PE/VC Agenda - India Trend Book - 2018 - ey.com€¦ · In 2018 as well, the Indian PE/VC industry...

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PE/VC Agenda India Trend Book - 2018

Transcript of PE/VC Agenda - India Trend Book - 2018 - ey.com€¦ · In 2018 as well, the Indian PE/VC industry...

Page 1: PE/VC Agenda - India Trend Book - 2018 - ey.com€¦ · In 2018 as well, the Indian PE/VC industry is off to a very strong start, with US$7.9 billion of PE/VC investments in Q1 eclipsing

PE/VC AgendaIndia Trend Book - 2018

Page 2: PE/VC Agenda - India Trend Book - 2018 - ey.com€¦ · In 2018 as well, the Indian PE/VC industry is off to a very strong start, with US$7.9 billion of PE/VC investments in Q1 eclipsing
Page 3: PE/VC Agenda - India Trend Book - 2018 - ey.com€¦ · In 2018 as well, the Indian PE/VC industry is off to a very strong start, with US$7.9 billion of PE/VC investments in Q1 eclipsing

Contents

PE/VC exits cross a new high

Why invest in India – the macro view

Investment activity - highlights and trends

Distressed Assets - an opportunity for PE?

The Indian PE/VC sector – the road ahead

Appendices

24

06

12

30

44

46

1

2

3

The evolving regulatory and policy framework365

4

6

7

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PrefaceGrowing from strength to strength In 2017, both Private Equity (PE)/Venture Capital (VC) investments and exits recorded new all-time highs. India received US$26.5 billion in PE/VC investments in 2017, 35% higher than the previous high of 2015 and 63% higher than previous year. PE/VC exits in 2017 almost doubled in value to US$13.0 billion compared to the previous high recorded in 2016. The record level of growth has been driven primarily by large sized deals both in case of investments and exits. From a sector perspective, all the major sectors recorded significant increase in value invested in 2017, compared to the previous year.

Fund raising by PE/VCs increased by nearly 33% to US$5.8 billion in 2017 compared to US$4.3 billion in 2016, further adding to the already high level of dry powder available with PE/VC funds.

Source: EY analysis of VCC Edge data

Snapshot of PE/VC activity - 2017

Investments 2017 2016

Value (US$mn) 26,458 16,203

Number 595 588

Funds raised

Value (US$mn) 5,774 4,313

Number 44 41

Exits

Value (US$mn) 13,013 6,668

Number 259 209

In 2018 as well, the Indian PE/VC industry is off to a very strong start, with US$7.9 billion of PE/VC investments in Q1 eclipsing the previous Q1 high (2016) seen over the past four years by over 83%. Q1 2018 is now the second best quarter in last four years for PE/VC investment activity, as it saw 13 deals with investment amounts greater than US$100 million, against six such deals in Q1, 2017. As always, this is an amalgamation of all asset classes, including PE, real estate and infrastructure, which accounted for US$4.8 billion, US$1.5 billion and US$1.6 billion worth of investments respectively in Q1 2018. Although pure play PE investments declined from US$5.6 billion in Q4 2017 to US$4.8 billion in Q1 2018, they are almost 26% more than the US$3.9 billion invested in Q1 2017. The deficit in PE investment from Q4, 2017 was more than adequately picked up by the infrastructure and real estate asset classes that saw four and two deals respectively above the US$100 million mark.

3,450 5,139 6,003 5,043 4,310 3,658 3,097 5,138 4,179 6,214 8,686 7,379 7,916

181 188220

178146 164

121157

129165

138163 180

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

US$ million No. of Deals

PE/VC investment in India - Quarterly trends

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Vivek SoniNational Leader, Private Equity Services

Like the Indian equity capital markets, the Indian PE/VC market too seems to have developed a co-relation with its Global counterparts. At US$354.3 billion of PE/VC investments, 2017 was the best year since 2007 for the PE/VC industry globally. US$633.8 billion of dry powder is currently available to fund deals and 55% of global PE CFO’s expect to raise a new fund in 2018, of which 60% expect the new fund to be larger than the previous one. Like in India, Global PE deal activity in 2018 too is off to a very active start, holding out the promise of a strong year.

According to the Global Limited Partners (LPs) Survey 2017 conducted by EMPEA, India now ranks as the most attractive emerging market for General Partners (GPs) investment over the next 12 months, climbing from 9th place in 2013. This new found fondness for India by LPs coupled with the record levels of dry powder raised/being raised globally is very positive for the Indian PE/VC Industry. At EY India, we believe this will lead to the entry of new players (regional as well as global GPs) into India with large amounts of funds under management, further enriching the Indian PE/VC ecosystem. EY’s Global PE leader Herb Ingert says, ‘This is the Golden Age of Private Equity’ and we at EY believe that India is very well positioned to attract a disproportionately higher share of this mountain of global private capital looking for alpha returns.

2017 was a landmark year for India on the regulatory front. With big ticket reforms like Goods and Service Tax (GST), Insolvency and Bankruptcy Code (IBC) and a host of changes to the tax code (covered later in this report), the Government has been busy streamlining regulations to improve India’s ‘Ease of Doing Business’ ranking. The overseas investment community, especially the PE/VC and LP investor community, has responded favorably to these structural changes and the perception around India as an investment destination seems to have improved significantly.

OutlookIf we look at the past 20 years history of the Indian PE/VC industry, we find that notwithstanding intervals of weak macro’s, political instability, unstable currency, lack of awareness of the India opportunity by the Global LP Community, and a variety of other negative factors, the Indian PE/VC ecosystem has grown from approx. US$200 million in 1998 to almost US$39.5 billion in 2017 (PE/VC investments plus exits), a CAGR of almost 32%.

With all the positives now backing the Indian PE/VC story, strong Q1 numbers and the deal momentum in play, we believe that PE/VC investment activity in 2018 will eclipse the highs seen in 2017. The changes unleashed by the IBC regulation have opened India to a new PE asset class, adding more wind to the already full sails of the Indian PE/VC story. The Infrastructure asset class too is expected to see a lot of investment dollars, especially in the roads sector as the Government looks to privatize arterial routes to fund their ambitious roads’ capex plans. Real estate too is projected to see good investment activity, especially commercial real estate as more ‘REITable’ platforms get built.

On the exits front, there are strong undercurrents of strategic M&A deals in play. If and when they materialize, early stage backers of the Indian E-commerce sector will see strong exits, taking the Indian early stage investing eco-system to new highs. Overall, PE/VC exits should put up a strong performance in 2018 also, unless the Indian equity indices correct materially. We believe that the strong PE/VC exits seen in the past three years (over US$26 billion) have played a material role in ‘re-rating’ the India PE/VC sector in the eyes of Global LPs. These exits have underlined the ability of the Indian market to return foreign capital to LPs with returns, which in turn will attract more LPs and lead to an increase in India’s share of their Emerging Markets Capital allocation.

With technology led disruptions and internet connectivity bringing us closer to realizing the power of India’s demographic dividend, we believe that the next five years will be the Golden Age of the Indian PE/VC industry. In our view, political and policy stability permitting, by 2021, annual Indian PE/VC investment levels could potentially be in the range of 1.5x-2x the highs of 2017.

We hope you enjoy reading this report.

Happy Investing

Activity on PE/VC exits in Q1 2018 has been comparatively muted, climbing down 51% from Q4 2017. This is not surprising given the volatility unleashed in the Indian as well as global capital markets by a variety of factors including US inflation, Fed rate hikes, geopolitical tensions and the recent stance of the US Government on trade tariffs.

1,161 2,749 1,205 1,358 2,067 1,073 2,046 1,483 2,033 2,790 4,550 3,749 1,824

60 59 66 69

42 44

64 59 61 70

64 64

51

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18

US$ million No. of Deals

PE/VC Exits in India –Quarterly Trend

1 EY PE Capital Briefing January 2018 2 EY 2018 Global Private Equity Survey

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01Why invest in India

– the macro view

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The key underlying strengths making India one of the most attractive investment destinations globally are (a) its strong growth prospects in the near and medium-term, (b) sustained productivity-enhancing reforms undertaken since 2014 and (c) a strong demand-side push to growth imparted by the FY19 Budget of the Central Government.

1. India’s re-emergence as the global growth leaderIndia, for the first time, overtook China in terms of gross domestic product (GDP) growth in FY16. But this position was lost the very next year due to the adverse but short-term impact of demonetization and GST transition. However, after 1QFY18, the Indian economy has regained its growth momentum. The World Bank and the IMF have projected India’s FY19 growth at 7.3% and 7.4% respectively (Exhibit 1). These projections firmly place India as the global growth leader among the major economies of the world. The underlying drivers of growth are export and investment demand. Other agencies, including the Government’s Economic Survey, estimate growth prospects for FY19 to strengthen.

The IMF has projected a strong positive outlook for global growth, which would support India’s export demand. Export growth has already shown signs of strengthening since 2HFY18. Private investment demand has also started to improve from 1HFY18. Although private and government consumption expenditure showed a slight deceleration in

2HFY18, these trends are likely to be reversed soon because of the strong demand push being introduced through the Budget.

On the demand side, as shown in Exhibit 2, recovery in gross fixed capital formation and exports is likely to support growth in 2HFY18. Investment is expected to pick up from 3.1% in 1HFY18 to 5.9% in 2HFY18 and growth in exports is likely to

accelerate to 7.6% in 2HFY18 as compared to 1.2% in 1HFY18. Export growth moved from the negative zone during 4QFY15 to 4QFY16 to become strongly positive.

Exhibit 2: Real GDP growth (%)

AD component

1HFY15

2HFY15

1HFY16

2HFY16

1HFY17

2HFY17

1HFY18

2HFY18

PFCE 9.6 4.6 3.0 8.9 8.2 9.2 6.6 6.1

GCE 9.2 11.8 2.2 3.8 16.5 26.0 10.2 6.6

GFCF 2.6 3.4 4.8 5.4 5.2 -0.3 3.1 5.9

EXP 6.2 -2.3 -5.2 -5.2 1.8 7.2 1.2 7.6

IMP 2.1 -0.3 -4.7 -6.9 -2.2 7.0 10.4 9.7

GDP 7.6 6.4 8.0 8.2 7.7 6.5 6.0 7.0

Source: CSO, MOSPI, Government of India. AD: Aggregate demand; PFCE: Private final consumption expenditure; GCE: Government final consumption expenditure; GFCF: Gross fixed capital formation; EXP: Exports; IMP: Imports; GDPMP: GDP at market prices.

6.4

7.4

8.2

7.1

6.5

7.27.4 7.6

7.5 7.4 7.47.5

7.0

7.47.3

6.7

7.8

7.25

8.0

6.0

6.5

7.0

7.5

8.0

8.5

FY14 FY15 FY16 FY17 FY18 FY19 FY20

CSO Potential GDP (OECD)

OECD World Bank

IMF ES

Exhibit 1: India’s GDP growth: — actual vs. potential

Source (Basic Data): MOSPI, OECD; World Bank; Economic Survey 2017-18, Ministry of Finance, Government of India.

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2. Structural and supply-side reforms: sustained productivity-enhancing effectsAs is already well recognized, India’s demographic profile confers on it a long-term growth advantage through the virtuous cycle of higher saving and investment leading to growth. This is further supplemented by sustained structural and supply-side reforms undertaken by the current Government that have considerable productivity-enhancing potential. Some examples of these initiatives are GST, Make in India, Smart cities, digitization and Skill India. GST, for example, is very largely a supply-side policy reform as it aims to improve the productive efficiency of the economy by better resource allocation, removal of inter-jurisdiction fiscal barriers and bringing in supply chain efficiencies. Improved regulatory policies including the new bankruptcy law, the Fiscal

Responsibility and Budget Management Act, 2003 (FRBMA) in its current or potentially modified form and Real Estate Regulation Act (RERA) are examples of the institutional and regulatory reforms as summarized in Exhibit 3, depicting the Policy Wheel, which highlights the current Government’s emphasis on structural and supply-side reforms.

Some policies can have both supply and demand side implications. Thus, the Government’s capital expenditure on infrastructure adds to demand but infrastructure improves the productivity of other resources. Demand and supply-side policies are not mutually exclusive and they can be pursued together. Demand-side policies get the wheels of the economy moving by giving it a quick push. Supply-side policies sustain the momentum of the wheels and help produce long-term beneficial results.

A significant policy priority of the Government relates to Make in India, which focuses on the following sectors: automobiles, automobile components, aviation, bio-technology, chemicals, construction, defense manufacturing, electrical machinery, electronic systems, food processing, IT and BPM, leather,

media and entertainment, mining, oil and gas, pharmaceuticals, ports and shipping, railways, renewable energy, roads and highways, space, textile and garments, thermal power, tourism and hospitality, and wellness. These sectors catering to both the domestic and export markets have bright growth prospects

• Tax-GDP ratio slated to increase due to formalization and digitization of economy and also due to GST.

