On TRAC? Private Equity View

Nifty BSE | NSE 31/05/12 Are Mutual Funds betting on Nifty?

One of the limitations of the existing Takeover Regulations is that the 15% trigger limits large Private Equity investments in medium-sized companies. So, the Takeover Regulations Advisory Committee or TRAC recommendations to raise the trigger to 25% should come as good news to PE players. But, there's a twist in that tale!

CNBC-TV18's Menaka Doshi caught up with Amit Chandra, once amongst India's leading investment bankers and now the India Managing Director of well known global private equity fund Bain Capital to discuss the issue.

Below is a verbatim transcript of the interview. Also watch the video.

Q: Last week when we were debating the TRAC report, TRAC member YM Deosthalee said that we did not design this to help benefit the private equity industry as a new asset class. The benefits are unintended. So I am trying to understand whether some of the negatives are also unintended and how much of a limitation there can be on private equity. Let me start with the fact that on one hand the trigger is being proposed to be raised to 25%-this is the substantial acquisition of shares-but on the other hand the definition of control has been widened to include de facto control. How does this code bode for private equity?
 
A: I think certainly raising the trigger from 15 to 25% is very beneficial for private equity and also very beneficial for companies in India. The reason being, a lot of companies in India tend to list at a very early stage and effectively are not fully mature for the capital markets. I think private equity can play a pivotal role in providing capital to these companies.

Unfortunately, the 15% trigger was actually preventing flow of funds to these companies and therefore proving only to be disadvantageous to them. Therefore, I think raising 15% to 25% is a very welcome move. It will help enhance the universe for private equity to invest in. My hypothesis is that you will see a lot more funds flowing to the corporate sector because of this rule.

On the flip side, I think the issue of control is a big problematic issue because we have seen in the past that companies have had to go to court to figure out whether investors are effectively in control or not. I think what would be helpful would be if SEBI, instead of contesting the current SAT ruling, instead provided some sort of a clarificatory framework, which went on to address the fact that some of the control clauses that they believe are control-oriented but are essentially protective in nature should be classified as clearly being not construed as control clauses.

I think if that one issue is resolved in conjunction with implementing the guidelines, which the committee has evolved, it will go a long way in both significantly enhancing the flows from private equity to corporate India and clearly there is a good compelling case for that being in the overall good of the country. But also SEBI's other big agenda of improving corporate governance by bringing institutional investors who are more aligned with the minority shareholders than with promoters-that can be achieved by allowing investors to get protective clauses.
 
Q: I am going to argue that because I don't think we have seen very activist type of private equity investor or institutional investors in this country, most of them stay mute and private equity protects itself through protective clauses, thereby creating almost a barrier between how they are treated and how the minority is treated. So I will drop the governance point and focus on the control aspect. Now if private equity is allowed to go all the way, let us say 24.99% without having to do a mandatory open offer, do you still believe that there will be a need for special rights accorded to them through shareholder agreements because that seems to be a symptom of 15% regime? But if you are able to increase your stake all the way upto 24%, you have therefore negative control in shareholder meetings, would you then need to still continue having shareholder agreements with affirmative rights or vetos or things like that?
 
A: Unfortunately, the answer to that is yes for a lot of situations. There will certainly be a situation in which the promoter holding is not very high, let us say in the mid-20s or the mid-30s and going upto 24.9%. That actually gives you enough teeth to be able to voice and carry through protective issues which align you more to minority than with the promoter.

But I think in situations where promoter holding is still very high, the only way you can protect yourself is by having certain protective clauses. So, I think it is going to be situation specific. But my own sense is that I would argue with you that I think having these protective clauses is great for the governance of the company and for aligning value creation for minority shareholders with the majority shareholders and therefore I don't see a logic for pushing back on it, the way we are experiencing a push back at this point of time.