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September 26, 2011

"Mistakes to Avoid in PE Fund Raising"

Extract from an Economic Times article by Manish Kanchan, Managing Director of SAGE Capital.
Very often we see entrepreneurs consulting with well wishers, old-time chartered accountants or their loyal CFOs during the deal-making process. Usually this is the first time anybody is dealing with private equity transactions and are therefore completely out of their depths. Sometimes, they are also insecure about their own future position in the company.

...Investment bankers are your allies. Choose them based on their track record of having closed similar transactions Ask for references and speak with them. Do not appoint them based on the valuation they promise you. Investment bankers do not sign the cheque. Once appointed, trust them and encourage them to provide you with honest feedback directly. The same applies for lawyers as well.

...The business plan must be realistic with a slight optimistic bias. It should also be linked to past performance. If the business has grown at 15% over last 3 years do not project it to grow at 60% suddenly after the deal closes. The fund managers seek to understand your thought process, how you assess risks, how you deal with competition, from where you will get people to manage the growth. The level of detail, correlation to industry growth rates, and honesty, will win respect and improve the chances of raising money.

... Do not sign the term sheet too readily. The term sheet lists out the key commercial terms and rights and obligations of each party. This is a nonbinding document which is typically subject to legal, financial, commercial due diligence and approval from the investment committee of the fund. This allows the fund to modify its offer (or sometimes walk away). However, clauses relating to exclusivity are binding on the promoter and the company. Exclusivity prevents the company from engaging in discussions with another investor usually for periods ranging from 90 to 120 days.


Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.

Profile of Online Jeweley Retailer CaratLane

Extract from The Economic Times profile of Carat-Lane
Online jewellery retail portal Carat-Lane aims to bypass the hiccups that have laid low a number of e-commerce players, by adopting a two-pronged strategy – building its own delivery network even as it increases the geographical footprint.

... Sacheti, who co-founded the company with Srinivas Gopalan in 2008, expects to service more than 100 cities in India by the end of the current financial year. The company expects to post revenue of . 100 crore for financial year 2011-12, a 50% rise from the previous fiscal's top-line numbers.CaratLane, which specialises in the sale of solitaires and diamonds, is now considering entering different product categories such as watches, to diversify its range, but only in a phased manner.

"We have sold more than 3,000 solitaires in 2010, which has led us to believe that sustainability of jewellery is much better than product categories of lower value," Sacheti said. The margins are better, he added, and the probability of success higher. "Once you aggregate your own inventory, you can catapult to the next phase."


Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.

September 21, 2011

Super Angels Pitch: Meracareerguide.com

Super Angels Pitch: Live Inbox

Deal Alert: Franklin Templeton PE invests Rs.45-Cr in Symbiotec Pharma

Edited excerpts from the Press Release:

Franklin Templeton Private Equity Strategy, a private equity portfolio advised by Darby Asia Investors (India) Limited, has invested Rs 45 crore in Symbiotec Pharmalab Limited.

Symbiotec is engaged in research, development, manufacturing and marketing of research based Active Pharmaceutical Ingredients (“API”s) for corticosteroids and hormones. It has an extensive product portfolio of over 40 corticosteroids and hormones APIs and supplies its products to leading pharmaceutical companies in India and overseas including marquee names such GSK Pharmaceuticals, Teva, Ranbaxy and Cipla. The funds raised from FTPES will be applied towards backward integration by setting up fermentation facilities which is expected to improve the Company’s competitive positioning and profitability. This also is expected to help the Company to attract customers from highly regulated markets such as US, Europe and Japan.

Systematix Capital Services Pvt. Ltd was the exclusive advisor to Symbiotec for this transaction.

Mr. Anil Satwani, Managing Director, Symbiotec Pharmalab Private Limited, said of the deal “We at Symbiotec, look forward to benefiting from Franklin Templeton’s global experience and achieving the common goal of transforming Symbiotec into an Integrated Steroids Solution provider to the global Pharmaceuticals industry”

Franklin Templeton Private Equity Strategy is a private equity investment product offered to high net worth individuals in India, and was established in 2008 with total capital commitments of Rs 6300 million (US$147 million). FTPES makes selective investments in high growth, mid-sized and unlisted Indian companies.