• Wide-ranging reforms covering all major dimensions of the economy.

• The positive side of demonetization was digitization and formalization of the economy.

• Digitization is a potential positive spin-off of demonetization.

• Power sector reforms: from deficit to surplus.

• Surface transport: tangible success — National Highways Development Program (NHDP), which includes projects such as the Golden Quadrilateral and the East-West Corridor, would be brought to a close in six months’ time.

Source: EY analysis

Demand side policies

Supply side policies

Monetary policy Fiscal

policy

Mainly supply side policies with demand implications

GST

Make in India

Market based pricing of government resources

Pushing aggregate demand

Sustaining momentum, augmenting productivity

Smart Cities

Skill India Digital

India

Exchange rate policy

Tax cuts Trade policies

Mainly demand side policies with supply implications

Subsidy reduction

Deficit financed infrastructure spending

Government expenditure restructuring

FDI policiesPower sector reforms

FY19 Budget along with outlays for selected programs

Institutional and regulatory fulcrum: e.g.,

FRBMA, RERA, Bankruptcy

Law

Exhibit 3 : Policy wheel

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going forward. Foreign direct investment (FDI) norms for investment directed toward these sectors have also been eased significantly.

With respect to FDI, the Government unveiled a new consolidated FDI policy framework on 28 August 2017. Further liberalization of FDI has been progressively taken up since then. Exhibit 4 highlights how FDI inflows into India have been gathering momentum.

Source: (Basic data): RBI; * Data forecasted for FY18 based on the data that was available till December 2017

• With the progressive liberalization of FDI policies, gross FDI inflows have shown a sustained increase since FY15.

• FDI policy distinguishes between two routes: automatic route and Government-approval route.

• Most sectors have now been placed under the automatic route, where 100% FDI is allowed.

• The limited number of sectors under the Government-approval route include space, biotechnology, mining and some defense sectors.

Exhibit 4: Gross FDI inflows (US$ billion)

46.6

34.3 36.045.1

55.660.2 64.3

010203040506070

2011-12

2012-13

2013-14

2014-15

2015-16

2016-17

2017-18*

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3. India’s FY19 Budget: a demand-side push toward growthThe supply-side initiatives have now been supplemented by a demand-side push through the FY19 Budget of the Central Government. This has envisaged significant support to aggregate demand by focusing on agriculture and rural livelihoods, infrastructure and education, and health and social sectors. While total expenditure in the FY19 Budget as

a percentage of GDP is slightly lower than the corresponding amount in FY18 Revised Estimates (RE), this contractionary effect is more than made up by the utilization of extra-budgetary resources for the selected focus areas. Looking at the incremental effect of these extra-budgetary resources, there is a net expansionary change in the Government’s budgetary expenditure in FY19 compared to FY18 RE to the extent of nearly 1 percentage point of GDP (Exhibit 5).

In the case of agriculture, nearly 83.6% of the total outlay is to be raised as extra-budgetary resources by the concerned public sector enterprises, special purpose vehicles and other similar institutions.

Thus, the policy push to growth in the short run and the underlying structural reforms with their productivity-enhancing

effects in the long run make India’s growth narrative quite convincing. Its sustained position as a global growth leader makes India an attractive investment destination for private capital looking to generate an alpha return through long-term investing.

Exhibit 5: Role of budgetary and extra-budgetary resources — FY19

2017-18 (RE) % of GDP

2018-19 Budget Estimates (BE) % of GDP

FY19 BE over FY18 RE percentage points of GDP

Incremental outlay (FY19 BE minus FY18 RE) INR crore

Total expenditure 13.21 13.04 -0.17 2,24,463

Expansionary effect of financing outlays by budgetary and extra-budgetary resources

Agriculture and rural livelihood program

7.04 7.66 0.62 2,48,057

Schematic outlays for education, health and social protection sectors

0.73 0.74 0.01 15,600

Capital outlay on infrastructure 2.93 3.19 0.26 1,02,830

Total outlay 10.70 11.59 0.89 3,66,487

Memo

Nominal GDP (INR crore) 16,847,455 18,722,302

Source: Union Budget documents and MOSPI

Dr. DK SrivastavaChief Policy Advisor

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02Investment activity

- highlights and trends

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PE/VC investments at a new all-time high in 20172017 was a record year for PE/VC investments in India, recording an all-time high of US$26.5 billion. In value terms, investments rose by 63% compared to 2016, while the number

of deals remained at similar levels (595 deals vs. 588 deals in 2016). Investments surpassed the previous record set in 2015 by 35%. This rise in value terms was despite a 22% drop in the number of deals compared to 2015 (595 deals in 2017 vs. 767 deals in 2015).

While the growth appears to be impressive in absolute terms, it is skewed by a few large deals by Softbank from its gigantic US$100 billion Vision Investment Fund. In 2017, Softbank made investments of close to US$5 billion in the Indian market. Most of these investments came from its Vision Fund, which is also the largest pool of private capital ever mobilized. Such large investments by a single fund are a rarity in the Indian market. After adjusting for these one-off deals, the growth in the PE/VC investment activity in 2017 moderates. Nonetheless, it is still impressive and even after adjusting for these mega deals, 2017 counts as the best year in terms of the value of PE/VC investments, driven by an overall underlying trend of deals becoming larger and more complex.

2017 also recorded the largest PE/VC investments in India so far, which involved Softbank investing US$2.5 billion from its Vision Fund into India’s most valuable new age e-commerce company — Flipkart — for a 23.6% stake.3 This deal now makes Softbank the largest investor in India’s largest online retail company, which is battling Amazon in one of the world’s most competitive e-commerce markets. This investment is a mix of primary and secondary trades. The deal provided a partial exit to Tiger Global, which until recently, was the largest investor in Flipkart.4 The other large investments that involve Softbank include the US$1.4 billion invested in Paytm and the US$1.1 billion invested in Ola Cabs along with Tencent.

Exhibit 6: PE/VC investments in India 2008-2017

10,627 8,430 9,641 7,546 9,116 11,683 19,635 16,203 26,458

362226

372446 416 392

470

767

588595

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Value (US$ million) Volume

3,657

Source: EY analysis of VCC Edge data

3 https://www.vccircle.com/india-competition-watchdog-approves-softbank-flipkart-alibaba-bigbasket-deals/, https://inc42.com/buzz/softbank-to-sell-part-of-its-stake-in-flipkart-to-walmart-is-it-a-done-deal/

4 https://economictimes.indiatimes.com/small-biz/money/softbank-vision-fund-invests-2-5-billion-in-flipkart/articleshow/60001483.cms

The strong investment activity in 2017 and associated data indicate the emergence of the following trends:

I. Deals are becoming larger and more complex

2017 had some very large deals, making it one of the best years in terms of closure of large deals. 2017 recorded 55 deals of value greater than US$100 million, aggregating US$19.1 billion and accounting for 72% of the total value of investments in 2017. In comparison, 2016 recorded only 33 deals of value greater than US$100 million aggregating US$8.1 billion. This also resulted in the average size of deals rising to US$55 million in 2017 from US$33 million in 2016. Even if we adjust for the large Softbank investments, deals greater than US$100 million add up to 50 deals, aggregating to US$13.5 billion, which is still the highest ever in terms of both value and volume and significantly higher than the next best year for large deals, which was 2016. Adjusted for the Softbank deals, the average deal size drops to US$45 million, which still is the highest ever and almost 35% higher than the average deal size in 2016. Also, except for credit investments, the increase in average deal size has happened across deal segments.

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Target InvestorAmount (US$m)

Deal stake %

Investment month

Stage Target sector

Flipkart SoftBank 2,500 24 Aug-17 Growth E-commerce

Paytm SoftBank 1,400 NA May-17 Growth Financial services

DLF Cyber City Developers Limited

GIC 1,390 33 Aug-17 Growth Real estate

ANI TechnologiesPrivate Limited (Ola Cabs)

Tencent, Softbank 1,100 NA Oct-17 Growth E-commerce

Bharti Infratel Limited

KKR, CPPIB 956 10 Mar-17 PIPE Telecom

Axis Bank Limited Bain Capital 795 4 Dec-17 PIPE Financial services

GlobalLogic CPPIB 720 48 Jan-17 Growth Technology

IndoSpace CPPIB 500 NA May-17 Buyout Real estate

Logos India Ivanhoé Cambridge (the real estate subsidiary of CDPQ) and QuadReal Property Group

400 NA Oct-17 Start-up Logistics

ICICI Lombard General Insurance Company Limited

Warburg Pincus LLC, Clermont Group, IIFL Special Opportunities Fund

383 12 May-17 Growth Financial services

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

5 http://docs.preqin.com/samples/2018-Preqin-Global-Private-Equity-and-Venture-Capital-Report-Sample-Pages.pdf

Source: EY analysis of VCC Edge data

Exhibit 8: Deals greater than US$100 million

5 6 11 8 19

20 20

46

33

55

0102030405060

0

5

10

15

20

25

2013 2014 2015 2016 2017

US$ billion # of deals

Exhibit 9: Average and median deal size

0

30 31 32 33

55

09 9 9 10 10

Year 2013 2014 2015 2016 2017

Average Median

Exhibit 7: Top 10 PE/VC Investment deals in 2017

The surge in deal size is not just restricted to India but is a global phenomenon primarily driven by rich valuations and more deployable capital available with PE/VC Investors. According to a Prequin report,5 higher valuations have seen the average deal size for venture capital deals grow 120% in the past decade (US$10 million in 2007 vs. US$22 million in 2017).

With global funds flush with dry powder after raising a record level of funds in 2017, the only constraint on private equity globally has been the availability of targets as opposed to capital availability.

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Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

II. LPs are increasingly co-investing with GPs and/or investing directly

LPs are pension funds, insurance companies, university endowments, family foundations and even corporates with multi-billion dollar funds under management. Traditionally, fund-of-funds were used to funnel money to private equity and venture capital firms, but now data suggests that LPs are increasingly investing directly in companies, often co-investing

6 https://www.empea.org/research/2017-global-limited-partners-survey/

with the GPs backed by them. This trend, which started about five years ago in India, witnessed increased traction in 2017.

Some of the reasons that can be attributed to this trend are:

1. It provides additional flexibility and choice in investment decisions. The direct investment route gives a better sense of the market by being more closely involved with the investment than just being financial investors through a GP.

2. The attractiveness of India as an investment market is growing given its healthy growth potential, improving ease of doing business and the Government’s strong commitment on the reform agenda.

3. Co-investing helps LPs improve returns by reducing fee drag, as they do not pay any incremental management fee to the GP on co-investments.

Direct investments by LPs in the Indian market over the past 10 years add up to approximately US$20 billion, of which almost US$6 billion was invested in 2017 alone. Some of the largest investors in the Indian market over the years include LPs such as GIC, Temasek, International Finance Corporation, Abu Dhabi Investment Authority and, of late, some of the Canadian LPs such as Canada Pension Plan Investment Board (CPPIB), Caisse de dépôt et placement du Québec (CDPQ), and Public Sector Pension Investment Board (PSP).

In 2017, Canadian LPs made direct investments of approximately US$2.5 billion in India and have evinced keen interest in India as an investment destination, earmarking significant funds for additional direct investments in India.

LPs, on account of the sheer size of funds under management, are more inclined to make larger ticket size investments. Thirteen out of the 27 direct investments made by LPs in India in 2017 were deals with size greater than US$100 million. In value terms, this accounts for almost 89% of the total direct investments made by LPs in 2017. GIC’s purchase of a 33% stake in DLF’s rental business arm for US$1.4 billion was the largest direct LP investment in 2017. CPPIB’s US$720 million investment in Global Logic, a software development company, and the US$500 million buyout of IndoSpace, a developer of industrial and logistic parks in India, are among the larger direct investments by Canadian LPs in India in 2017.

A recent LP survey conducted by EMPEA6 indicates that almost two-third of the LPs surveyed are seeking to co-invest with emerging market PE funds in 2018. With almost 52% of the survey respondents planning to increase their co-investment pools over the next two years, this appears to be a trend pervasive across all emerging markets.

