Sebi's relaxed norms likely to give private equity firms faster exits

Private equity (PE) firms will find exiting investments easier after the Securities and Exchange Board of India’s (Sebi’s) plans to ease lock-in restrictions for promoters after the initial public offering (IPO) come into effect.
 
These will also make deals attractive for them.
 
On Tuesday Sebi said promoters’ lock-in for three years in the case of at least 20 per cent of their shareholding after an IPO could be brought down to one year, and for the rest it could be six months from one year now.
 
Sebi also plans to replace the “promoter” concept to “person in control”. So far, since PE funds have limited lives and long lock-in periods, exits are complicated and the process is delayed in most cases, experts said, adding that it is challenging for PE firms that are increasingly becoming promoters due to buy-outs and control deals.
 
“It (Sebi plan) will help with planning for exits ... which means foreign firms will be more comfortable investing in Indian companies,” said a senior executive at Brookfield Asset Management.
 
Anshu Kapoor, head of investment management at Edelweiss Wealth, said: “The reduction in the promoter lock-in period would make PE exits simpler in PE-controlled deals. Similarly, the reduction in pre-IPO non-promoter shareholding would also help minority PE investors plan their exits better.”
 
He added that the reduction in lock-in from three years to one could change certain deals from “difficult to attractive”.
 
Sandip Khetan, partner and national leader, financial accounting advisory services (FAAS), EY India, agreed.

 
“This might also further have a positive impact on the proposed overseas listing regulations and attract more global investors.”
 
However, he cautioned, saying authorities needed to continue to strengthen the disclosure framework around such shareholdings and planned exits to ensure that minority shareholders were not impacted negatively.
 
Exits have gone up in the past couple of months.
 
Last month recorded 13 exits worth $2.7 billion, almost 23x the $117 million of April 2020 and 25 per cent higher than the $2.1 billion in March this year. The fundraises stood at $569 million in April, against none in the year-ago period, according to EY and the PE Indian Venture Capital Association.
 
Siddharth Pai, founding partner and CFO at 3one4 Capital, Co-Chair at Regulatory Affairs Committee, Indian Private Equity & Venture Capital Association said the lock-in has been a particularly thorny issue in exits via an IPO as any Company will need to balance giving an exit for investors with raising capital for operations and capex.
 
“The reduction in the lock-in is a move in the right direction to alleviate this inherent tension and allow for greater flexibility in the exit timelines for such investors,” Pai said.
 
Bala Deshpande, founding partner at MegaDelta Capital, said the move was timely.
 
“Apart from encouraging more ‘promoters’ to go public, it will pave the way for more professionalism in businesses.”
 
However, Srini Sriniwasan, managing director, Kotak Investment Advisors (KIAL), said the provision (to reduce lock-ins for promoters) did not have a direct impact on private equity.
 
“There is a lock on AIF (alternative investment funds) investments if they are not invested as compulsory convertible instruments. In step with this relaxation, PE funds or AIF who may be invested in securities of the company must also not have any lock-in so long as their capital is invested for more than one year prior to IPO in the company,” he said.
 
More fund flows
 
Sriniwasan said relaxation in the definition of “promoter” to “person in control” would pave the way for more funds to take substantial or even majority equity in a company and run it with professional managers who could be identified as “persons in control”.
 
Pai of IVCA said that the end of ambiguity, with respect to the “promoter” tag, inspires a lot of confidence among investors, given they will no longer have this sword of damocles hanging over their heads. “Control is a more defined term and more globally accepted, which will help attract more capital and increase the attractiveness of IPOs as an exit option,” he said.
 
Parth Gandhi, founder and chief investment officer at Bombay Capital said: “This will increase the ability of PE players to exit investments in a timely manner through IPOs.”