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Need uniform regulation for smooth transactions: Parag Saxena

Interview with CEO of New Silk Route

Reghu Balakrishnan 

New Silk Route (NSR) Partners is an India-focused private equity firm with a fund size of $1.4 billion under management. Parag Saxena, the founding general partner and the CEO of NSR, has an experience of almost 28 years in PE space. Saxena, a Wharton School graduate, has served on committees advising the Prime Minister of India on foreign direct investments and venture capital for the Planning Commission of India. He speaks to Reghu Balakrishnan on regulatory aspects and shares concerns of Indian PE space. Excerpts:

Is Indian government supportive of PE industry growth?
I don’t think the industry needs any support. What it needs is no obstacle. So my view is on venture capital and the growth capital industry. We don’t have a private equity industry in India right, because we don’t do leveraged transactions. So classic PE transaction actually doesn’t exist in India. But all we need is, for government not to be in the way. To make it possible and to do transactions easily, we need to have uniform regulations.

Did the government realise the value of PE in India?
I don’t know the answer to that question. I have sat on a committee once that looked at rules and regulations, did some work for the planning commission may be four to five years ago. There was a group of us who worked on that and made some recommendations. So it’s definitely on the radar screen but the question is how high up it is on the radar screen, right, that’s what matters.

What are the measures needed for a great future for Indian PE industry?
In principal, it’s a bad thing for government to get involved in the pricing of deals. There is no simple tax structure, not permitting hybrid transactions such as debt and equity or preferred stock and common stock, not commending various terms. Now the government has a very good reason to not do many of these things because they are trying to prevent money laundering or their trying to prevent tax evasion. But I think what’s important for business is a uniform set of rules. If you have a uniform set of rules businessman will find a way to operate and to deliver service efficiently.

However, a discipline is needed in the industry itself.
True. It should be exercised by the people who give them money. So investors in the end have to exercise that discipline. Investors have to decide, who is experienced, who brings investment experience, operating experience, whatever it is that you need.

However, overseas investors are concerned on performance by Indian PE market.
Any long term investor will know that they have to be in India for the long- term. If the economy keeps growing at 6.5 to 8% and if the underlying in that economy keep growing at 15-25% in earnings per share, you can’t ignore that economy. So investors I think will definitely come back.

And PE managers are unable to find way for exit and return money back.
A good PE manager should be able to find the right way to extract value from the situation. So if you can’t find the market for an exit, you have to find may be a strategic buyer here or elsewhere. You have to find whether your company can get listed somewhere else. They’ll find low valuations but a way to get out of even in the domestic markets. Because may be you can’t do something at a 15 times earnings, you can do it at a 12 times earnings. So you have to look for, that’s the job, why are you getting paid. 

If the PE fund managers are getting 16- 17% IRR (internal rate of return), that is the best way to get out?
About 16-17% IRR, in a long term, is an excellent IRR. It’s a fabulous IRR.I have been investing in the business for 30 years. I know that actually very few people get long term 16-17% IRR. They have talks on 25 and 30 and all that. But realistically good investors know what they are doing. About 16-17% will put you in the top 20% of all investors. It’s an excellent return over the long term. I am hoping to be in that IRR bracket when the exit.

You had some bitter experiences like investments in KS Oils.
At this point in time, it’s an issue of unclear accounting. We still don’t know all the answer to the questions that we want. There are a lot of instances of unclear accounting. That’s one of the things that is to get better over time, if we are going to attract capital. Effectively, it means from a policy standpoint that greater enforcement has to take place.

So, lack of corporate governance is a major issue?
Lack of corporate governance as well as lack of enforcement. We would use every legal mechanism that is available to us, if we feel that our rights have been violated in some way. And I think all PE, all investors should do that, should enforce the rights that they have, they should proceed if they feel they have been taken advantage of, they should exercise their legal right.

Incidents of differences between promoters and PE investors are also on rise.
You know, second guessing a transaction after its done is always easy. So I don’t know if people did not do enough diligence or whether critical facts were hidden from them. It’s a question that is usually very hard to answer. And I don’t know it’s going to be on a case by case basis. It depends on the individual facts and circumstances you know what actually happened.

What are NSR's investment plans for 2012?
Generally, we would expect to invest $300 to 400 million in the next 2 years. The timing is always uncertain. We are very interested in restaurants; we are very interested in medical devices. We think that there is a great need in India for both those areas.

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First Published: Tue, March 20 2012. 13:29 IST