Darby is the private equity arm of Franklin Templeton Investments, and manages a range of private equity, mezzanine, and infrastructure funds in Asia, Latin America, and Central and Eastern Europe. Darby was founded in 1994 by The Honorable Nicholas F. Brady, who served as U.S. Secretary of the Treasury between 1988 and 1993. In 2003 Darby became a fully owned subsidiary of Franklin Resources, Inc. [NYSE:BEN], a global investment management organization operating as Franklin Templeton Investments.

Franklin Templeton Investments provides global and domestic investment management solutions managed by its Franklin, Templeton, Mutual Series, Fiduciary Trust, Darby and Bissett investment teams. The San Mateo, CA-based company has more than 60 years of investment experience and $716 billion in assets under management as of August 31, 2011.

September 16, 2011

Profile of software products firm CustomerXPs

Economic Times has a profile of the entrepreneurial story of Bangalore-based "Customer Experience Management" Software firm CustomerXPs.
Though the team was in place, it took us over a year to develop the first sample. By January 2008, we started taking feedback from prospective clients and realised that the product was becoming very complex. That's when we started interacting with Sharad Hegde, former Infosys chief technology officer, for his advice on simplifying the product. By mid-2008, he joined our firm as a consultant and also became an angel investor for CustomerXPs. He has invested about $1 million (Rs 4.6 crore) in the company.

Our deadline for earning the first revenue was August 2009, but we missed it because we couldn't close a deal. However, the silver lining was that we were upgrading our product, which was an ongoing process. Despite realising that selling software products is difficult in India — many such companies have been forced to change to software services firms within six months as revenues don't roll in — we were determined that our first inflow of funds should be licensed revenue from a reputed client.

At that time, international markets were a taboo since foreign travel would have increased our costs significantly. As a result, we became more negotiable and, finally, we earned our first revenue from India's largest private sector bank, ICICI Bank. It became our client in March 2010.

In January 2011, we raised our first round of venture capital funding from Singapore-based JAFCO Investment. None of us took a salary, or for that matter, a holiday, for the first three years and were managing on personal savings and investments. The austerity has finally paid off. Today, we employ 60 people and operate from a 5,000 sq ft office at JP Nagar (leased for Rs 1.5 lakh). Currently, we only have ICICI Bank as a client, but we are looking forward to closing deals with about 4-6 more banks by the end of the year.


Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.

September 15, 2011

Off topic: Interaction with Constant Contact

This post is for the benefit of (and comments from) fellow paid content publishers.

Constant Contact, a web-based email newsletter/marketing service that we at Venture Intelligence have been using to send out our paid for Deal Digest Daily newsletters sent us the following message - out of the blue - yesterday:
Response (Kristen D)
Dear Arun,

I am sorry to report that your account, login name: "entureintelligence" (sic), has been flagged for uploading several industry spamtraps along with a host of problematic addresses.

As a result, we will no longer be able to provide Constant Contact services to you.

The marketplace associated with sending email has changed dramatically, and as a result, we have had to adapt our complaint tolerances and list management inspections to meet the current business environment. While we appreciate your consideration, we can not afford the risk and exposure associated with your account. High abuse complaints result in getting our servers blocked by ISPs. We cannot limit the blocks to just your account, so it impacts all of our customers.

I will leave your account accessible until 9/21/2010, so that you may export your current list.

Please be reminded that your opt-outs (unsubscribe requests) via Constant Contact never expire. Federal law requires that you honor all opt-out requests indefinitely, regardless of future mailing platforms, unless you receive a new explicit opt-in request for that address.

Thank you for your attention.

Best Regards,

Constant Contact
Email: support@constantcontact.com
Web: http://www.constantcontact.com
Phone: 866-433-8499 or 339-222-5900


To which I had replied:

Customer (Arun Natarajan) 09/14/2011 11:57 PM

*OURS IS A PAID NEWSLETTER SERVICE - IE, OUR MAILING LIST IS MORE THAN 100% OPT IN. YOU CAN EASILY VERIFY THE SAME FROM OUR WEB SITE AT
http://ventureintelligence.in/newsletters.htm

WE ARE HIGHLY UPSET THAT YOU HAVE PREVENTED US FROM BEING ABLE TO SEND OUT OUR PAID FOR DAILY NEWSLETTER TODAY WITHOUT CHECKING THE BASIC FACTS / GIVING US A WARNING.

