increasingly becoming open to the idea of consumption and a better lifestyle.

Put together, this set of people, which is loosely bunched together as the Indian middle class, has given immense fillip to the consumer culture in the country in the past two-to-three years. And marketers are hopeful that their enthusiasm will not abate in the future. "If the economy continues to grow at its current rate (India's GDP has grown over 6 per cent on average in the past one decade), and there is no reason why it should not, the breadth and the depth of the consuming class is only going to expand," says Rajeev Bakshi, the outgoing Chairman of PepsiCo India, adding: "The 50-60 million population of metros is going to double in the next five years and that, indeed, is a sizeable opportunity for most marketers across the globe." Agrees Rajan Mehra, Country Manager, eBay India: "Even with 100-150 million population, India will be a bigger market than Canada and Australia put together and hence, its attraction for marketers."

... The past two-to-three years, in fact, have been stupendous as is obvious from the following: television penetration in 2005 stood at 50 per cent (of these, more than 60 per cent were cable and satellite connections) of the total population as against 35 per cent in 2000, refrigerator penetration was 12 per cent last year as against 9.4 per cent, and a total of 12 per cent of the population had telephone connections in 2005 as against 6.5 in 2000. Also, the average age of home owners during this period came down from 40 years to 28-30 years. Today, there are around 130 million mobile phone users and the internet population stands at 40 million. Credit card penetration is still quite low at around 2 per cent, but it has grown 10 times between 2001 and 2005.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 04, 2007

Reliance Entertainment zips ahead with its gaming plans

Businessworld has a profile of Reliance Entertainment's aggressive plans for the gaming market.
The Rs 216.5-crore Indian gaming market is buzzing with action. The latest development has been the restructuring by the approximately Rs 16,000-crore Anil Dhirubhai Ambani Group (ADAG)-owned Reliance Entertainment (REL). The company’s Paradox Studios, set up in 2001, developed games only for Reliance mobile subscribers, who constituted about 15 per cent of the Indian mobile gaming users. As gaming options proliferated, there was a need to focus, so Paradox was shut down in September 2006. In the same month, REL floated Jump Games followed by Zapak Digital Entertainment in December, with focus on mobile and online gaming, respectively.

Rajesh Sawhney, president, REL, points to the 1:10:100:1,000 equation. What this means is, for every console-gamer, there would be 10 PC gamers, 100 online gamers and 1,000 mobile gamers. And therein lies the opportunity.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

What's next for microfinance?

Business Today has a special feature on the opportunities and challenges facing the microfinance sector in India.
Currently, there are about 800 MFIs and 22 lakh government-backed self-help groups (SHGs) that are the principal sources of microfinance. The latter is typically an informal association of 10-20 poor women who contribute small amounts into a savings pool. After saving regularly for six months, lending small amounts and maintaining accounts, an SHG becomes eligible to be 'linked' to a bank, which opens a savings bank account for the SHG and offers loans up to four times the group's savings. The SHG can then on-lend the money to its members, helping them to engage in some income generation activities. The MFIs, on the other hand, comprise a mélange of NGOs, NBFCs, Section 25 companies (which are treated as charities that cannot distribute profits to sponsors), and cooperatives (like SEWA in Gujarat). Unlike the SHGs, which tap funds from public sector banks, MFIs draw their capital mostly from private banks, SIDBI, and foreign investors. (Akula's SKS, for instance, has Silicon Valley venture capitalist, Vinod Khosla, as one of its investors.) Currently, the average loan size for an SHG is less than Rs 4,000 and for an MFI, about Rs 5,000.

... Clearly, there's a problem with the cost structure. And, unfortunately, a large part of the problem can be attributed to the absence of a proper regulatory framework. For instance, MFIs, unless they are mutual- or member-owned outfits, cannot collect savings as deposits, which are one of the cheapest sources of funds. Instead, they must depend on bank borrowings for lending onwards. Says SKS' Akula: "If we are allowed to take deposits, we would be able to slash the interest rates on our loans by about 5-6 per cent."

As a result, Indian MFIs have the highest financial expense ratio (8.5 per cent) in the world. So, how have the MFIs been able to grow at a furious pace? Thanks to private banks, which initially started lending to them to meet their priority sector obligations, but soon realised that microfinance could be a lucrative segment. Says J. S. Tomar, Managing Director of Varanasi-based Cashpor Micro Credit, which operates in eastern Uttar Pradesh and Bihar: "Banks see a huge market in micro-borrowers in rural areas because the urban markets are becoming increasingly competitive." (That also explains why VCs such as Hyderabad-based Bellwether, Mauritius-based Lok Capital and us-based Unitus Equity Fund are investing in MFIs.) ICICI Bank, for example, has funded more than 100 MFIs with an exposure of Rs 2,350 crore.



Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Second rung global banks make aggressive re-entry into India

Business Today has an article on how lesser known foreign banks like BNP Paribas and Barclays are making aggressive moves to expand their footprint in India.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Reliance Retail to partner kirana stores and microfinance instutions?

Business Today's cover story on the unfolding battle for organized retail between Reliance and the WalMart-Bharti combine, says Reliance is likely to strike partnerships with neighbourhood grocery stores and microfinance institutions.
Moving into neighbourhoods, of course, poses a problem. Zoning laws apart, good properties are hard to come by and there's always the neighbourhood store to compete with. But guess what? Reliance may not end up competing with the neighbourhood stores-at least, not those that are, say, 3,000 sq. ft big. Instead, such stores would want to become Reliance franchisees. Reason: better returns on investment. As the neighbourhood store stands today, it is severely disadvantaged: it doesn't have economies of scale, quality or great shopping environment, or a compelling product mix. Most of them don't handle fresh produce because the wastage is too high. Now, consider a scenario, where someone like Reliance comes in and says, "Mr Grocer, I'll double your return on investment, take the headache of supply chain and store management away from you, but let you sit at the till just like before because your social standing within your community is important to you." Which grocer, do you think, will say no to a proposition such as this one?

