What is Private Equity
Private equity is medium to long-term finance provided in return for an equity stake in potentially high growth unquoted companies. The investors’ returns are dependent on the growth and profitability of the business. Companies at various stages of development can avail of private equity to finance their plans. Private equity financing at the various stages of maturity of a company would be as follows:
a. Seed stage Financing (provided to research, assess and develop an initial concept)
b. Start Up Financing (for product development and initial marketing)
c. Expansion stage Financing (for growth and expansion of a company which is breaking even or trading profitably)
d. Replacement Capital Financing (for Purchase of shares from another investor or to reduce gearing via the refinancing of debt)
e. Buyout financing (investing in more mature companies with established business plans to finance expansions, consolidations, turnarounds and sales, or spinouts of divisions or subsidiaries)
Stages in the Private Equity Investment Process
Private equity investment is typically a transformational, value-added active investment strategy. It involves investing in securities through a negotiated process which may consist of the following stages:
1. Assessment of need for Fund
2. Approaching the Private Equity Fund/ Advisor
3. Initial Enquiries and Negotiations/ Selection of PE Fund Advisor
4. Business Valuation
5. Preparing a Business Plan
6. Due Diligence
7. Term Sheet
8. Shareholders Agreement
9. Structuring the Deal / Final Negotiation and Deal Completion/ Execution of Legal Documents
10. Exit Strategy
Important Documents Required in the Private Equity Process:
1. Business Plan
2. Term Sheet
3.Warranties and Indemnities
4. Disclosure Letter
5. Shareholders' / Investors' Rights/ Subscription Agreement
6. Company’s Memorandum and Articles of Association
Legislations having a bearing on Private Equity
The Legislations, which will have a bearing on the Private Equity Deal, are:
1. Capital Market Regulations
• Securities and Exchange Board of India Act,1992
• SEBI (Issue of capital & Disclosure requirements ) Regulations 2009
- Chapter XIII- Guidelines for Preferential Issues
- Chapter XIIIA- Guidelines for Qualified Institutions Placement
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011
• SEBI ( Prohibition of Insider Trading ) Regulations 1992
• SEBI (Foreign Institutional Investors) Regulations 1995
• SEBI (Venture Capital Funds) Regulations 1996
• SEBI (Foreign Venture Capital Investors) Regulations 2000
• SEBI (Mutual Funds) Regulations 1996
• Securities Contracts ( Regulation) Act,1956
2. Reserve Bank of India (RBI)
• Foreign Exchange Management Act, 1999
• Foreign Exchange Management Regulations
3.Foreign Investment Promotion Board (FIPB)
4. Income Tax Laws
• Income Tax Act,1961
• Double Taxation Avoidance Agreements
5. Indian and International Accounting Standards
• IAS 32- Financial Statements Presentation
• IAS 39- Financial Instruments- Recognition and Measurement
• IFRS 7 – Financial Instruments Disclosures
6. Other Laws:
• Companies Act,1956
• Indian Trust Act,1882
• Indian Contract Act,1872
• Foreign Contribution (Regulation) Act, 2010
• Limited Liability Partnership Act 2008
• Listing agreement Clause 40A and 40B for Listed Companies
• Unlisted Public Companies (Preferential Allotment) Rules, 2003.
• Private Limited Company and Unlisted Public Limited Company (Buy Back of Securities) Rules 1999
Role of a Chartered Accountant (CA) in Private Equity Funding
The CA can assist the company in the private equity process in the following ways:
1. Undertaking an Initial appraisal of Management’s financing proposition
2. Preparation and advising on Business Plan
3. Business Valuation
4. Preparing financial model
5. Planning the capital/ funding structure
6. Review and appraisal of the terms of deal
7. Negotiation on terms of deal
8. Project management of transaction
9. Advising on the future plans/ exit route etc.
10. Due Diligence and reporting formally on the projections
11. Advice on tax matters
12. Advise on legal and Regulatory issues
13. Auditing
14. Risk Management
15. Assistance in documentation
17. Assistance in Mergers and Acquisitions
About the Author
Rajkumar S. Adukia
B. Com (Hons.), FCA, ACS, AICWA, LL.B, M.B.A, Dip IFRS (UK), Dip LL & LW
Senior Partner, Adukia & Associates, Chartered Accountants
Meridien Apts, Bldg 1, Office no. 3 to 6
Veera Desai Road, Andheri (West)
Mumbai 400 058
Email rajkumarfca@gmail.com
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