PLEASE TAKE A FEW MINUTES TO CHECK THE BASIC FACTS AND LET US KNOW, AT THE EARLIEST, IF YOU WOULD LIKE US TO CONTINUE USING CONSTANTCONTACT.


Kirsten's response to this went thus:
Arun,

Unfortunately, due to the nature of the addresses that were in your list we will not be able to continue service.

Thank you,
Kristen


I have sent them the foll note - without much hope - and have started to look for an alternative provider:

Kirsten,

Can you support "nature of the addresses that were in your list " with examples please? The key point we are making is that every single address on our list is either paid for or 100% opt-in based trial users. So, in our own interest, we would love to remove anyone who might not want to be on our list! Thanks. Arun


Fortunately, there are plenty of services such as ConstantContact, including Benchmark Email, Mail Chimp, etc. I found a useful comparative review here:
http://email-marketing-service-review.toptenreviews.com/


My quick thought from this episode is that it would be useful to have email services which are not focused on "email marketing", but specialize in enabling the sending of email newsletters - especially, paid for ones like ours.

I would be happy to hear any comments/suggestions that you might have at arun@ventureintelligence.in

Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.

September 13, 2011

Can Indiagames leverage the Disney connection?

Business Standard has an article on Indiagames' future under Walt Disney (which is in the process of taking over Indiagames' current parent, UTV)
Today, Indiagames works with original equipment manufacturers (OEM) as well as telcos like Tata Docomo, Uninor, and Idea. Large accounts like Airtel and Vodafone have grown 24 per cent year-on-year in FY2011. App stores have also fuelled the firm’s growth. T20 fever developed by Indiagames was among the top 10 games in Apple’s App Store.

Indiagames is perhaps the only company that has been successful in creating a business model for games via subscription. A Games on Demand (GoD) model was initiated for PC-gamersand has 80,000 users in 2011 from 30,000 in 2010 and is a solid contributor, generating Rs 8.2 crore of revenue in FY201, up from Rs 2.3 crore in FY2010. A user can download and play unlimited times, up to 300 PC games which are digitally delivered for a monthly subscription of Rs 200 and Rs 100 . It has also entered into the interactive TV games through DTH platforms and is working with Reliance Big TV and Airtel Digital.

...The company will launch its first social game around Shahrukh Khan’s sci-fi movie Ra.One. With this they are also testing the ‘freemium’ model of payment. Here, the primary game is for free but for special features and advance games, users will have to pay up. These accessories like special powers etc will be prices between Rs 5 to 50. Also, the company in its FY11 filing said it will target rural markets.


Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.

Starting Up @ MIT School of Business, Pune

From the Press Release:
Starting Up, ET NOW’s show on India's start-up ecosystem, with an objective to promote and generate awareness on entrepreneurship & entrepreneurial skills in India; visits the MIT School of Business to conduct a one day special workshop titled 'Starting Up @ MIT'. The entire session will be recorded by the MIT Team & the videos will then be uploaded onto their online platform & become a part of the new entrepreneurship syllabus at MIT.

Prominent entrepreneurs like Samir Palnitkar, Founder of Shop Socially.com; Anup Tapadia, Founder of Touchmagix; Abinash Tripathy, Former Indian Head of Zimbra and now Founder of Infinitely Beta will be the main speakers at the workshop along with Sudhir Syal, Anchor & Editor of the show ‘Starting Up’.

The various topics covered during the workshop will include - How to write a business plan, the essence of starting up, evaluating start-up ideas, secret to scaling a business and the art of product innovation. In addition, the workshop would also include a video content on the basics of registering a start-up company and a session where entrepreneurs will be split into teams & encouraged to come up with independent B-plans of their own.

Catch the full episode of ‘Starting Up @ MIT’ on Tuesday, 13th September at 11pm and repeat telecast on Saturday, 17th September at 9pm and Sunday, 18th September at 7.30pm. Only On ET NOW.

September 11, 2011

Deal Alert: Taurus Flexibles ties up with Spain based Cikautxo s. Coop

From the press release:

Taurus Flexibles have announced their strategic association with Spain based Cikautxo s. Coop and Mondragon S. Coop to augment the manufacturing of rubber and plastic hoses for the automotive segment for international and domestic markets. This tie-up is being achieved by the acquisition of 50% stake in Taurus’ wholly owned EOU subsidiary in Pune created from the transfer of assets from the parent group. The joint venture company is called Cikautxo Taurus Flexibles Private Ltd. and has an estimated networth of Rs. 34 crores.