Stretching this analogy a bit, it may even be possible for someone like Reliance to turn kirana stores (250-300 sq. ft in size) into, say, regional cooperatives, where Reliance becomes their faceless supply chain manager for a fee. Happy Commies, happy Reliance. Jokes apart, at least for the next several years, India will continue to have consumers-especially in smaller towns-who are more comfortable shopping at kiranas rather than supermarkets. No wonder, then, Reliance is being approached by at least a couple of microfinance institutions (MFIs) to sell to the poorest of poor. Under this arrangement, Reliance won't be paid by its poor customers but by the MFIs, which in turn will recover the money from their clients-in installments. At one stroke, Reliance's retail plans will move to an entirely different level. Bharti-Wal-Mart, then, may have no choice but to follow suit or, indeed, do better.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

Manufacturing's comeback

Business Today's 15 year anniversary issue has an feature on the resurgence in Indian manufacturing.
The recession of the mid-90s followed. It was the worst of times. The doomsayers said Indian industry was going under. But displaying a resilience few thought it possessed, India Inc. invested heavily in modernising and upgrading capacities and on rationalising its bloated manpower. The process was painful, but the sector emerged from it leaner, meaner and fighting fit. Ravi Kant, MD, Tata Motors, remembers how the company cut almost Rs 2,000 crore in annual costs over a span of just a few years. "Our break-even point reduced from about 60 per cent capacity utilisation to 34-35 per cent," he says.

The tide has turned quite decisively. India Inc. is once again on a capacity expansion drive. So are several foreign companies (see Talking Big Bucks). And many Indian companies are aggressively eyeing overseas markets. What has caused this change? Liberalisation has, over a period of time, created an extremely robust and hungry-for-consumption domestic market. This is creating demand for manufactured products. Want proof? Look at the telecom sector. The total subscriber base crossed 180 million, and the country is adding an average of six million mobile subscribers every month. Result: there is a veritable boom in the associated manufacturing segments. Finnish telecom equipment company Nokia has invested $200 million (Rs 900 crore) on a mobile handset manufacturing unit here. Says Jukka Lehtela, Director (Operations), Nokia: "India is one of the fastest growing telecom markets in the world and it is, therefore, imperative for companies to be closer to the customers by being present in it." About 80 per cent of the output at the Nokia Telecom Park in Tamil Nadu is sold in India.

A thriving eco-system of suppliers and vendors is also helping manufacturing grow. Tata Motors, for example, outsources nearly 80 per cent of its mini-truck, the Ace. There are significant cost advantages as well. According to McKinsey, it is possible for a Fortune 500 company to manufacture products in India at about 70 per cent of the cost of a similar product in the US (see The India Edge). Tata Motors' Indica costs about 40 per cent less than what a comparable car developed in the West would have cost.


Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

List of rapidly growing sectors

The top 30 listed IT Services grew at 28.99% CAGR over the last three years. Guess what is the corresponding growth rate in the mining sector? How about 46.71%? Business Standard's special magazine section listing the top 2000 Indian companies has an interesting section on the mining and other sectors which have displayed scorching growth rates. Other sectors that outpaced IT, according to the listing, include Retail, Steel, Jewellery and Metals.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.

February 01, 2007

Beginning of the end of Bubble 2.0

When Rajesh Jain sold off his online property (IndiaWorld) for Rs.500 crores to Sify in late 1999, lots of folks took the deal as a sign of beginning of the great Internet boom. In hindsight, the deal proved to actually represent the end - with no one else making remotely close to that kind of money in the Indian Internet space. Now, it looks like Google's buyout of YouTube is a signal of end of the Web 2.0 hype cycle ("Bubble 2.0")

TheDeal.com reports how 2007 has begun to witness emergence if trouble at "some big-money Web 2.0 troubles" (as against the bootstrapped start-ups).
Online video startup Guba is apparently on the block after its CEO resigned last month, according to GigaOm. This comes after Accel and Benchmark-backed MetaCafe's M&A travails. Browster, a browser startup supported with $5.8 million in first round funding from Advanced Technology Ventures, Vanguard Ventures and First Round Capital, has shut its web site down and refused to explain why. Not usually a good sign. FilmLoop, a slideshow startup that raised $7 million in first round funding last year from ComVentures, Garage Technology Ventures and GlobeSpan Capital Partners, has cut staff after failing to find a buyer, according to TechCrunch.

Which startups are next to fail? Odds are good that any advertising-based Web 2.0 startup you name is a candidate.


Plus, as KPCB's Randy Komisar points out in his interview to Venturebeat, the firm is largely staying away from Web 2.0 companies.
Web 2.0 can get pretty speculative– where you throw a party, and if people come, you get Google to monetize it for you [with Google’s Adsense ads]. Every so often a YouTube happens, and that really stokes the fire – some would-be entrepreneurs get the impression, to quote Dire Straits, that the “money is for nothin, and the chicks for free”.

I’m looking for more fundamental innovations. I’m less interested in the content and media fallout. There are no strong barriers to entry in Web 2.0.

...I’m not sure how long YouTube would have remained an independent business had they not been bought by Google. Google has an efficient search engine to monetize large audiences. If you’re creating Web 2.0 products and media, its tough to build anything of sufficient scale to remain independent — you are more likely to end up being a feature on Google, Microsoft or Yahoo. Google bought YouTube because they’re interested in where people are spending time online, and because they didn’t want anyone else to buy it

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports.