The private equity industry in India has grown significantly in the last two years. It is estimated that in 12 months ended December 2006, $7.5 billion capital flowed into the country through the private equity route across 302 deals (Source: TSJ Media). This is a humongous difference compared to a decade ago when the cumulative private equity capital under management in India would not have exceeded the $500 million mark with significant participation from UTI, ICICI, SIDBI and other government agencies or PSU-driven asset management companies. While this is a big step forward, it is still small when compared to China, where the industry is four times bigger than India.
Regulatory authorities have helped fuel the growth of the private equity industry in India by undertaking various initiatives in the last decade. An example of this is the clarity on foreign investment promotion, which has come during this period. From being a largely ad-hoc decision driven by political agendas, there is a clear policy framework today. For example, FDI of up to 26 per cent is allowed in insurance and print media, 49 per cent in broadcasting and domestic airlines, 74 per cent in telecom and private sector banks and 100 per cent in pharmaceuticals and software development. The challenge today is to accelerate this pace of regulatory facilitation and leverage the global liquidity flows into India This will help not only in expanding coverage to new sectors for private equity but also stimulate the fledgling venture capital industry in India, which even today is capital deficient.
A more lenient view on the FDI limits in areas like the banking sector would facilitate prudent business decisions - like writing off non-performing loans to the agriculture sector as opposed to driving political agenda at the cost of destroying shareholder value. A fine balance needs to be drawn in India between political agenda and efficient allocation of resources, which can have a multiplier effect on the economy. Ample evidence of the same is in front of us in the field of telecom. De-regulating the telecom sector has not only generated employment for thousands of people but has also resulted in greater tax realisation for the government.
In the US our industry operates in silos of Angel Investors, Series A investors, Mezzanine Funds, Pre-IPO, Private Equity and Buy Outs. In India there is no such distinction and most funds are opportunistic in nature, driven by minimum size of deal more than anything else. Part of the reason for this can be traced back to the restrictive regulations on capital allocation with respect to venture capital. The emphasis of regulations on protecting the interests of the investors is well placed, however, this is “buyers beware” business and institutional private equity investors typically do not act in a hurry, which could be the case in public capital markets. The focus of the regulation, therefore, should be on attracting quality capital into the country and not just on the amount of capital.
The writer is Partner, Baring Private Equity Partners Ltd