Taurus Flexibles is a Rs. 200 crores reputed domestic manufacturer of automotive tubes and hoses with an impressive track record, while with € 220 million turnover, Cikautxo s. Coop of Spain designs and manufactures parts and assemblies for diverse applications for the automotive industry. The company holds the repute of proving service to leading automobile companies in the world.

Commenting about the deal, Rishi Kshettry, CEO, Cikautxo Taurus Private Ltd, stated “We wanted to raise our profile and enhance awareness of our technological expertise. Both the companies have ingenious approach and technical acumen, which will facilitate augmentation of innovation for both processes and products.” Adding more about the alliance he said, “Cikautxo’s boasts of enviable customer base in India and internationally e.g. VW, Daimler, Ford, Renault, Nissan, GM-Opel, PSA, Behr, Valeo, amongst others and it’s our honour to extend our expertise to some of the best in the automotive industry.”

Mondragon and Cikautxo both are cooperatives which are owned by their employees. Mondragon recently have set up an industrial park in India to provide space to its group companies in the country.

According to Victor Arrizabalaga, CEO of Cikautxo s. Coop, “The strategic alliance with Taurus Flexibles have paved our way into the Indian domestic market, undoubtedly one of the fastest growing auto market in the world. The rational production cost in India and technical capabilities will complement our existing manufacturing bases in Spain, Czech Republic, Slovak Republic, Brazil and China and will enable us to meet the global demand.”

Merisis Capital Advisors, specialists in mergers and acquisitions have been the exclusive advisors for the deal between Taurus Flexibles and Cikautxo s. Coop. Commenting on this arrangement Sumir Verma, Managing Director, Merisis Capital Advisors, said “the deal reflects a growing pragmatism on the part of the Indian vendors to structure a relationship with international vendors and create a win-win situation for both the parties.”

About Taurus Flexibles:

Taurus Flexibles, part of the Taurus Group is one of the leading manufacturers of hoses and fuel lines for passenger cars and commercial vehicles. The parent company Taurus was founded in the year 1971 and was the first hydraulic hose plant in India. Currently the company has five plants at Jamshedpur, two plants at Pune and one in Hosur, Tamil Nadu.

About Cikautxo s. Coop:
Cikautxo s. Coop (http://www.cikautxo.es) founded in 1971 designs and manufactures parts and assemblies in various polymers diverse applications. It is engaged in development and manufacture for the fluid conduction, shock-absorbing and sealing parts for Automotive, domestic appliances and biomedical industries. Cikautxo s. Coop is a member of the Spain based Mondragon; the biggest cooperative group in the world.

About Merisis Capital Advisors:
Merisis Capital Advisors (www.merisis.in) is a boutique investment bank offering independent advisory services to emerging growth and mid market corporate clients, and institutional investors focused on this segment. Merisis focuses on the emerging growth and mid-market segment where the team's experience in finance and industry helps companies plan their growth strategy, grow inorganically through well planned acquisitions and capitalize themselves by partnering institutional investors.

September 07, 2011

Businessworld cover story on Venture Capital

From the cover story profiling 7 leading VC firms: Helion Ventures, Nexus Ventures, IndoUS Ventures, IDG Ventures India, Accel India, Inventus Capital and Canaan Partners.
During 2004-10, venture capitalists invested $3.96 billion in Indian startups. Another $621 million has been invested this year, according to Chennai-based research firm Venture Intelligence. There is an established line of VC firms who have consistently invested through this period. Some are local arms of Silicon Valley firms such as Norwest Venture Partners and Draper Fisher Jurvetson. Others, such as Helion Venture Partners and Inventus Capital Partners, are independent startups themselves. By 2015, total investments will touch $10 billion, projects Bangalore-based VC firm IDG Ventures India.

...The numbers underline a few important facts about the Indian startup economy. First, there is enough innovation at the startup level to encourage risk capital to make bets over a sustained period. Second, if VC investments are advancing towards the $10-billion mark, investors clearly see many more latent pockets of innovation. So far, the money has gone into myriad sectors including e-commerce, consumer services and clean tech. The net will be cast wider into areas such as cloud computing, mobile infrastructure services, healthcare, education and rural businesses.