Exhibit 10: Percentage share by value (US$ billion)

1, 4% 1, 4%

2, 8%

3, 11%

19, 72%

< US$10 millionUS$10 million - US$20 millionUS$20 million - US$50 millionUS$50 million - US$100 million > US$100 million

1, 6%1, 6%

2, 15%

4, 23%

8, 50%

2017 2016

Exhibit 11: Percentage share by # of deals

< US$10 millionUS$10 million - US$20 millionUS$20 million - US$50 millionUS$50 million - US$100 million > US$100 million

2017 2016

252, 52%

68, 14%

65, 13%

45, 9%

56, 12%

253, 52%

68, 14%

77, 16%

53, 11%

33, 7%

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Exhibit 12: Top investment deals by LPs in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Financing stage

Target sector

Investor

DLF Cyber City Developers Limited

1,390.00 33 Aug-17 Growth Real estate GIC

Global Logic 720.00 48 Jan-17 Growth Technology CPPIB

IndoSpace 500.00 NA May-17 Buyout Real estate CPPIB

Logos India 400.00 NA Oct-17 Start-up Logistics Ivanhoé Cambridge (subsidiary of CDPQ)

ReNew Power Ventures Private Limited

350.00 NA Nov-17 Growth Renewables CPPIB

Kotak Mahindra Bank Limited

341.65 1.5 Mar-17 PIPE Financial services

CPPIB,CDPQ

Bharti Infratel Limited 302.00 3.2 Mar-17 PIPE Telecom CPPIB

Cube Highways and Infrastructure Pte. Limited

300.00 NA Nov-17 Start-up Infrastructure ADIA

Manipal Health Enterprises Private Limited

171.35 18 Aug-17 Growth Healthcare Temasek

Can Fin Homes Limited 112.89 13.45 Mar-17 PIPE Financial services

GIC

Source: EY analysis of VCC Edge data

III. Investments in start-ups rebounded, with new sectors leading the charge

Investments in start-ups recorded a drop in 2016 after the record highs in 2015. This was driven primarily by a greater than 50% decline in the number and value of e-commerce deals following valuation concerns as e-commerce firms struggled to contain their cash burn amid intense competition. Start-up funding had peaked in 2015, recording US$4.8 billion of invested PE/VC capital across 454 deals. Of this, investments in e-commerce accounted for more than 40% of both deal value and volume.

The tide, however, seems to have turned with new sectors of interest emerging in financial services and logistics. Financial services recorded 52 start-up funding deals worth US$564 million in 2017 compared to 28 deals worth US$230 million in 2016. Similarly, logistics received US$649 million in investments across 14 deals in 2017 compared to US$124 million across 12 deals in 2016.

E-commerce continued to be the sector to receive the largest amount of start-up funding at US$819 million, of which

US$500 million was on account of investment by Softbank in budget stay aggregator Oyo Rooms. The number of e-commerce deals, however, continues to be on a sharp decline (45 deals in 2017 vs. 80 deal in 2016 vs. 169 deals in 2015).

Source: EY analysis of VCC Edge data

Exhibit 13: Start-up deals in India 2014–17

1.7 4.8 2.1 3.5

253

454300 312

0

200

400

600

-

2.0

4.0

2014 2015 2016 2017

US$ billion # of deals

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17PE/VC Agenda - India Trend Book - 2018

Exhibit 15: Top buyout deals in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Target sector Investor

IndoSpace 500 100 May-17 Real estate CPPIB

Carnival's Chandigarh Property 340 100 Jul-17 Real estate Blackstone

Aegis Limited 275 100 Apr-17 Technology Capital Square Partners

Hindustan Powerprojects Private Limited

250 100 Apr-17 Power and utilities Macquarie Group

Karvy Computershare Limited 240 83 Aug-17 Financial services General Atlantic

Source: EY analysis of VCC Edge data

IV. Buyout and credit deals lesser than 2016 but remain strong emerging trends

Buyout and credit deals moderated from the highs of 2016. In value terms, buyouts declined by 20% and credit deals by 18% in 2017 compared to the previous year. Nonetheless, the deal activity in buyout and credit deals continues to remain robust. Despite the decline, buyouts are more than three times the value in 2014 and credit deals are at almost four times the corresponding value in 2014.

Since 2015, buyout deals have gained in prominence both in the number and size of deals, in line with the global trend, reinforcing the fact that there is growing confidence among funds to undertake large control transactions in emerging markets. This is also evident from growing allocation of capital toward India by large global pension and sovereign funds as noted earlier. Five out of the top 25 deals in 2017 were buyout deals.

Credit/Structured debt as a mode of funding, which emerged as a new trend in 2016, continued into 2017, with the majority of credit deals taking place in the real estate sector. While these deals provide healthy returns with downside protection to the investors, they have emerged as a viable means of financing for the cash-strapped real estate sector in addition to the plain vanilla bank financing option. The largest credit deal in 2017 was the mezzanine debt funding provided by Piramal and APG Asset Management worth US$300 million to Mytrah Energy. Credit deals by PE-investor-backed platforms are expected to increase with many investors showing interest in acquiring distressed assets and stressed loan portfolios from banks in wake of the resolution ecosystem put in place by the new IBC.

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

Exhibit 14: Buyouts deals in India 2014-17

1.3 3.0 3.9 3.2

11

2329 25

0

10

20

30

40

-

2.0

4.0

6.0

2014 2015 2016 2017

US$ billion # of deals

Exhibit 16: Credit deals in India 2014–17

0.6 1.1 2.9 2.5

2435

6557

0

20

40

60

80

-

1.0

2.0

3.0

4.0

2014 2015 2016 2017

US$ billion # of deals

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18 PE/VC Agenda - India Trend Book - 2018

V. 2017 was a good year for Growth and PIPE investments

While 2017 saw investment value increase significantly across the major deal segments of growth, start-up and PIPE compared to 2016, growth capital accounted for more than 50% share of the total value invested. 2017 was the best year for growth capital, with US$13.5 billion invested across 159 deals, more than twice the value recorded in 2016. As noted earlier, large investments by Softbank and Canadian pension funds contributed significantly to the surge in growth capital investments.

Likewise, 2017 was also the best year for PIPE investing, with US$3.8 billion invested across 42 deals, more than a two-fold increase in value compared to 2016. KKR and CPPIB’s US$956 million investment in Bharti Infratel for a 10.3% stake was the largest PIPE deal for the year, followed by Bain Capital’s US$795 million investment in Axis Bank for a 3.7% stake.

VI. Investments rise across most sectors with the traditional favorites receiving a record level of investments

All the major sectors recorded a significant increase in the value of investments in 2017 compared to the previous year. It was the best year in terms of the value of investments for most sectors. In 2017, sectors like financial services, real estate, e-commerce, technology, retail and consumer products, and healthcare recorded the highest ever investments by PE/VC investors in India, together accounting for 74% of all investments made during the year. Except for technology, which recorded a decline of 10%, all the other sectors mentioned above grew by over 50% in terms of value.

Apart from these, sectors such as logistics, power and utilities and food and agriculture also witnessed good investment activity in 2017, which we expect to continue in 2018.

Exhibit 17: Growth deals in India 2014–17

6.6 8.5 5.7 13.5

121

213

160

159

0

50

100

150

200

250

-

5.0

10.0

15.0

2014 2015 2016 2017

US$ billion # of deals

Exhibit 19: Deal value (US$ billion) by sector in 2017 and % contribution to overall value

Financial services, 7.2, 27%

Real estate,5.0, 18%

E-commerce, 4.7, 17%Technology, 1.8, 7%

Power and utilities, 1.3, 5%

Healthcare, 1, 4%

Retail and consumer, 0.8, 3%

Others, 4.7, 18%

Exhibit 18: PIPE deals in India 2014–17

1.6 2.3 1.6 3.8

61

4234

42

0

20

40

60

80

-

1.0

2.0

3.0

4.0

2014 2015 2016 2017

US$ billion # of deals

Exhibit 20: Deal value (US$ billion) by sector in 2016 and % contribution to overall value

Financial services, 2.5 , 16%

Real estate,3.2, 20%

Technology, 2.0 , 12%

Telecom,1.6 , 10%

E-commerce,1.5 , 9%

Infra, 0.7 , 4%

Healthcare,0.6 , 4%

Others, 4.1 , 25%

Source: EY analysis of VCC Edge data Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data Source: EY analysis of VCC Edge data

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19PE/VC Agenda - India Trend Book - 2018

VII. Increased investment activity expected to continue in 2018 as investor sentiment remains upbeat

The year witnessed US$5.8 billion of new funds raised by PE/VCs, an increase of nearly 34% compared to 2016 (US$4.3 billion). Kedaara topped the charts with a sector-agnostic fund of US$750 million. This was followed by a US$600 million fund raised by Chryscapital’s seventh sector-agnostic fund, and HDFC Capital’s US$550 million real estate fund.

Even globally, from CVC in Europe to Apollo Global Management in the US, private equity funds have rapidly raised record-sized funds backed by institutional and sovereign investors who are chasing high returns in a low-interest rate environment. As an example, Saudi Arabia’s large allocation toward alternative assets contributed to the creation of SoftBank’s US$100 billion Vision Fund, which made close to US$5 billion worth of investments in India in 2017 alone.

Exhibit 21: Deal volume by sector in 2017

Financial services, 112, 19%

Technology, 121, 20%

E-commerce, 60, 10%Real estate

53, 9%

Food and agri,47, 8%

Retail and consumer, 37, 6%

Healthcare,37, 6%

Others, 128, 22%

Exhibit 23: Funds raised and announced (US$ million)

21,548

14,075

4,313

5,774

2016

2017

Announced Raised

Exhibit 24: # of funds raised and announced

68

75 41

44

2016

2017

Announced Raised

Exhibit 22: Deal volume by sector in 2016

E-commerce, 91 , 15%

Technology, 114 , 19%

Financial services, 72 , 12%

Retail and consumer, 28 , 5%

Healthcare, 35 , 6% Real estate, 70 , 12%

Food and agri,27 , 5%

Others,151 , 26%

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

In line with the historic trend, the top five funds contributed more than 50% of the total funds raised, indicating a preference for experienced GPs with a track record of performance. In fact, only US$926 million was raised by first-time managers. There were 15 fund raises by Indian PE/VC funds aggregating to US$2.4 billion in 2017. From a sector perspective, sector-agnostic funds comprised 60% of total value of funds raised by PE/VCs in 2017.

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20 PE/VC Agenda - India Trend Book - 2018

Exhibit 25: Top 10 fund raises by PE/VCs during 2017

Name of the fundAmount

(US$ million)Month Sector focus

Kedaara 750 Sep-17 Sector agnostic

ChrysCapital fund VII 600 Feb-17 Sector agnostic

HDFC Capital 550 Dec-17 Real estate

Morgan Stanley 450 Sep-17 Infrastructure

Edelweiss Special Opportunities Fund (ESOF) II 350 Apr-17 Sector agnostic

SAIF 350 Jul-17 Sector agnostic

CX Partners 250 Nov-17 Sector agnostic

Madison India 230 Sep-17 Sector agnostic

Lighthouse’s third fund 200 Dec-17 Sector agnostic

ICICI Venture: India Advantage Fund Series 4 (IAF4) 160 Feb-17 Sector agnostic

Source: EY analysis of VCC Edge data

Sector InsightsAs noted earlier, 2017 was the best year for most of the top sectors of interest to the PE/VC industry. With various policy measures targeted at these sectors, coupled with the high levels of dry powder at hand, we expect the momentum to continue into 2018 as well.

Financial services emerged as the top sector for PE/VC investments in 2017, overtaking real estate from last year. Investments in financial services at US$7.2 billion were almost three times that of last year. The Government’s demonetization drive in November of 2016 with an intent to move to a “less cash” economy helped accelerate the adoption of FinTech, not only for payments but also for other financial services. Concerted efforts by the Government in pushing financial sector reforms through measures such as Jan-Dhan Yojana and BHIM app to promote digital and financial literacy, and structural reforms such as bank recapitalization, revision of FDI cap for banks and the IBC have gone a long way in driving investments into the sector.

In addition to deals in the FinTech, microfinance and NBFC spaces, this year also saw deals in the insurance and housing finance sector, with deals such as the US$383 million investment in ICICI Lombard by Warburg Pincus, Clermont and others, US$113 million investment in Can Fin Homes by GIC and True North’s investment of US$100 million in Home First Finance.

Exhibit 26: Deals in the financial services sector in India 2014–17

1.1 2.9 2.5 7.2

4564 72

112

020406080100120

-

2.0

4.0

6.0

8.0

2014 2015 2016 2017

US$ billion # of deals

Source: EY analysis of VCC Edge data

The investment sentiment for financial services has been further bolstered by successful Initial Public Offering (IPO) exits such as that of ICICI Lombard, AU Small Finance Bank, MAS Financial Services and BSE. In fact, ICICI Lombard was the largest exit by a PE/VC fund in India via the IPO route, which saw Fairfax selling its 12% stake for US$558 million.

Financial services

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21PE/VC Agenda - India Trend Book - 2018

Exhibit 27: Top deals in the financial services sector in 2017

Target Amount (US$ million)

Deal stake % Investment month

Financing stage

Investor

Paytm 1,400 NA May-17 Growth SoftBank

Axis Bank Limited 795 3.7 Dec-17 PIPE Bain Capital

ICICI Lombard General Insurance Company Limited

383 12.2 May-17 Growth Warburg Pincus, Clermont Group, IIFL

HDFC Standard Life Insurance Company Limited

356 NA Nov-17 PIPE UC-RNT Fund, other anchor investors

Kotak Mahindra Bank Limited 342 1.5 Mar-17 PIPE CPPIB,CDPQ

SBI Cards and Payments Services Private Limited

325 26 Dec-17 Growth Carlyle

Source: EY analysis of VCC Edge data

The real estate sector saw significant investment activity in 2017. Despite a slowdown in residential sales amidst the overhang of RERA implementation, PE/VC funds remained bullish on the real estate sector, which garnered PE investments worth US$5.0 billion in 2017. This was primarily driven by investor interest in yield-generating commercial assets. Four out of the top five investments in the real estate sector in 2017 were into commercial real estate. Investments in the residential real estate space were mostly debt and mezzanine in nature, providing a viable alternative to cash-strapped developers as banks shied away from lending to developers.

As mentioned earlier in the report, interest from sovereign wealth funds and pension funds in the Indian real estate and infrastructure space has also greatly helped the cause, with these funds contributing close to US$2 billion of the total funds invested by PE/VCs in the real estate sector in 2017. GIC’s investment of US$1.4 billion for a 33% stake in DLF’s rental arm is the largest investment in the Indian real estate sector till date.

The Government’s focus on bringing in enabling reforms such as RERA to the sector has bolstered the confidence of both consumers and investors alike. Also, after according infrastructure status to affordable housing in 2017, the Government has announced plans to launch a dedicated affordable housing priority sector fund under the National Housing Bank (NHB) in the 2018 Budget. These measures will go a long way in boosting investor sentiment toward the sector. Further, the Government’s support to new investment avenues such as real estate investments trust (REIT) funds will add to the sector’s attractiveness. With declining vacancies, and improving

7 http://www.realtynmore.com/wp-content/uploads/2017/08/Pulse_June_2017.pdf 8 https://economictimes.indiatimes.com/industry/services/property-/-cstruction/embassy-to-list-select-office-assets-via-reit/articleshow/59173640.cms9 https://www.dealstreetasia.com/stories/blackstone-gic-top-global-real-estate-investors-in-india-66433/

Exhibit 28: Deals in the real estate sector in India 2014–17

2.1 3.4 3.2 5.0

54

8170

53

0

20

40

60

80

100

- 1.0 2.0 3.0 4.0 5.0 6.0

2014 2015 2016 2017

US$ billion # of deals

Source: EY analysis of VCC Edge data

Real estate rentals, superior quality buildings in central business districts (CBDs), secondary business districts (SBDs), and peripheral business districts (PBDs) are likely to see maximum “REITable” assets. According to a report by JLL,7 close to 283 million sq. ft. of office space in India is “REITable,” a large proportion of which is already held by PE/VC funds and their portfolio companies. Embassy Office Parks, an investment partnership between Embassy Group and Blackstone Group, has received SEBI registration for a US$600 million REIT, which includes a clutch of marquee office parks, namely, Embassy Manyata Business Park and Embassy GolfLinks in Bengaluru, measuring more than 20 million sq.ft of office space.8 Blackstone, which owns the largest portfolio of office assets in India, has invested about US$2.7 billion over the last decade in the Indian real estate sector.9 Canadian pension funds have also been active investors in the Indian real estate and infrastructure sector. A total of US$951 million was raised by real estate focused funds in 2017 on the back of US$981 million raised in 2016.

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22 PE/VC Agenda - India Trend Book - 2018

Exhibit 30: Deals in e-commerce sector in India 2014-17

3.9 4.2 1.5 4.7

72

186

9160

0

50

100

150

200

-

1.0

2.0

3.0

4.0

5.0

2014 2015 2016 2017US$ billion # of deals

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

Source: EY analysis of VCC Edge data

Exhibit 29: Top deals in the real estate sector in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Financing stage

Investor

DLF Cyber City Developers Limited 1,390 33 Aug-17 Growth GIC

IndoSpace 500 NA May-17 Buyout CPPIB

Carnival's Chandigarh Property 340 100 Jul-17 Buyout Blackstone

Phoenix Group, Marvel Group and Jatia Group 196 NA Mar-17 Growth Altico Capital

Shriram Properties, IT SEZ 190 100 May-17 Buyout Xander

Exhibit 31: Top deals in the e-commerce sector in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Financing stage

Investor

Flipkart 2,500 23.6 Aug-17 Growth SoftBank

ANI Technologies Private Limited(Ola Cabs)

1,100 NA Oct-17 Growth Tencent, Softbank

Oravel Stays Private Limited (OYO Rooms) 260 NA Sep-17 Start-up Lightspeed, Sequoia, SoftBank and others

Oravel Stays Private Limited (OYO Rooms) 250 15 Apr-17 Start-up SoftBank

ANI Technologies Private Limited (Ola Cabs)

102 NA May-17 Growth Falcon Edge, UC-RNT Fund

E-commerce, with investments of US$4.7 billion in 2017 rebounded from the lows of US$1.5 billion recorded last year, supported by two large deals made by Softbank worth US$3.6 billion. In the absence of these deals, e-commerce would have recorded an even lower performance compared to last year. In wake of the many “me too” kind of e-commerce businesses sprouting up and the high valuations, investors are shifting their focus on scalability, sustainability and profitable growth. Consequently, the number and scale of e-commerce deals have seen a proportionate decline.

Exhibit 32: Deals in the technology sector in India 2014–17

2.0 1.1 2.0 1.8

101152

114 121

0

100

200

-

1.0

2.0

3.0

2014 2015 2016 2017

US$ billion # of deals

Technology companies received US$1.8 billion of investments across 121 deals in 2017. The key themes were cloud-based SaaS solutions, data analytics and mobile apps. Moreover, PE/VC funds are showing interest in technology companies, focusing on particular industries, typically financial services (FinTech), analytics and healthcare. CPPIB topped the list of technology investors with a US$720 million investment into Global Logic for a 48% stake.

E-commerce

Technology

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23PE/VC Agenda - India Trend Book - 2018

Source: EY analysis of VCC Edge data

Exhibit 33: Top deals in the technology sector in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Financing stage

Investor

GlobalLogic 720 48 Jan-17 Growth CPPIB

Aegis Limited 275 100 Apr-17 Buyout Capital Square

Druva Software Private Limited 80 NA Aug-17 Growth Sequoia, Nexus, and other investors

Nazara Technologies Limited 79 NA Dec-17 Growth IIFL and others

Markets and Markets Research Private Limited

56 NA Mar-17 Growth FTV Management, Zodius Capital Advisors

Healthcare is one of the largest sectors in India and also one of the most in need of investments. The total industry size is expected to touch US$280 billion by 2020.10 Rising income level, greater health awareness, increased incidence of lifestyle diseases and improved access to insurance are expected to be the key contributors to growth. The sector has a huge potential for PE/VC investors and is expected to continue to drive a considerable amount of investments going forward. In its 2018 Budget, the Government launched one of the world’s largest healthcare programs, a new flagship National Health Protection Scheme, providing a health insurance cover of INR5 lakh (US$8,000) per family per annum.11 The scheme will cover 100 million vulnerable families, with approximately 500 million beneficiaries. Initiatives like these provide further incentive for investors to allocate capital to the Indian healthcare sector. In 2017, PE/VC funds invested US$1 billion across 37 deals, up from US$640 million invested in 2016 across 35 deals.

Like healthcare, a couple of other sectors that have seen favorable interest driven by increasing income levels and improving lifestyles are retail and consumer products (RCP) and food and agriculture. RCP witnessed US$797 million in investments across 37 deals compared to US$636 million invested across 28 deals in 2016. Food and agriculture related companies recorded 47 deals in the sector compared to 27 in 2016. The deal size, however, remained on the smaller side with the largest deal being US$50 million.

* Retail and consumer products

10 https://www.ibef.org/industry/healthcare-presentation 11 https://blogs.economictimes.indiatimes.com/et-commentary/national-health-protection-scheme-now-let-the-meds-kick-in/

Healthcare

RCP* and Food & Agri

Logistics

Logistics is one sector that is witnessing considerable interest off late, especially after the passage of GST. Moreover, the Government has recently accorded infrastructure status to the logistics sector, covering cold chains, warehousing facilities and logistics parks, which is further increasing the attractiveness of the sector. Measures like the e-way bill are a welcome step for the transporters, eliminating the need to visit check posts and thereby enabling faster movement of goods and facilitating better utilization of vehicles.

We have already witnessed some large investments made in this sector with CPPIB’s buyout of IndoSpace, a developer of industrial and logistics parks, for US$500 million and a commitment to invest another US$600 million. Likewise, another Canadian pension fund CDPQ has invested US$400 million in a logistics investment and development firm LOGOS India to develop and own modern logistics facilities across cities. These investments could further increase in the coming years given the increasing importance of the sector for the growth of trade and commerce.

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03PE/VC exits cross a

new high

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25PE/VC Agenda - India Trend Book - 2018

Exits at all-time high on the back of buoyant capital markets

2017 was the best year ever for exits in terms of both value and volume. The aggregate deal value for PE/VC exits in 2017 was US$13.0 billion. This is almost twice that of the previous high of US$6.7 billion achieved in 2016. This strong exit activity was driven by open markets and IPOs backed by buoyant capital markets, which rose by close to 30% in 2017.

The financial services sector witnessed the maximum number of exits in 2017, followed by technology, real estate and healthcare. Financial services recorded 51 exits worth US$3.9 billion, which was more than 3x growth over 2016. Financial Services sector rose by 41.4%12 on the bourses in 2017, providing ample opportunities for the PE/VC funds to exit at good valuations via the open market and IPO routes. There were four PE/VC backed IPOs in financial services: ICICI Lombard (US$558 million exit by Fairfax), AU Small Finance Bank (US$234 million exit by Warburg, Kedaara, Chryscapital and IFC), MAS Financial Services (US$35 million exit by Sarva Capital, NDF and others) and BSE (US$30 million exit by GKFF Ventures).

Buoyant capital markets support record level of exits via open market and IPOs

The rise in capital markets in 2017 provided a favorable environment for open market exits, which recorded a 3.7x increase over 2016 (US$6.2 billion vs. US$1.7 billion in 2016), accounting for 47% of the total PE/VC exits in India. 2017 saw the largest PE/VC exit in India with Qatar Foundation Endowment selling its 5% stake in Bharti Airtel for US$1.5 billion.

A similar increase was seen in PE/VC backed IPOs in 2017. There were 20 PE/VC backed IPOs in 2017 with companies raising close to US$3.3 billion compared to 17 PE/VC backed IPOs raising close to US$2.4 billion last year. This is the highest level of PE/VC-backed IPO’s in the last five years and a record for PE/VC-backed IPO exits in which PE/VC funds garnered proceeds of almost US$1.8 billion from the offer for sale compared to US$913 million in 2016. ICICI Lombard’s IPO of ~US$891 million was the largest ever PE/VC-backed IPO in India, which also saw one of the biggest exits via an IPO by a PE/VC fund, with Fairfax selling its 12% stake for US$558 million.

