Global private-equity (PE) firms have hardly been able to do buy-out deals in India. However, the new takeover code guidelines offer larger opportunity for investment in India, as it increases the threshold for open offers to 25 per cent from 15 per cent. Rajeeve Gupta, managing director and head of the India Buy-out team at Carlyle Group, talks about the challenges of buy-out deals and the opportunity that the new takeover code would offer. Edited excerpts of an interview with Abhineet Kumar:
How will the investment strategy for large buy-out funds like Carlyle change, when the threshold for an open offer trigger is set at 25 per cent, up from the existing 15 per cent stake in a company?
The proposed change is a potential game changer for ultra high growth mid-sized (UHMS) Indian companies — a segment that always deserved to be rewarded by policy makers. You will now see Carlyle engage more pro-actively with such companies.
The old threshold limit prevented, unintentionally, exceptionally high growth companies from receiving commensurately large capital from global PE funds like Carlyle. With the proposed change in the open offer threshold, this constraint to the growth of UHMS Indian companies will be eased. Carlyle could now provide larger equity funding to such valuable companies, alongside its expertise. Illustratively, in the Rs 1,200-crore market capitalisation range, we can now provide Rs 400-crore equity funding to a galloping company, whereas in the past such a company would have been able to seek around half the amount. So, a valuable new segment opens up to us. But more importantly, this change is good for the best companies in India and so is a positive for the economy.
Can we expect a surge in PIPE (Private Investment in Public Equity) deals in the background of the code allowing higher percentage of holding?
The math does say yes, because while the change in threshold is only 60 per cent (from 15 per cent to 25 per cent), the amount of capital a company would now be able to take from a PE fund without breaching trigger limits would increase by 89 per cent. But keep in mind that PE funds’ interest in PIPEs is by and large confined to exceptional companies. Take our own case, we invested in the largest PIPE ever in India and that was in HDFC. Our view was HDFC was not just best in class in India but in the world. So, don’t expect an across-the-board increase in PIPES. But PIPES in certain segments that encapsulate exceptional companies of several descriptions, like the UHMS companies mentioned earlier, will soar.
What are the challenges in buy-out deals? Does the proposed de-listing norms sound favourable for buy-outs?
The binding constraint to buy-outs in India was never the takeover code or delisting rules. The real constraint is Press Note 4 (PN 4) of 2009 clause 6(d) that places a blanket restriction on any borrowing by any holding company in India, if it is majority owned by a foreign entity. Its earlier avatar was PN 9 of 1999. Since January 2009, around 25 Indian entrepreneurs tried to sell companies founded by them to one or the other of the top four PE funds operating in India. They came to PE funds, because they knew PE buyers would invest in and grow their companies, orient them to capturing global markets, retain the management team built by the entrepreneurs (unlike in a trade sale to a local competitor who would strip out the management team) and professionalise the company in every respect. Not one of the deals could be consummated, because regulations do not permit PE funds to design an optimal capital structure for buy-outs. It meant a potential loss to the economy, to entrepreneurship and to employment and I did wonder who gained.
How can the proposed takeover code impact hostile takeovers? Can we expect a rise in this?
Hostile actions are alien to Indian culture and we don’t see a place for them here. I would be concerned if any provision in the code were to encourage such actions whose economic benefits are questionable. Coincidently, one of the philosophies of Carlyle since its inception is not to indulge in hostile actions. All our investments are partnership investments with co-shareholders or entrepreneurs. In 100 per cent buy-outs, we see the management team as our partner. And we have seen tremendous benefits of these positive relationships. Hostile acts are not a route to value creation.
What is the pool that you have dedicated for investment in India?
Our fund for Asia is in excess of $2.5 billion. There are no country sub allocations.
What is your outlook for PE investments in India for the next two to three years? Which sectors would attract the maximum investment and why?
Investments will go where investments can be absorbed, which means the highest growth sectors. At eight-nine per cent, GDP (gross domestic product) growth, almost every sector needs growth capital in India. So in India, PE is in the happy situation of being able to choose its menu of sectors, where it believes growth would create the largest value and invest in those sectors.