The mood in the VC industry, as BW found speaking to 15-odd investors, is unmistakably upbeat. Confidence levels are up as several move close to completing a full investing cycle with their debut funds, an event that is itself a milestone. The last major VC outing in India ended in the dotcom bust of 2000-01 and investors retreated from the market nursing huge losses. Much of the renewed confidence has to do with the kind of entrepreneurs leading the current charge of startup activity. “The need to address the customer and the market, and not just focus on the technology or product has become internalised with entrepreneurs,” says Samir Kumar, co-founder and managing director of Bangalore-based Inventus. Another big factor is that most VC firms that sprung up after 2004 have successfully raised second funds or are well on their way. This means the startups that have been funded so far have access to follow-on funding. The dotcom bust saw several startups die because their investors had run out of cash.


Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.




September 05, 2011

Naukri.com's Sanjeev Bikhchandani on the new e-commerce boom

Extracts from the interview appearing in the latest issue of the Indian Angel Network's newsletter:

As far as E-Commerce is concerned, it is becoming a big money game and you will see companies either succeed massively or blow up in style. What is somewhat worrisome is the tendency of some E-Commerce companies to scale up sales even if they are negative margin, the more you sell the more you lose. Investors also need to ask probing questions about revenue recognition practices. There are some smoke and mirrors out there. I expect sanity to return to this space sometime in the next two years. Excessive valuations will be corrected. The smoke will clear and dodgy accounting practices will be recognised for what they are. People will not be selling below variable cost anymore.

...For the most part people are starting off aping successful businesses in the West. You can’t blame the entrepreneurs alone for this, since these are also the models for which funding comes easier because the VC’s feel more comfortable funding stuff that has done well in the US. Having started however, smart teams are morphing the model to suit local conditions and so the Indian flavours start emerging in a couple of years after the first round of funding. Purely Indian models, in general, need to bootstrap longer and deliver more results in order to get Series-A funding. But they may end up winning bigger in the long run.

Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.

September 04, 2011

ET Now's "Super Angels’ show: Countdown to the Grand Finale begins

From the Press Release:

‘Super Angels’, the ongoing series on ET NOW’s Starting Up – the home for start-ups on Indian television, has successfully completed 14 episodes.14 start-ups have pitched in their business plans to 4 of India’s most influential investors, competing for a spot in the grand finale where the winner gets an opportunity to raise funds between Rs.50 Lakhs & Rs. 2 Crores live on the show.

Speaking about the show and its format, Harshal Shah, Founder and Managing Director of Reliance Ventures said this “The format of the show is very hands-on, impromptu, and educational. It is also informative to entrepreneurs as the process of a formal or informal education in the VC space is not something that most Indian business schools are able to expose their students”.

Vishal Gondal, Founder of Indiagames said that the key difference with the show was with its format, “The format is spread over 6 months rather than the 1-2 months other shows have aired for. The 6 month period is extremely relevant since this is the amount of time it generally takes for an Angel investor to invest in a startup in India. Not only this, it allows us to mentor the start-up over a 6 month period and the entire process is like a journey rather than a competition. I have personally spent atleast 5 hours offline with each of the start-ups that I have met on the show and in one case this also included completely rebranding and renaming one of the startups in the competition.” Apart from the mentoring by the Super Angels on the show, the startups are also mentored by the show’s mentoring partners TiE.

Some of the key suggestions provided by the Super Angels have revolved around branding, product positioning, monetization strategies and customer acquisition. For instance Spatial Ideas have begun focusing on ‘customer acquisition’ based on a suggestion shared with them on the show.

Sharing his views about the show, Umakant Soni of Vimagino said, “Sudhir, his team and the choice of judges on the show have made a difference, in their efforts, helping us gain mileage with the audiences; making it an A class show. It is not for TRP’s but for building great companies that will change the coming times”.

While Mahesh Murthy of the Seed Fund feels that India should have more shows on these lines that provide a platform for the start-up community in India. He also added, “The show deserves to be a half hour show, its more scalable than all competing shows on Indian television, has a more credible jury process and really gives investors like us the maximum chance of investing in a startup. I suspect 2-4 will get an offer for funding on the show.”