IPOs recorded a five-year high in 2017, with 182 companies raising US$12.1 billion, almost three times the amount raised in 2016.12

Source: EY analysis of VCC Edge data

Chart 34: Exits in India 2014–17

3.4 6.5 6.7 13.0

166

254209

259

050100150200250300

-

5.0

10.0

15.0

2014 2015 2016 2017

US$ billion # of deals

Source: EY analysis of VCC Edge data

Exhibit 36: Open market exits in India 2014–17

2.5 2.4 1.7 6.2

96119

91

128

0

50

100

150

-

2.0

4.0

6.0

8.0

2014 2015 2016 2017

US$ billion # of IPOs

Exhibit 35: Top exits via open market in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Target sector Seller

Bharti Airtel Limited 1,485 5 May-17 Telecom Qatar Foundation Endowment

Max Group (Max Ventures and Industries Limited and Max Financial Services Limited)

511 16 Nov-17 Financial services Goldman Sachs

Max Financial Services Limited 358 15 Sep-17 Financial services Goldman Sachs

Genpact Limited 294 5 Aug-17 Technology Bain Capital, GIC

Dalmia Bharat Limited 236 8 Apr-17 Cement and building products

KKR

12 as per NIFTY Financial Services index which includes banks, financial institutions, housing finance and other financial services companies 13 Chittorgarh.com,moneycontrol.com,bseindia.com,nseindia.com

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26 PE/VC Agenda - India Trend Book - 2018

Target Exit amount (US$ million)

Exit stake %

Target sector Seller

ICICI Lombard General Insurance Company Limited

558 12 Financial services Fairfax

AU Small Finance Bank Limited 234 21 Financial services Kedaara, IFC, Warburg Pincus and ChrysCapital

Eris Lifesciences Limited 200 16 Pharmaceuticals ChrysCapital

Indian Energy Exchange Limited 94 12 Power and utilities Aditya Birla Capital, Multiples and others

Godrej Agrovet Limited 88 6 Food and agriculture Temasek

Future Supply Chain Solutions Limited

81 20 Logistics SSG Capital

Matrimony.Com Limited 78 15 E-commerce Mayfield, Bessemer and others

Khadim India Limited 68 33 Retail and consumer products

Reliance Alternative Investments Fund

Mahindra Logistics Limited 65 14 Logistics Kedaara Capital

Dixon Technologies India Limited 53 17 Power and utilities India Business Excellence Fund-I

S Chand and Company Limited 48 14 Education Everstone Capital

Security and Intelligence Services India Limited

42 5 Business services CX Capital

Shankara Building Products Limited

39 25 Industrial products Reliance Alternative Investments Fund

Tejas Networks Limited 37 11 Technology Cascade Capital, Intel Capital and others

MAS Financial Services Limited 35 9 Financial services DEG, Netherlands Development Finance Co. and Sarva Capital

Source: EY analysis of VCC Edge data

Exhibit 37: Exits by PE/VC funds via IPOs in India 2014–17

36 192 913 1,788

3

1517

20

0

5

10

15

20

25

-

500

1,000

1,500

2,000

2014 2015 2016 2017

OFS by PE/VC (US$ million) # of IPOs

Exhibit 38: Exits via IPO in 2017

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27PE/VC Agenda - India Trend Book - 2018

Exhibit 38: Exits via IPO in 2017 (Cont’d)

Exhibit 39: PE/VC-backed IPOs in the pipeline filed with Securities and Exchange Board of India (SEBI)

Company name PE investor Sector

Atria Convergence Technologies Limited

Kilimanjaro Credit Fund, Olympus Capital, TA Associates , True North

Technology

IndoStar Capital Finance Limited Everstone, Goldman Sachs and others Financial services

TCNS Clothing Company Private Limited

TA Associates Retail and consumer products

AGS Transact Technologies Limited Actis Advisers, TPG Growth Technology

Nazara Technologies Limited IIFL, Westbridge Technology

CMS Info Systems Limited Baring Private Equity Asia Technology

Hinduja Leyland Finance Limited Everstone Capital Partners Financial services

Barbeque Nation Hospitality Limited Clearwater and CX Partners Food and Agriculture

John Energy Limited Singhi Advisors, Sage Capital Power and Utilities

Krishna Institute of Medical Sciences Quadria Capital and ICICI Ventures Healthcare

Capricorn Food Products India Limited

Quadria Investment Management Food and agriculture

Seven Islands Shipping Limited Wayzata Investment Partners Logistics

Gandhar Oil Refinery India Limited IDFC Oil and gas

Source: EY analysis of VCC Edge data

Source: SEBI website Note: There are close to 15 other PE backed companies that are planning to file DRHPs in 2018

Target Exit amount (US$ million)

Exit stake %

Target sector Seller

BSE Limited 30 2 Financial services GKFF Ventures

Prataap Snacks Limited 26 8 Food and agriculture Sequoia

CL Educate Limited 9 8 Education Gaja Capital and others

Jash Engineering Limited 3 15 Industrial products Pragati India Fund

Capacit’e Infraprojects Limited NA NA Infrastructure No offer for sale by PE fund Paragon

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28 PE/VC Agenda - India Trend Book - 2018

Secondary exits gain tractionApart from favorable capital markets, strong interest in the Indian markets by global pension and sovereign funds as well as big bracket PE/VC funds has further helped provide favorable exit opportunities to early investors into India. As a result, like open market and IPOs, exits via secondary sale also recorded an all-time high of US$3.4 billion across 44 deals, which was almost a seven-fold increase in value compared to 2016. Investments made by Softbank, CPPIB and other large buyout funds contributed to this rise. Five out of the 10 largest secondary exits in India happened in 2017. This has enhanced the credibility of the India investment story, as larger funds are willing to take on bigger bets at rich valuations, bring in the required capitalization while providing an exit to early investors.

Strategic exits moderate from the highs of 2016In 2017, M&A-driven exits recorded a significant decline with exits worth US$881 million across 42 deals in 2017 compared to US$2.7 billion worth of M&A exits across 55 deals in 2016 and US$2.1 billion across 73 deals in 2015. While each of the previous two years had witnessed a US$1 billion-plus strategic exit deal, the biggest exit in 2017 was worth US$246 million, in which Bharti Airtel purchased the 4G business of Tikona Digital from IFC, Goldman Sachs and others.

Indian has traditionally witnessed few large strategic exits due to the kind of PE/VC investments, which has been predominantly growth-oriented minority holding and the reluctance of promoters to sell out completely and give up control. This is, however, changing slowly, with buyouts finding favor among Indian promoters for various reasons. We have previously discussed the growing number and value of buyout deals in an earlier section of the report. Also, with many Indian companies looking to deleverage balance sheets, the focus is on consolidation, restructuring and asset sales. This, along with an added push from banks after the IBC, is likely to drive increased M&A activity this year.

Exhibit 41: Top exits via secondary sale in 2017

Target Amount (US$ million)

Deal stake %

Investment month

Target sector

Seller Investor

Flipkart 800 NA Aug-17 E-commerce Tiger Global SoftBank Vision Fund

Globallogic 720 48 Jan-17 Technology Apax CPPIB

ICICI Lombard General Insurance Company Limited

383 12 May-17 Financial services

Fairfax Warburg Pincus, Clermont Group and IIFL

Capital First Limited 275 25 May-17 Financial services

Warburg Pincus GIC and others

Mytrah Energy India Private Limited

270 NA Sep-17 Power and utilities

Apollo Global, Goldman Sachs, IDFC Alternatives and others

Piramal and APG

Source: EY analysis of VCC Edge data

Exhibit 40: Exits via secondary sale in India 2014–17

0.1 1.4

0.5 3.4

18

32

23

44

0

10

20

30

40

50

-

1.0

2.0

3.0

4.0

2014 2015 2016 2017

US$ billion # of IPOs

Source: EY analysis of VCC Edge data

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29PE/VC Agenda - India Trend Book - 2018

Moreover, just as the market attractiveness of India has gone up in the eyes of global LPs, foreign corporates are also keen to enter the Indian market and are on the lookout for inorganic expansion opportunities. We witnessed some large strategic exit deals in 2016 (Yokohana/ATG and Fosun/Gland Pharma) and with the stock of large companies with PEs having controlling stake piling up, we at EY India are overweight on the chances of some large strategic exits in 2018.

Source: EY analysis of VCC Edge data

Exhibit 42: Strategic exits in India 2014-17

0.5 2.1 2.7 0.9

26

73

55

42

0

20

40

60

80

- 0.5 1.0 1.5 2.0 2.5 3.0

2014 2015 2016 2017

US$ billion # of deals

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04Distressed Assets

- an opportunity for PE?

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Last year, a new regulation called the Insolvency and Bankruptcy Code was promulgated by the Government of India to help resolve the stress faced by the Indian banking sector on account of Non Performing Assets (‘NPAs’). This regulatory change has thrown open a new asset class – Distressed Assets – for PE funds investing in India.

Introduction to IBC - the first yearIBC is one of the most important economic and corporate regulatory reforms in the recent past, second only to the GST. It came in at a time when the asset bubble had all but burst and the Indian banking system was struggling to deal with the surging NPAs in absence of a workable resolution framework. Until IBC was introduced, the erstwhile restructuring mechanisms under circulars issued by the the Reserve Bank of India (RBI), inter-alia including Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), 5/25 scheme and Scheme for Sustainable Structuring of Stressed Assets (S4A), had failed to make the headway that these schemes were supposed to.

Just over a year ago, there was limited clarity over the impending US$150 billion (as per certain estimates) of bad

loans in the absence of a workable resolution framework in sight. In less than a year, IBC has already engulfed into its ambit an impressive amount of US$45 billion of non-performing assets comprising, inter-alia, assets among the 30-40 largest borrowers, owing to the RBI selecting the large cases to be referred to IBC. Another salvo from RBI’s recent circular of withdrawing all extant restructuring schemes may push another substantial amount of NPAs into IBC in the next 6-12 months — all of it in anticipation of the corporate insolvency resolution process (CIRP) culminating into a viable resolution process.

IBC came in the backdrop of an impending NPA crisis, RBI’s ongoing efforts to resolve stress by providing resolution frameworks within its powers, and sector-specific stress ailing several companies in stressed sectors. IBC promised time-bound resolution through a “creditors-in-control” regime. Riding on this promise, more than 600 cases have been admitted into CIR process. The speed reflects the urgency to resolve the NPA crisis and the stakeholders’ faith in the new law. However, will IBC be as effective as it had been intended remains a question.

Timeline of key events around stress asset market:

Joint Lenders’ Forum (JLF) mechanism introduced by RBI

S4A scheme was introduced by RBI

National Company Law Tribunal (NCLT) notified

Banking Regulation act amended to widen RBI’s power to direct lenders for resolution under IBC; RBI identifies 21 large cases for IBC; 1st resolution plan approved by NCLT in case of Synergy Dooray

5/25 scheme introduced by RBI

IBC code passed by Parliament but not notified; 100% FDI allowed in ARC

Corporate insolvency and other enabling provisions of IBC notified

IBC amended: now also applicable to personal guarantors; sec29A inserted to disqualify certain delinquent promoters

Bankruptcy Law Reforms Committee (BLRC) formed; RBI revised from 5/95 to 15/85 structure for ARC sale

Stressed asset touched 11.5% (Gross NPA + Retructured advances)

First CIRP case admitted by NCLT under IBC

Listing of security receipts (SRs) of Asset Reconstruction Company (ARC) allowed

SDR scheme introduced by RBI

No new cases referred to CDR in FY16

Stressed asset remains at 12%

RBI withdraws existing restructuring guidelines

asset quality review exercise started by the RBI

Final report and draft bill submitted by BLRC

RBI identifies 12 large cases to be resolved under IBC

Apr14 Jun16 Jul16

Aug17

Jul14 May16 Dec16

Nov17Aug14 Mar16 Jan17

Dec17

Jun15 Mar16 Mar17

Feb18

Sep15 Nov15 Jun17

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Harmonization with IBC – other key regulatory updates• Ordinance preventing certain promoters from bidding–

the insertion of section 29A by a recent amendment, inter-alia, makes certain persons (including the promoter/management group as well as certain other persons) ineligible to submit a resolution plan, with an intent to keep out such persons who, inter-alia, could have potentially willfully defaulted and are associated with NPAs > 1 year.

• Withdrawal of existing RBI restructuring norms – RBI has recently withdrawn all of its extant restructuring guidelines, viz., CDR, SDR, S4A etc., and introduced a revised framework to align the restructuring effort with IBC. Basis this framework, companies that are delinquent will be given a 180-day period to implement a resolution plan, failing which the company will be taken to IBC. There are other provisions around pre-approval by credit rating agencies and sustainability of the plan.

• Banks’ recapitalization – the Government had already infused INR250 billion in each of FY16 and FY17 as part of the Indradhanush plan of infusing INR700 billion by FY19. In addition to this, the Government has announced a comprehensive recapitalization plan of INR2.11 trillion.

• Changes in Budget 2018 – the Finance Bill, 2018 has introduced amendments in respect to Minimum Alternative Tax (MAT) computations, carry forward of losses and unabsorbed depreciations u/s 115JB and u/s 79 of the Income-tax Act, 1961.

• Listing of security receipts of ARC’s – SEBI, in December 2017, allowed listing of SRs issued by the ARC. It has also relaxed certain entry norms for foreign portfolio investors (FPIs).

• Amendment in Companies Act – the Government had notified the Companies (Amendment) Act, 2017, which brings key revisions, including issue of shares at a discount.

The impact of all these amendments is a reduction in the ambiguity involved for the various aspects that IBC entails, be it operational matters, legal matters or transaction-related aspects, which may have the potential to derail the IBC process. The harmonization from a regulatory perspective is key in instilling investor confidence in the process, which we hope will allow investors to move optimistically forward with the assurance that regulators are taking a practical view of things and are keen on making IBC a success.

CIR process under IBC and key tenets of IBC• On the occurrence

of a default, a financial creditor or operational creditor or corporate debtor (CD) may file for the commencement of CIRP with NCLT.

• With effect from the date of NCLT order to commence CIRP, the board of directors (BoD) gets suspended and all powers are vested with the interim resolution professional (IRP). who is appointed by NCLT for a 30-day period.

• IRP constitutes Committee of Creditors (COC), which may retain or replace the IRP as resolution professional (RP). The COC would make or ratify all decisions with a majority of 75% voting rights.

