GPs in India are mostly concerned about India’s regulatory environment and believe clarity and stability in the fiscal and tax regime are the most critical factors for India to remain an attractive private equity market going forward, according to a recent survey by PricewaterhouseCoopers.
Over twice the amount of respondents believe that a stable fiscal and regulatory environment is the most important issue in India, compared to corporate governance or political and social stability.
In recent years, India’s attractiveness as an investment destination has been impaired by frequent policy reversals, corruption scandals and indecisiveness, with the retroactive implementation of the General Anti-Avoidance Rule – that will tax funds investing in India even if they are domiciled offshore – being of particular concern for the private equity community.
Moreover, government intervention in sectors, including multi-brand retail, pharmaceuticals, financial services or infrastructure, serves as a deterrent to GPs.
“A good investor keeps himself away from businesses which will be highly impacted by government decisions. There are several other areas which are not or are less impacted by such decisions and have potential to generate higher returns,” one respondent, who is the head of India at a global private equity fund, said.
The most attractive sectors outlined by respondents were retail and consumer, IT and IT services, business services and healthcare (excluding pharma).
More than half of the funds surveyed also believe that allowing leveraged financing in India will spur M&A activity “dramatically”. India does not allow leveraged M&A deals except in distressed asset classes – a recent exemption brought in by the Reserve Bank of India.
Nevertheless, private equity investment is making up an increasing portion of foreign direct investment in India. Total equity inflow into India between April 2000 and December 2013 was $209.8 billion, of which $73.8 billion (37 percent) was by private equity.
Moreover, there are an increasingly number of buyout deals available for private equity firms, allowing them to take control of companies in a market that has traditionally allowed mostly minority deals.
In 2013, 27.3 percent of private equity deals were buyouts, compared to 21.5 percent in 2012 and just 5.6 percent and 3.7 percent respectively in 2011 and 2010, the PwC findings showed.
The industry is also supposed to consolidate further, with respondents that the number of GPs in India will drop to about 75 to 80 significant investors, with a greater degree of differentiation between market segments, for example large buyout funds, late growth-stage investors, early stage investors and venture capital.