Data Highlight: Schneider Electric gets turned on by India

Schneider Electric's June 2011 acquisition of a 74% stake in Luminous Power Technologies, the New Delhi-based provider of inverters, UPS and power storage systems, was the French electrical products maker's sixth Indian acquisition in the last 3 years.

Schneider's aggressive moves in the Indian market is part of a general rise in inbound acquisitions by European companies. While US-based companies continued to be the most keen acquirer of Indian companies during the first 6 months 2011 accounting for 18 of transactions (followed by Japanese companies which acquired 7), H1’11 witnessed 18 Europe-headquartered companies (including 4 from UK, 4 from Germany and 3 from France) shopping for Indian targets.

Data Source: Venture Intelligence M&A Deal Database and Venture Intelligence India M&A Report


September 02, 2011

SEBI Alternative Investment Fund Regulation 2011 – The Basiz Perspective

The following is a note on the SEBI - Alternative Investment Fund Regulation 2011 (AIF) prepared by A V Seshadrinathan ("Sesh"), MD of leading fund accounting KPO Basiz.

An Accounting and Tax perspective

The proposed AIF regulation has clearly demonstrated, that High networth Individuals and Qualified investors in the country are sizeable, have the knowledge to take on risks and are well informed, when investing into alternative investments. The alternative asset class itself, has been recognized as an mainstream investment for certain investors. The regulation at its highest level, seeks to prevent retail investors from straying or being induced to this asset class. Further the regulation also classifies Investment strategies based on objectives of the investment. Therefore, while the regulation caters to monitoring & regulating the liability side of the fund, it also ensures that monies are invested into assets or securities that match the philosophy & strategy, disclosed by the fund manager during the capital raising process. This also makes it easy for the government of the day to target benefits to sections of the economy that need investments.

Key Salient features of the proposed regulation:

> High Net worth Individual defined as a person capable of investing Rs 1 Crore in all investments combined has been defined.

> Minimum subscription would be Rs.1 Crore or 0.01% of the fund raised.

> Tax benefits / incentives available to a particular philosophy strategy or certain sectors of the economy are availed only by those that were intended to.

> Regulation grandfathers DVCF funds into the new regulation. None regulated funds need to register on the regulation coming into effect.

> Funds can be structured as LLP’s. This is a major development as funds globally prefer these structures for ease of operation, tax pass through, limited liability and other benefits. This would also mitigate some of the disadvantage of structuring the fund as a trust mainly to avoid the issues related to an irrevocable trust.

> Regulation 13(2) :

AIF registered under one category cannot change its category. This is in contradiction with regulation 9(2), which says that Strategy can be changed with 75% on investors consent. Defining Strategy and Category is important for clarity.

> Minimum size of the fund needs to be Rs. 20 crore.

> Fund manager needs to contribute at least 5% of the size of fund in hard contributions. This contribution will be locked in till the last redemption is made. This would pave way for sponsored investment managers, backed by outside or solicited capital in the investment manager’s entities themselves.

> Maximum number of investors in the AIF shall be 50. It is not clear, if this includes underlying pooled investors like partnership, trusts or association of persons or the fund entity level only. There is a discrepancy though. It appears that the 50 investor limit applies to companies and LLPs. It does not seem to apply to trusts.

> Winding up methodology needs to be explicitly mentioned in the prospectus.

> The last residual investment, that cannot be disposed in the fund needs to be picked up by the investment manager.

> The board may specify criteria for charging performance fees. This could create uncertainty. Also it would restrict the ability of two parties to a private contract.

> No fund shall have sub-funds underlying. It is not clear however, if the regulation allows the fund of fund as a possibility.

> Minimum tenor of the fund shall be 5 years extendable by 2 years.

> Funds with size greater than Rs.500 crores would need to have a custodian.

> The regulation has categorized strategies into

a) PIPE
b) Debt
c) VCF (maximum of 250 crore)
d) Infrastructure
e) SME
f) Real estate
g) Social Venture funds
h) Strategy
i) PE funds

Of the above, it seems that strategy funds includes all other strategies, not listed separately and therefore offer amply flexibility. These categories can include funds that can invest long/short, derivatives and structured products. It seems that this category may spawn growth of “Hedge funds”. All the categories come with minimum and maximum exposures to issuer, class of securities, exposure to follow-up investment, etc. Board may impose appropriate restrictions on investments in complex structured products, if no investor approval is acquired.