• COC comprises financial creditors (FCs) or operational creditors (OCs) (where there are no financial creditors).

• Each FC or OC needs to claim the amount due from the CD as at the date of the order.

• The corporate debtor is managed by the RP during the CIR process reporting to the COC.

• During CIRP, the company is under moratorium and protected from all legal actions so that all stakeholders can focus on maintaining a going concern while a resolution plan is finalized.

• The resolution under IBC is a time-bound process, i.e., within 180 plus 90 days (subject to an extension granted by the Hon’ble NCLT).

• RP has to invite potential resolution plans and have them approved by CoC and the Hon’ble NCLT.

• Liquidation value to be provided to stakeholders only after the receipt of resolution plans.

• Each resolution plan has to comply with certain minimum conditions as stipulated in IBC.

Resolution process

Appointment of a resolution professional

Moratorium period (180/270 days)

Default

Formation of Committee of Creditors

75% of the creditors to

approve

Implement the resolution plan

Goes into liquidation

NoYes

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33PE/VC Agenda - India Trend Book - 2018

• Resolution plan can be submitted by anyone subject to certain exclusions in the law and the eligibility criteria set by the COC.

• Certain delinquent promoters not allowed to submit resolution plan (inter-alia, if willful defaulters or account is NPA > 1 year etc.).

• In case a resolution plan is not finalized and approved by the NCLT, the company will go into liquidation.

• Cross-border insolvency framework is yet to be framed.

• RBI has shelved the extant restructuring guidelines and replaced it with a revised framework to harmonize the restructuring with the IBC norms, failing which CIRP can be commenced in case of the CD.

Abundant opportunity for private capital seeking to invest in stressed asset classThe time-bound resolution framework in IBC and risk of liquidation is expected to ensure that there are significant assets on sale and at appropriate valuations. While banks are keen to clean their balance sheets and recover as much as possible from delinquent assets, most viable IBC cases may result in a new investor coming on board. Recent amendments have clarified that a certain set of promoters (including, inter-alia, willful defaulters, NPA assets with NPA >= 1 year etc.) cannot bid for the assets under IBC. While the jury is out on whether the ordinance will benefit the process or not, it definitely reduces competition from a bidder perspective.

Many other global private equity funds, including KKR and Co., SSG Capital Management, Blackstone and International Finance Corp. (IFC) have also acquired stakes in existing ARCs, while US-based JC Flower and Indian Investment banker Ambit Holdings have formed a JV and launched an ARC. Separately, we are seeing a very keen interest in acquiring these assets from global PE players including AION Capital, Deccan Value International and Liberty House Group.

The kick-off of the auctioning of the 12 large cases referred by RBI has already attracted interest from several large and small PE investors, which are in the advanced stages of negotiation. PE investors are trying all combinations: direct investment, tie-up with strategic buyers etc.

The transaction perspective – Commercial and LegalThe law is still in a nascent stage and has yet to yield the results expected. As the interpretation and implementation of the law is evolving, several complexities are cropping up including legal and operational challenges in resolving the stress.

It, therefore, remains a pertinent issue that the consummation of distressed debt transactions is easier said than done, whether in IBC or otherwise, owing to various bottlenecks including diligence delays, lack of information availability, exit of key personnel on CIRP commencement and other legal/commercial aspects.

In case the liquidation value is too low, it makes negotiations tougher for the banks and therefore a disincentive to prefer IBC as a resolution option. However, with IBC being a transparent platform for bidders, the final pricing will be determined by market factors and what interested investors are willing to pay. With the recent amendment in regulations, the liquidation and fair value shall be disclosed to COC members only after receipt of resolution plans, the potential intent being to arrive at the most appropriate value for the asset in the transaction process, without being influenced by the valuations. This said, higher recovery shall continue to be a challenge for the bankers and the threat of major haircuts looms large. The ongoing deluge of bids being invited under IBC is an opportunity which could easily be leveraged by a global PE to enter India and/or consolidation of sector-specific holdings within a PE portfolio. On the resolution plan aspect, the process under IBC is yet to mature, and many bid plans may not fructify due to impending legal clarifications or indecisiveness of the COC.

In anticipation of the opportunity to invest at right valuations, PE funds have launched several stressed asset dedicated funds aggregating ~US$4 billion in the past two years, some of which are listed in the table below:

Exhibit 43: Indicative list of distressed debt funds launched in last two years

Investors Launch date Approximate fund size

Brookfield July 2016 US$1,040 million

Piramal group and Bain Capital

August 2016 US$1,000 million

AION- Apollo and ICICI

August 2016 US$825 million

Lone Star and IL&FS

February 2017 US$550 million

CPPIB and Kotak Mahindra*

January 2016 US$525 million

SREI Alternative Investment

February 2016 US$300 million

JM Financial July 2016 US$300 million

* The JV is reportedly called off. But Kotak will go alone to invest in the market and CPPIB may invest on a case-to-case basis.

Source: News reports

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34 PE/VC Agenda - India Trend Book - 2018

Despite the bottlenecks, the resolution process in the 12 large cases has galloped ahead under the IBC and is near completion (Refer status in Exhibit 44 below).

From a PE investor perspective, IBC continues to present a big opportunity for potential acquisitions across the industry spectrum, with specific entry opportunities for global PEs into India. However, the value drivers in each business need to be evaluated carefully and in detail.

Further, the time period to evaluate and execute a deal is fairly limited, anywhere between 3 and 6 months, from inception to

closure. The shortened time period leads to a fair amount of risk, which will have to be carefully evaluated prior to closing such deals. The time period limitations and challenges from an information perspective etc. will require appropriate diligence from investors.

Exhibit 44: Status of 12 cases of RBI list and investors’ interestS no.

Name of Company Debt (US$

billion)

Initiated by Initiated on Bids Received from Shortlisted Bidder, subject to approval by NCLT (where applicable)

1 ABG Shipyard Limited

1.71 ICICI Bank 01.08.2017 Liberty House Liberty House Group

2 Alok Industries Limited

3.30 SBI 18.07.2017 RIL jointly with JM Financial ARC

3 Amtek Auto Limited 1.98 Corporation Bank

24.07.2017 Liberty House Group, Deccan Value Investors

Liberty House Group

4 Bhushan Power & Steel Limited

6.60 PNB 26.07.2017 Tata Steel, JSW, Liberty House Group

5 Bhushan Steel Limited

7.40 SBI 26.07.2017 Tata Steel, JSW Tata Steel

6 Electrosteel Steels Limited

1.30 SBI 21.07.2017 Tata Steel, Vedanta, Edelweiss and Renaissance Group

7 ERA Infra Engineering Limited

1.04 Prideco Commercial Projects Private Limited

12.04.2017 N.A (Insolvency Application not admitted)

8 Essar Steel India Limited

5.30 SBI 02.08.2017 Numetal Group, Arcelor Mittal

9 Jaypee Infratech Limited

1.44 IDBI 09.08.2017 Multiple bids including JSW group, Adani group, Suraksha ARC, Deutsche Bank, Jaiprakash Associates, Jieyang Zhonguci (a Chinese company)

10 Jyoti Structures Limited

0.82 SBI 04.07.2017 Sharad Sanghvi and Kedar Capital

11 Lanco Infratech Limited

1.00 IDBI 07.08.2017 OPG Group, Prem Energy, Goyal Group and Diva Group

12 Monnet Ispat and Energy Limited

1.08 SBI 18.07.2017 JSW steel along with AION Capital JSW steel along with AION Capital (Subject to legal vetting by CoC)

Source: News reports (Note that no independent verification of above information has been undertaken and is purely basis publicly available information)

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Source: News reports (While certain news reports suggested an additional 28 large accounts highlighted by RBI, for CIRP initiation, list above presents 21 names basis publicly available information)

Note that no independent verification of above information has been undertaken and is purely basis publicly available information

Exhibit 45: List of additional 21 assets proposed by RBI for CIRP

# Name of the company

1 Videocon Industries Limited

2 Visa Steel Limited

3 IVRCL Limited

4 JaiPrakash Associates Limited

5 Ruchi Soya Industries Limited

6 Uttam Galva Steel Limited

7 Unity Infraprojects Limited

8 Uttam Galva Metallics Limited

9 Bilt Graphic Paper Products Limited

10 Coastal Projects Limited

11 Jayaswal Neco Industries Limited

12 SEL Manufacturing Company Limited

13 Essar Projects India Limited

14 Asian Color Coated Ispat Limited

15 Soma Enterprise Limited

16 East Coast Energy Priivate Limited

17 Nagarjuna Oil refinery Limited

18 Castex Technologies Limited

19 Orchid Pharma Limited

20 Jai Balaji Industries Limited

21 Wind World (India) Limited

The way forward for investorsThe success of IBC hinges upon the successful resolution plans being finalized and their implementation in a manner that it is a win-win for all stakeholders. The objective of the new framework, before a company is taken to IBC, is to salvage companies that are worthy of turnaround and thereby protect institutional capital.

The Government on its part is trying its best to create a cohesive ecosystem that is fair, transparent and business-friendly; the regulators are responsive to ironing out difficulties faced by stakeholders; and newer economic policies are being implemented to boost growth across all stressed and non-stressed sectors. This is clearly evident from the series of amendments across the legal spectrum to maintain/achieve consistency. While this may take some time to achieve completely, the direction is right. This is also in keeping with the Government’s push toward enhancing ease of doing business in India, which has hitherto been wanting. IBC and other regulatory modifications are additionally an effort to enhance transparency and ensure that creditors’ interests are safe.

The existing banking NPA stress on the economy is substantial and so is the opportunity for investors. The debt market and stressed asset market are poised to expand and organize once the first phase of IBC is complete and the ball is rolling.

The next 9 to 12 months will be dominated by the 30-40 cases undergoing/completing the CIRP. Subsequent to these 12 months, while there would be an easing in the size of assets undergoing IBC, it would still require anywhere between 48 and 60 months to effect a substantial clean-up of the bad loans. This is critical so as to commence the next phase of investment/growth lending, particularly in the infrastructure lending space.

The sheer size of assets on sale under IBC warrants notice from global and domestic investors. There are abundant assets and more for both financial and strategic investors. With improved liquidity, legal transparency, ready market and time-bound systems in place, the ball is in the court of bankers and investors to leverage the platform that IBC offers.

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05The evolving regulatory

and policy framework

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From a tax and regulatory perspective, the calendar year 2017 was very eventful to say the least. From a tax standpoint, the Government has continued its endeavor to provide tax certainty and bring about robust measures to simplify foreign investment opportunities. Similarly, on the regulatory front, the Government has endeavored to strengthen relationships with foreign investors with the underlying objective of encouraging foreign investments and easing the process of doing business in India.

We have summarized below some of the key tax and regulatory changes introduced in financial year 2017 that could impact the private equity ecosystem:

Tax updates:I. Key amendments introduced vide Finance Act 2018

• Reduction in corporate tax rate to 25% (maximum marginal rate 29.12%) for companies having a turnover up to INR2500 million in FY17. Further, Education Cess and Secondary and Higher Education Cess aggregating to 3% replaced with Health and Education Cess at the rate of 4%, resulting in a marginal increase in effective tax rate.

• Long term capital gains tax on sale of listed securities on the recognized stock exchange (including IPOs): Historically, long-term capital gains on certain listed securities including equity shares held for more than 12 months were eligible for a tax exemption, subject to certain conditions and payment of securities transaction tax.

Levy of a concessional tax is introduced at 10% (excluding surcharge and cess) on long-term capital gains from disposal of equity shares and certain funds/units, subject to payment of securities transaction tax.

Grandfathering of past gains prescribed for listed (i.e. cost of acquisition to be the higher of actual cost or highest price on the stock exchange as on 31 January 2018) and unlisted equity shares (cost of acquisition to be computed as per cost inflation indexed) as on 31 January 2018. However, the relief may continue to be available under relevant tax treaties, subject to satisfaction of all conditions for claiming benefit under these treaties.

The Central Government to notify transactions of listed equity shares that will be eligible for grandfathering of capital gains where no securities transaction tax was paid at the time of acquisition (such as shares received on merger, bonus shares etc).

• Accumulated profits of amalgamating company to be considered for deemed dividend: The scope of deemed dividend has been expanded to include accumulated profits (whether capitalized or not) or losses of an amalgamating

company in the accumulated profits of the amalgamated company as on the date of amalgamation.

• Distribution tax on deemed dividend: Loans and advances (directly or indirectly) to substantial shareholders (as prescribed) to attract dividend distribution tax with a higher rate of 30% without grossing up.

• Relief to companies under the Insolvency resolution process:

• Relief from Minimum Alternate tax – For computing book profits of the companies under IBC, the aggregate of brought forward loss and unabsorbed depreciation will be allowed as a deduction instead of lower of the two.

