Private Equity in India
Private Equity (PE) has emerged as a significant source of funding for businesses in India, providing capital, Expertise and strategic support, particularly to startups, high-growth companies, and enterprises looking for strategic capital. India, with its rapidly growing economy, increasing entrepreneurial activity, favourable regulatory environment, young population, and expanding market, has become a key destination for private equity investors.
1. What is Private Equity?
Private Equity refers to investment in unlisted companies (or sometimes listed companies to make them private) by institutional investors, high-net-worth individuals (HNIs), or specialized PE funds or venture capital funds through direct equity infusion or quasi-equity instruments with the aim of generating high returns through value addition and eventual exit (IPO, trade sale, buyback).
2. Key Features of Private Equity Investment
2.1 Active Ownership
Unlike passive investors, PE funds actively engage with management, often taking Board seats and influencing strategic decisions.
2.2 Medium to Long-Term Investment Horizon
PE investors usually invest with a 4-10 year horizon, focusing on growth, expansion, restructuring, or buyouts.
2.3 Structured Instruments
PE deals may include equity, preference shares, convertible instruments, or hybrid securities.
2.4 Exit-Oriented
PE funds focus on eventual exit with substantial return — IPO, strategic sale, secondary sale, or buyback.
2.5 High Risk-Reward
Investments are made in high-growth but risky ventures.
3. Growth of Private Equity in India
India has become one of the most attractive PE destinations globally due to: –
- Strong Economic Fundamentals: GDP growth, demographic dividend, and digital transformation.
- Startup Boom: Unicorns and tech-driven businesses attracting massive PE funding.
- Ease of Doing Business: Improved regulatory environment and foreign investment policies.
4. Key Sectors Attracting PE Investments
Private Equity in India is sector-agnostic, but some industries dominate:
- Technology & Startups (Fintech, Edtech, E-commerce)
- E-commerce
- Healthcare & Pharma (Hospitals, Biotech)
- Renewable Energy
- Infrastructure & Real Estate (REITs, Smart Cities)
- Consumer Goods & Retail (D2C brands, FMCG)
- BFSI (Banking, Financial Services, Insurance) (NBFCs, Insurtech)
5. Regulatory Framework Governing Private Equity in India
Private Equity investments in India are governed by multiple laws and regulators:
5.1 Foreign Exchange Management Act (FEMA), 1999
- Foreign PE investments must comply with FDI Policy and FEMA regulations
- Sectoral caps and entry routes (automatic / government) apply.
5.2 Companies Act, 2013
Compliance on private placement (Section 42), preferential allotment (Section 62), and governance norms.
5.3 SEBI (Alternative Investment Funds) Regulations, 2012
PE funds are usually registered as Category II AIFs.
5.4 Taxation Laws
- Income Tax Act: Capital Gain Tax, Dividend, Interest on convertible instruments, etc.
- GST implications
5.5 Competition Act, 2002
Large deals may require CCI approval.
6. Tax Considerations for PE Funds & Investors
6.1 Fund-Level Taxation
- Domestic PE Funds: Taxed as pass-through entities (investors bear tax liability).
- Offshore Funds: Subject to DTAA benefits (Mauritius, Singapore routes).
6.2 Investor Taxation
- Capital Gains Tax:
Long Term (Investment held over 24 months)
- Long Capital Gain Tax (LTCG)
- For transfer made after 23.07.2024:
- 5 % without Indexation Plus Surcharge & Cess, or
- 20% with Indexation
- For transfer made before 23.07.2024: 20% with Indexation
- For transfer made after 23.07.2024:
- Long Capital Gain Tax (LTCG)
Short Term (Investment held for period lesser than 24 months): At Normal Rates
- Dividend Distribution Tax (DDT): Abolished, now taxed in investors’ hands at Normal Rates.
7. Typical Private Equity Investment Process
7.1 Business Valuation
The company is valued using methods like DCF, Comparable Company Multiples, or Asset Valuation.
7.2 Term Sheet Negotiation
A non-binding document outlining key terms: Valuation, Instruments, Rights, Exit options.
7.3 Legal & Financial Due Diligence
Detailed examination of legal, regulatory, tax, financial, and operational aspects.
7.4 Shareholder & Subscription Agreements
Binding contracts covering rights, obligations, governance, exit.
7.5 Allotment of Shares / Securities
- Board and shareholder approvals.
- Filing of ROC forms (PAS-3, MGT-14, etc.).
- Compliance with pricing guidelines for foreign investors.
8. Common Instruments Used in PE Deals
- Equity Shares – Voting rights, Dividends.
- Compulsorily Convertible Preference Shares (CCPS) – Preferred by PE investors for protection and assured conversion.
- Debentures / Convertible Notes – For structured funding with downside protection.
- Warrants / Options – For future participation.
9. Stages of Private Equity Investments
PE investments occur at different business lifecycle stages: –
| Stage | Description |
|---|---|
| Early-Stage (VC) | Startups with high growth potential |
| Growth-Stage | Scaling businesses with proven models |
| Buyouts (LBOs) | Acquiring controlling stakes in mature firms |
| Distressed PE | a. Turnaround funding for struggling firmsb. ARC investments in stressed assets |
10. Exit Routes for PE Investors in India
- Initial Public Offering (IPO)
- Strategic Sale / Trade Sale to another company
- Secondary Sale – Selling stake to another PE firm
- Promoter Buyback – Promoter repurchases shares
11. Challenges in Private Equity in India
- Regulatory complexity (FEMA, SEBI)
- Regulatory Hurdles: Changing tax policies (Angel Tax, GST)
- Delays in government approvals (where applicable)
- Valuation Concerns :-
- Gaps between investor and promoter
- Overpriced startups leading to down rounds
- Exit Uncertainties : Limited IPO opportunities in bear markets.
- Corporate Governance Issues : Founder-investor conflicts.
12. Role of a Chartered Accountant in Private Equity Transactions
A Chartered Accountant plays a pivotal role in the PE lifecycle:
- Valuation advisory (DCF, Comparable Analysis)
- Due Diligence Reporting (Financial, Tax, Legal)
- Structuring of transaction (Tax-Efficient, Compliant)
- Assistance in Regulatory Compliance (FEMA, ROC, SEBI, RBI)
- Tax Optimization (Fund structuring, DTAA benefits)
- Post-Deal Integration (Financial reporting, MIS)
- Ongoing compliance and reporting
- Exit Tax Planning
13. ROC & Regulatory Compliance in PE Transactions
| Compliance | Form / Action | Timeline |
|---|---|---|
| Board & shareholder resolutions | MGT-14 (if SR passed) | Within 30 days |
| Private placement return | PAS-3 (Return of Allotment) | Within 15 days of allotment |
| Filing of offer letter | PAS-4 + PAS-5 (if required) | As per Rules |
| FEMA reporting (for foreign PE) | FC-GPR (RBI portal) | Within 30 days of allotment |
14. Conclusion
Private Equity is reshaping India’s corporate landscape in India, offering companies not just funding but strategic guidance along with offering immense opportunities for businesses and investors alike. However, PE transactions require careful structuring, strict compliance, and expert financial, legal, and tax guidance to protect the interests of all stakeholders.
A Chartered Accountant’s role is critical to add significant value to clients exploring private equity by staying updated on PE trends, navigating valuation, tax structuring, legal compliance, and regulatory approvals to ensure the PE transaction is both value-accretive and compliant.