The regulation does cast reporting responsibilities on the fund and investment managers.

Some of the important reporting & disclosure responsibilities are:

1) Risk management & conflicts of interest reporting:

a) Identification, analysis and reporting of systemic risks. This might result in regular risk reports that need to be filed with the SEBI. This will also mean regular review of policies and procedures related to risks. Further adoption of globally accepted reporting & risk management practices may also be required.

b) Reporting on excessive risk strategies that are a result of aggressive performance structure will need to be reported separately.

c) Reporting on conflict of interest. This will necessitate documentation of procedures that will mitigate conflict of interest.

2) Financial reporting to include:

Quarterly and Annual financial statements may need to state or disclose
(i) Description of investment strategy
(ii) Use of leverage
(iii) Redemption policies in normal and exceptional circumstance
(iv) Valuation methodologies
(v) Risk management procedures
(vi) Fees charged by managers shall be disclosed. This includes all types of fees and includes those paid to affiliates of the managers
(vii) Cost of doing the investment transaction and related charges
(viii) Fees charged to portfolio companies by manager or affiliate of the managers
(ix) Custody policies & procedures
(x) Risk reporting in financial reports

The regulation has specified that the following be reported in annual financial statements. The requirements are similar to IFRS 7. They include:

a) Concentration risk
b) Forex risk
c) Leverage risk both liabilities & asset side including those of the portfolio companies
d) Realization risk at the time of exit
e) Strategy deviation risk
f) Reputation risk at portfolio company level. It is however hard to fathom, how this can be measured.
g) Environmental, social & corporate governance risks at fund and portfolio company level. Again hard to fathom how this can be measured.

(xi) Books & records of the funds shall cover
a) Portfolio statements including valuation, valuation policies and procedures.
(b) Deal sheets, buy & sell ledgers
(c) Investor statements describing contribution, allocation and distributions
(d) Portfolio company selections research and analytical methodologies
(e) Books & records of the fund may need to be maintained for 5 years.

(xii) Fund audits need to be completed within 90 days of the year end and financial information of the fund needs to be provided to investors within 90 days of the year end of the fund.

(xiii) Disclosure related to non accounting matters. Breach of the provisions in information memorandum, inquiries or action by regulators and material contingency or liabilities related to the fund shall be disclosed in full.

3) Investment operation reporting & Standard operation procedures for investor

a) Estimation of quarterly projections of capital calls and distributions (including beneficial interest) need to be made & reported.
b) Changes in ownership interest/transfer, rating control to related parties to the fund need to be disclosed.
c) Financial information of underlying portfolio companies need to be provided to investors within 90 days of the fund’s year end to the investors. This means that all underlying portfolio companies need to complete their audit well within 90 days of the year end of the fund.

Tax issues related to the new regulation

This regulation has tax, legal and banking impact. Thus other regulations like the Income tax, RBI, Company Law, regulations will have to be harmonized with changes in this regulation.

For example, LLP’s will now be allowed as investment vehicle structures. However the ROC’s need to accept this change, when the regulations come into force. The Income tax department has already included an LLP within the definition of a “partnership firm”. However partnership structures currently do not have “Pass through status”. They are taxed at partnership level unlike trust structures. Regulated LLP’s structures need to have “Pass through status” if they invest in 10 sectors, that qualify as venture capital similar to trust structure. Thus pass through benefits under section 115U should be available to LLP’s too to ensure level playing field. However MAT has been imposed on LLP’s recently. This would create discrimination for even the regulated LLP’s, that invest in the designated sectors. Regulated Investment LLP’s need to be given exemption from MAT provisions as well. The Income tax department however needs to ensure a level playing field between FVCF and the DVCF, as far as tax treatment on capital gains go. LLP’s are better equipped to provide solutions compared to irrevocable trusts as investment vehicles.

Sesh is the Managing Director of Basiz Fund Service Pvt. Ltd. Basiz is a global fund administrator with focus on India especially the PEVC segment administering more than USD 8 billion in assets. Sesh can be contacted @ Cell : +91 8286008554 ; email: sesha@basizfa.com


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