• Eligibility to carry forward tax losses: Change in shareholding of a company pursuant to resolution plan approved under IBC shall now not result in lapse of carried forward business loss of such company.

• Amendments relating to Base Erosion and Profit Shifting (BEPS): Definition of “business connection” widened to include activities of an agent that habitually plays a principal role in negotiations leading to conclusion of contracts by the non-resident. A similar provision forms a part of the Multilateral Instrument (MLI) which India has recently signed.

It is also proposed that “business connection” would also include non-residents having “significant economic presence” in India through digitized businesses.

• Amendments relating to International Finance Service Centre (IFSC):

• Transactions in bonds or specified global depository receipts, rupee denominated bond of an Indian company, derivatives entered on or after 1 April 2018, on a recognized stock exchange (RSE) in IFSC, by a non-resident would not be regarded as a transfer and hence not taxable, provided the consideration is payable in foreign currency.

• Further, units located in IFSC, being a non-corporate person, would be subject to Alternate Minimum Tax of 9% instead of 18.5%.

Source: www.indiabudget.nic.in

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38 PE/VC Agenda - India Trend Book - 2018

II. Union Cabinet approves signing of the MLI in June 2017 for implementing tax treaty related BEPS measures

On 7 June 2017, the first signing ceremony of the MLI was held in which 68 jurisdictions, including India, signed the MLI, and eight other jurisdictions signed a letter expressing their intent to sign the MLI. The MLI will operate to modify tax treaties between two countries on the principles of matching of their choices and will be applied alongside the existing tax treaties. Each signatory needs to notify the tax treaties it wants to amend through the MLI (covered tax agreement or CTA).

India has provided a provisional list of all its reservations on specific provisions of the MLI in respect of its 93 comprehensive tax treaties. Particularly, India has chosen to additionally apply the simplified Limitation of Benefits (SLOB) rule, which provides an objective determination to deny treaty benefits, along with the mandatory minimum standard of the Principal Purpose Test (PPT) to counter treaty shopping. On permanent establishment related provisions, India has opted for a wider scope of dependent agency permanent establishment to include activities of an agent playing a principal role in concluding contracts even though such contracts are formalized abroad or such activities of an agent who claims to be independent even though he is working exclusively or almost exclusively for closely-related enterprises (CREs).

Currently, Mauritius has not notified India as CTA. However, Mauritius via a press release, announced that for the tax treaties which are not covered by the MLI, Mauritius will discuss bilaterally with the respective treaty partners in order to implement the BEPS minimum standards.

Later, via a subsequent press release, the Mauritius Government reiterates its intent to engage in bilateral dialogue with treaty-partner countries (including India) to modify/conclude the tax treaty agreements by the end of 2018.

Source: http://www.incometaxindia.gov.in/Lists/Press%20Releases/Attachments/631/Press-Release-India-Signs-Multilateral-Convention-Implement-Tax-Treaty-7-06-2017.pdf

III. Protocol to treaty between India and Singapore enters into force

On 23 March 2017, Central Board of Direct Taxes (CBDT) notified that the Third Protocol amending the India-Singapore tax treaty, which was signed on 30 December 2016, had entered into force on 27 February 2017.

The protocol introduces source-based taxation of capital

gains arising from the transfer of shares occurring on or after 1 April 2017. Shares acquired on or before 31 March 2017 are grandfathered and continue to qualify for the exemption, subject to satisfying the conditions in the modified Limitation of Benefit (LOB) provisions of the protocol.

Transitional provisions for reduced taxation (i.e., taxation at 50% of domestic tax rates) by the source country on capital gains from the alienation of shares have also been provided for a limited period from 1 April 2017 to 31 March 2019, subject to meeting the modified LOB provisions.

The protocol also provides that the treaty does not prevent a country from applying its domestic law on prevention of tax avoidance or tax evasion.

Source: https://online.ibfd.org/kbase/#topic=doc&url=/data/tns/docs/html/tns_2017-02-27_sg_3.html&WT.z_nav=Pagination

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Final guidelines for determination of place of effective management (POEM) for corporate residency

On 24 January 2017, after due public consultation, the CBDT issued a circular providing the final guiding principles for determination of POEM of a foreign company in India.

The guidelines emphasize that the test of POEM is one of “substance over form” and is to be determined having regard to the facts and circumstances of each case on a yearly basis. The guidelines provide that the determination of POEM is primarily based on whether or not a company has “active business outside India.” For companies other than those engaged in ABOI, the Guidelines prescribe alternative factors such as determination of the location of

board meetings, location of the head office, who constitutes senior management etc. It is also stated that the place of implementation of decisions or the place where routine day-to-day decisions are taken is not relevant for determination of POEM. Furthermore, POEM is not to be determined by taking a “snapshot” view but by considering activities performed over a period of time during the year for which POEM is determined.

By way of a safeguard, the guidelines require two-step approvals as per which the tax officer has to seek prior approval from a senior tax officer before initiation of assessment proceedings.

CBDT issues clarifications for implementation of General Anti-Avoidance Rules (GAAR)

Stakeholders and industry associations had requested for clarifications on implementation of GAAR provisions and a Working Group was constituted by CBDT in June 2016. Pursuant to it, on 27 January 2017, CBDT issued a circular providing certain clarifications.

Some of the key clarifications are:

• GAAR can co-exist with Specific Anti-Avoidance Rules (SAAR).

• GAAR provisions can also apply if the LOB test in a Double Tax Avoidance Agreement (DTAA) does not adequately address tax avoidance.

• Consistency principle will be followed while applying GAAR provisions in different years if the facts and circumstances remain the same.

• GAAR cannot apply if Authority for Advance Rulings (AAR) has, in an advance ruling, considered an arrangement to be permissible or if an authority such as the Court or NCLT has examined the tax avoidance matters adequately while sanctioning an arrangement.

• No corresponding adjustment across all taxpayers in an arrangement to be allowed as it militates against the deterrence of GAAR. The Circular also notes that adequate procedural safeguards are in place before GAAR can be invoked (such as vetting by an approving panel) so that GAAR provisions are applied only in deserving cases. Other clarifications in the Circular deal with the scope of grandfathering to convertible securities, bonus issues etc.

CBDT issued rules prescribing methodology for determining fair market value of unquoted equity shares

On 12 July 2017, CBDT issued rules in relation to determining the fair market value (FMV) of unquoted shares for the purpose of relevant provisions inserted by the FA 2017 to curb abusive practices resulting in the avoidance of capital gains tax on transfer of shares.

The Rules seek to determine the FMV of unquoted equity shares of the company by adopting the independent fair

valuation of jewelry, artistic work, immovable property and shares and securities held by such company, while all other assets and liabilities of such company would continue to be valued at book value. Further, the rules also provide that FMV of unquoted preference shares would be the price such preference shares would fetch in the open market for which the taxpayer may obtain valuation report from merchant banker or an accountant.

IV. Key CBDT circulars/clarifications issued during calendar year 2017:

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Non-applicability of indirect transfer provisions to redemption or buyback of shares/interest in multi-tier investment structures

On 7 November 2017, CBDT issued a circular clarifying that the Indirect Tax (IDT) provisions will not apply to income accruing or arising to a non-resident on account of redemption or buyback of share/interest held indirectly in

specified funds in India (being a venture capital fund or a venture capital company or a Category I or II Alternative Investment Fund) if such income accrues or arises from or in consequence of transfer of shares or securities held in India by the specified funds and such income is chargeable to tax in India in the hands of the specified funds.

Goods and Service Tax (‘GST’)GST is a destination-based tax on consumption of goods and was introduced with effect from 1 July 2017. This is a substantial shift from the erstwhile indirect tax regime. In India, being a federal country where both Center and states have been assigned the powers to levy and collect taxes through appropriate legislations, a dual GST model has been implemented with Center and states simultaneously levying GST on a common base thereby breaking the tax into three components: Central Goods and Service Tax (CGST), State/Union Territory Goods and Service Tax (SGST/UTGST) and Integrated Goods and Service Tax (IGST).

Whereas GST has opened a whole new pool of credit to the advantage of service industry, it has also impacted the industry on several grounds, which can be enlisted as below:

1. State-wise registration: In the erstwhile Service Tax regime, a company having multiple state presence could discharge its service tax compliances through a single centralized registration. However, under GST, it would require separate registration for each state where it operates, which is akin to breaking one entity into distinct legal entities for the purpose of the law.

Compliance: GST returns need to be filed monthly for assessees having turnover more than INR15 million in the preceding financial year in contrast to bi-annual service tax returns to be filed by all the service providers. This has exponentially increased the compliance burden on the industry, increasing bi-annual returns to monthly returns and further multiplying it by each state registration if there is presence in multiple states. Currently, the Government has prescribed three monthly returns: GSTR-1 for outward supply, GSTR-2 for inward supply and GSTR-3 as a monthly return, which is a summary of the previous two returns filed. In addition, an annual return in GSTR-9 is to be filed before 31 December after the end of the financial year, thereby number of returns to be filed from two per year to 37 per year per registration.

During the initial months, the taxpayers had to grapple with multiple issues while filing their GST returns. In order to

streamline the compliance and provide interim relief from a mammoth change that GST has bought in and given the fact that the GST portal was not ready for handling such massive traffic, the Government introduced a summary return in the form GSTR-3B to be filed each month along with monthly payment of taxes.

Further, the Government gradually started accepting returns in Form GSTR-1, requiring the taxpayer to file invoice-level details for its outward supplies. However, the Government has temporarily suspended filing of returns in form GSTR-2, i.e., details of inward supplies, and GSTR-3, i.e., summary return, until further notice owing to the issues faced on the GSTN portal. As a result, a total of 2 returns – GSTR-1 and GSTR — 3B are being now filed for each month until 31 March 2018.

2. Input tax credit pools: A service provider was not allowed input tax credit of goods procured by them unless they had obtained VAT registration under the respective state legislations. However, with the introduction of GST, the credit of taxes paid on goods and services procured either domestically or imported (GST to be paid under reverse charge on imports) would be eligible under the new regime in accordance with input tax credit rules. This enhanced credit pools would ideally lead to a reasonable decline in the cost of service and an increase in the refund of input tax paid.

3. Qualification as exports and obtaining Letter of Undertaking (LUT): The basic principle for supplies to qualify as exports under the GST law is similar to the erstwhile service tax regime. Accordingly, management consultancy services would continue to avail the benefit of zero-rating and be treated as exports under the GST law.

However, a new procedural requirement of obtaining an LUT has been introduced under the GST law. It is a pre-requisite for claiming refunds where an assessee is engaged in providing export services. The requirement of submitting an LUT for availing tax benefit for exports was not there under the earlier regime.

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4. Refunds: The Government has attempted to streamline the process of refund of input tax credit under GST. In case of refund of tax on inputs used in exports under the current tax regime, refunds of 90% will be granted provisionally within seven days of filing of the refund application and the remaining 10% will be paid within a maximum period of 60 days from the date of receipt of application.

5. Valuation of services: The value of supply under GST shall be the transaction value except where supplier and recipient of supply are not related and price is not the sole consideration for the supply and is akin to the provisions under the erstwhile law.

However, supplies between related persons or distinct persons would be required to be valued in terms of the valuation provisions prescribed by the Government. It is pertinent to note that no such special valuation rules were specified in case of related party transactions under the service tax regime. Further, under the GST regime, even services that are provided to related persons without consideration would be liable to GST; these services would have to be valued in terms of the valuation provisions. Under the erstwhile service tax regime, any service without consideration, i.e., free services, was not liable to service tax.

Foreign Trade Policy update: Further, with the introduction of the Foreign Trade Policy 2015-2020, SEIS incentives have increased by 2% from earlier 3% to 5% for notified services such as market research and public opinion polling services, management consulting services or services relating to management consulting etc. The validity of duty credit scrips has increased from 18 months to 24 months. This has been followed by simplification in the procedure for the application of Import Export Code (IEC).

Further, the EXIM scrips under the export incentive schemes of chapter 3 of the Foreign Trade Policy (e.g., Service Exports from India scheme) can be utilized only for payment of basic customs duty at the time of import and cannot be used for payment of IGST and compensation cess or for payment of CGST, SGST or IGST for domestic procurements. Further, the sale of such scrips have been exempt from the levy of GST.

Regulatory Section:I. Liberalization of Consolidated FDI Policy 2017

On 28 August 2017, the Government issued the Consolidated FDI Policy 2017 (Consolidated FDI Policy), which subsumes all press notes, clarifications and press release in relation to FDI issued by the DIPP. The key highlights are as follows:

Key changes/clarifications:

Sourcing norms for products that have state-of-the-art and cutting-edge technology:

• In terms of the extant FDI policy, proposals involving foreign investments beyond 51% in single brand retail trading (SBRT) entities required sourcing of 30% of the value of goods purchased from India.

