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Private equity investment in India: Next year a blockbuster too?

Challenges in the economy are changing the manner in which PE capital is deployed

December 30, 2019 / 02:27 PM IST

Sindhuja Kashyap

We are living in turbulent times and economies all over the world are re-adjusting to the “new normal”. While the country whines over a slowing economy, experts see it as part of the J Curve theory where an initial negative impact due to any reform is likely to be followed by a sharp gain.

Despite several companies on their last legs in a slowing economy, India has managed to record its highest private equity (PE) investment in the past six years, eliminating any rumour to the contrary. The increase in investment could be attributed to the fact that investors see this slowdown of economy as not structural but cyclical.

This year has seen the government embark on various structural changes to revive the economy. Among others, several regulatory changes have resulted in India improving its ease of doing business rank substantially. FDI (foreign direct investment) rules have also been rejigged with whittled down norms for several sectors, including e-commerce.

The government took several startup initiatives to attract PE investors by relaxing norms of investment, offering tax benefits and ensuring compliance through self-certification. The premium on sanctity of enforcement of contracts has increased, which is partly attributable to the digitisation of local court data and updates. This has made it easier to identify, manage and reduce pendency of cases, instilling confidence in the legal system and ensuring less harassment through litigations. Additionally, e-filing of cases has also been introduced, cutting down strenuous legal work.


Corporate tax rates have also been slashed to 22 percent from 30 percent for the existing companies and 15 percent from 25 percent for new manufacturing companies, bringing about uniformity. Further, startups have been exempted from the angel tax, providing greater relief to investors and genuine entrepreneurs.

The market has encouraged creation of innovative investment opportunities, including real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). The listing of Indian’s maiden REIT and the great response it received have paved the way for independent REITs. Steps like introduction of startup cells have ensured speedy redressal and prohibition of any harassment to taxpayers.

Higher surcharge on capital gains for long- and short-term capital gains tax on listed shares for domestic and non-resident investors has been removed, translating into increased investor confidence. A similar treatment is being extended to foreign portfolio investors, under which no higher surcharge is required for derivative transactions.

India is making its presence known and acknowledged on the global platform through a host of regulatory changes, including but not limited to the national e-commerce policy, the Direct Tax Code (DTC) and the Data Protection Bill. The government also intends to bring in a world-class unified regulator for International Financial Services Centres (IFSCs) for regulating all financial services such as banking, capital markets and insurance in IFSCs, which are being regulated by multiple regulators. This introduction is the much-needed impetus to providing an ease of doing business platform for various financial market participants, boosting capital flow in the market.

Despite the measures taken by the government, growth is becoming more challenging across sectors on account of macroeconomic factors and increasing regulations. The challenges in the economy are changing the manner in which private equity capital is deployed with more emphasis on control transactions, given succession challenges in promoter-driven enterprises as well as regulatory challenges posed by the IBC.

The government should continue to remain steadfast in 2020 and tread on the path of reforms with no room for policy ambiguity aiming at sustainable and inclusive growth. While people are examining the government’s policy record, there are many reasons to build on successful instances of carefully designed policies to promote and nurture private capital in India.

Sindhuja Kashyap is Senior Associate (corporate) at King Stubb & Kasiva, Advocates and Attorneys. Views are personal.
Moneycontrol Contributor
first published: Dec 30, 2019 02:27 pm

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