• However, in case of products that have “state-of-the-art” and “cutting-edge technology” and where local sourcing is not possible, this requirement is relaxed for the initial three years from the commencement of business, i.e., opening of the first store.

• Under the Consolidated FDI Policy, it has been decided that a committee under the chairmanship of Secretary, Department of Industrial Policy & Promotion (DIPP), with representatives from NITI Aayog, concerned administrative ministry and independent technical expert(s) on the subject, will examine the claim and determine the products getting qualified under “state-of-the-art” and “cutting edge” technology, and proposals would be decided on the basis of their recommendations.

Sale through single vendor:

• In terms of the extant FDI policy for e-commerce, an e-commerce entity is not permitted to sell more than 25% of the sales value affected through its marketplace from a single vendor or group companies.

• In this regard, it has been clarified that 25% of the sale value will be calculated on a financial year basis.

Definition of “FDI-linked performance conditions”:

• In terms of the extant FDI policy, foreign investment was permitted under the automatic route in LLPs operating in sectors/activities where 100% FDI was allowed through the automatic route and there were no FDI-linked performance conditions. It has now been clarified that “FDI-linked performance conditions” would mean “sector-specific conditions.”

Conversion of LLP into company:

• It has been clarified that conversion of an LLP that has foreign investment into a company would be permitted under the automatic route.

Pension sector:

• FDI in the sector continues to be 49% under the automatic route. However, it is subject to the condition that the ownership and control of an Indian pension fund shall at all times remain with resident Indian entities.

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Proposals involving cumulative foreign equity inflow of more than INR50 billion:

• Under the extant regime, proposals for sectors under the Government approval route and involving foreign equity inflow of more than INR50 billion were also considered by the Cabinet Committee on Economic Affairs.

• It has now been clarified that if an entity under the Government approval route receives additional foreign investment up to a cumulative amount of INR50 billion, then fresh approval of the Government/competent ministry is not required when the additional foreign investment is into the same entity within an approved foreign equity percentage/or into a wholly owned subsidiary (WOS).

Source: http://dipp.nic.in/whats-new/consolidated-fdi-policy-circular-2017

II. Foreign investment in India – revised foreign exchange management regulations

On 7 November 2017, RBI issued a single revised Notification No. FEMA.20(R)/2017-RB dated 7 November 2017 in supersession of earlier Notification No.FEMA.20 dated 3 May 2000 (dealing with Foreign Investments in Indian companies & LLP) and Notification No.FEMA.24 dated 3 May 2000 (dealing with Investments in firm or proprietary concerns in India). The key features of the revised Foreign Investment Regulations issued are as follows:

Definitions

• Definitions of ‘Capital’, ‘Debenture’, ‘Preference Shares’ and ‘Warrants’ has been consolidated under the term ‘Capital Instruments’.

• Certain terms like FDI, FPI and FDI linked performance conditions have now been defined under the revised notification.

FDI and FPI in listed companies

• To align with the SEBI guidelines, RBI has now clarified that a person resident outside India can invest under either the FDI or the FPI route.

• In future, all foreign investment by Foreign Institutional Investor (FII), Qualified Foreign Investor (QFI) and nonresidents in listed companies below 10% will be considered as foreign portfolio investment.

• Any past FDI that reduces below the 10% limit in the future will continue to be considered as investment under the FDI route and not as investment under the FPI route.

Transfer of capital instruments

• NRIs are permitted to transfer, by way of sale, capital instruments (held on repatriation or non-repatriation basis) even to nonresidents under the automatic route, subject to sectoral restrictions.

• RBI has also permitted transfer of capital instruments to a non-resident pursuant to liquidation, merger, de-merger and amalgamation of companies incorporated outside India under general permission.

• Pledge of shares of unlisted Indian companies has been brought under the automatic route for securing credit facilities by its Indian subsidiary companies.

Source: https://rbi.org.in/SCRIPTS/NotificationUser.aspx?Id=11161&Mode=0

III. Other key regulatory amendments introduced are as under:

I. Union Cabinet approves the decision to abolish FIPB

On 24 May 2017, the Union Cabinet formally approved the proposal to abolish FIPB. Further, DIPP has issued a standard operating procedure for granting approvals for foreign investments on 29 June 2017.

Corporate Law rated:

II. Ministry of Corporate Affairs (MCA) notifies cross-border merger provisions

On 14 April 2017, MCA notified relevant provisions of the Companies Act, 2013 that permit merger of a foreign company with an Indian company and vice-versa.

Subsequently, RBI, on 26 April 2017, issued draft guidelines on cross-border mergers. The draft guidelines remove the requirement of RBI approval and prescribe requisite conditions on inbound and outbound merger and require valuation of companies involved in the cross-border merger to be done as per the internationally accepted pricing methodology. The final guidelines are not yet issued by RBI.

III. Restriction on number of layers of companies

On 20 September 2017, MCA notified the Companies (Restriction on Number of Layers) Rules, 2017 (Rules).

The Rules provides that a holding company can create up to two layers of subsidiaries only. While computing the number of layers, one layer that consists of one or more wholly owned subsidiary or subsidiaries shall not be taken into account. Further, the aforesaid restriction shall not affect a company from acquiring the shares of a company incorporated outside India with subsidiaries beyond two layers as per the laws of such country.

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The rules are applicable to all companies other than a banking company, systematically important non-banking financial company (NBFC) registered with RBI, insurance company and government company.

RBI related:

IV. The Insolvency and Bankruptcy Board of India notifies Corporate Voluntary Liquidation Process Regulations

On 31 March 2017, the Insolvency and Bankruptcy Board of India notified the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulations, 2016. These regulations provide the process for the initiation of voluntary liquidation of a corporate person – companies, limited liability partnerships and any other persons incorporated with limited liability under any law.

The regulations have come into effect from 1 April 2017.

V. Clarification on certain aspects in relation to FDI in LLP

On 3 March 2017, RBI introduced certain liberalizations dealing with FDI in an LLP. The key highlights are:

• Foreign companies can be appointed as Designated Partner (DP) in LLPs.

• Individuals appointed as DPs are not required to satisfy the residency test under FEMA.

• Clarification provided to state that conversion of a company into an LLP is covered under the automatic route provided it is engaged in a sector where 100% FDI is permitted under the automatic route, and there are no FDI-linked performance conditions.

• Provisions prohibiting LLP to avail external commercial borrowing (ECB) have been deleted.

Reporting of foreign investments in LLPs and divestment/transfer of capital contribution or profit share may be made to the RBI in an appropriate manner from time to time as may be prescribed.

VI. Issuance of rupee denominated bonds overseas

On 7 June 2017, RBI revised the RDB guidelines and henceforth all proposals/applications for the issuance of RDBs will be examined by RBI at the Central Office, Mumbai.

Further, the revised provisions in respect of maturity period, all-in-cost ceiling and recognized lenders (investors) of RDBs (Masala Bonds) are as under:

• Maturity period: Minimum original maturity period for Masala Bonds raised up to US$50 million equivalent in Indian rupees per financial year should be three years

and for bonds raised above US$50 million equivalent in Indian rupees per financial year should be five years.

• All-in-cost ceiling: The all-in-cost ceiling for such bonds will be 300 basis points over the prevailing yield of the Government securities of corresponding maturity.

• Recognized investors: Related-party within the meaning as given in Ind AS 24 is not allowed to subscribe to RDB.

SEBI related:

VII. SEBI permitted investments by FPIs in unlisted corporate debt securities

On 24 October 2016, RBI permitted FPIs to invest in unlisted corporate debt and securitized debt instruments. Thereafter, on 17 November 2016, RBI enhanced the list of eligible instruments for investment by FPIs under the corporate debt route along with certain terms and conditions.

In line with the RBI’s approach, on 27 February 2017, SEBI permitted FPIs to invest in the following:

• Unlisted corporate debt securities (NCDs/bonds) issued by public or private Indian companies, subject to certain prescribed restrictions such as minimum residual maturity of three years and end-use restriction on investment in real estate business, capital market and purchase of land.

• Securitized debt instruments as under:

• Any certificate or instrument issued by a special purpose vehicle (SPV) set up for securitization of asset(s) where banks, FIs or NBFCs are originators, and/or

• Any certificate or instrument issued and listed in terms of the SEBI (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008.

Further, investment by FPIs in securitized debt instrument shall not be subject to the minimum three-year residual maturity requirement.

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06The Indian PE/VC sector

– the road ahead

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After a very good year in 2017, the growth story for the Indian PE/VC industry remains strong. Globally, India remains one of the fastest growing large economies and this coupled with ground breaking structural reforms unleashed by the Government is expected to continue attracting alternate investment capital into the country.

The long-term viewTo put things in perspective, a record high PE/VC investment of US$26.7 billion in 2017 translates to PE investment of US$10.68 billion per trillion US dollars of GDP (assuming nominal GDP of US$2.5 trillion). China has PE/VC investment of US$18 billion per trillion US dollars of GDP and the levels seen in Asia Pacific and the OECD countries are even higher. Another metric to be considered is India’s low GDP per capita. Adjusted for purchasing power parity, India’s GDP per capita in 2017 was US$7,170, ranking the country 126th in the world and the lowest among the BRICs nations. Russia has GDP per capita of US$27,900, China US$16,620,14 Brazil US$15,500 and South Africa US$13,400. India clearly has a long way to go.15

As the Indian GDP continues to grow at rates exceeding 7%, and as technology and digitization increase productivity, India

Inc. is expected to have a very long runway to grow at double digits for a long time to come. This is expected to lead to a compounded growth of the Indian PE/VC industry over the long term. Like in the case of China, in the long term, domestic capital is expected to play a more important role in the Indian PE/VC industry.

The short to medium-term viewWe expect 2018 to be a strong year for the Indian PE/VC industry on both investment activity as well as exits. As we pointed out earlier in the report, deals are becoming larger and should two to three mega deals materialize, PE/VC investment activity in 2018 could very well surpass the record highs seen in 2017. Exits are expected to remain buoyant, backed by strong capital markets and good M&A interest from both domestic as well as overseas strategic investors. Unless a bout of global volatility unsettles the domestic capital markets, PE/VC-backed exits should have a strong year in 2018. Influenced by the strong exits performance over the past three years, global LPs already consider India as the most attractive emerging market. The continuation of this strong exits trend is vital for keeping the LP enthusiasm about India intact.

7,791

7,030

8,551

8,033

9,304 9,766 10,044

11,084

10,114

-

2,000

4,000

6,000

8,000

10,000

12,000

Nifty (January 2016 to March 2018)

2017 2018

04-Jan-16 04-Apr-16 04-Jul-16 04-Oct-16 04-Jan-17 04-Apr-17 04-Jul-17 04-Oct-17 04-Jan-18 31-Mar-18

Source: NSE India

14, 15 https://economictimes.indiatimes.com/news/economy/indicators/india-moves-up-one-notch-to-126-in-gdp-per-capita-terms/articleshow/61711262.cms

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07Appendices

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47PE/VC Agenda - India Trend Book - 2018

Appendix A

Our Private Equity Services PracticeEY has been working with the private equity industry for more than 25 years, with approximately 25,000 seasoned professionals worldwide dedicated to the industry and its business issues. EY serves 74% of the top 300 PE firms included in the Global PEI 300 firms list. Private equity firms, portfolio companies and investment funds face complex challenges. They are under pressure to deploy capital amid geopolitical uncertainty, increased competition, higher valuations and rising stakeholder expectations. Successful deals depend on the ability to move faster, drive rapid and strategic growth and create greater value throughout the transaction life cycle. EY taps its global network to help source deal opportunities and combines deep sector insights with the proven, innovative strategies that have guided the world’s fastest growing companies.

In India, EY is among the leading providers of advisory, tax, transactions and assurance services. The organization is also the number one professional services brand* in India, which is a testimony to our relentless commitment to deliver

exceptional client service and create a better working world. EY has 16 offices spread across 10 cities in India. Worldwide, our 247,570 people across 150+ countries and 700+ cities are united by our shared values and their unwavering commitment to quality.

• EY’s India Private Equity Services Practice has been among the top advisors for private equity deals over the past ten years. EY has been awarded the “Most Active Transaction Advisor” award by Venture Intelligence for 2009-2013 and also the “Investment Bank of the Year, Private Equity” award by VC Circle in 2012 and 2017.

• EY’s India Private Equity Services Practice provides value to PE funds and their portfolio companies through its deep sector and service expertise. EY India is organized around key industry verticals in a matrix structure that enables us to offer an unparalleled blend of industry expertise and functional skills. We actively track about 15 sectors with sector leads driving our penetration in each of those sectors.

EY has been ranked as #1 Financial Advisor for over a decade across Mergermarket, Thomson Reuters and Bloomberg**. Our position as the foremost M&A advisor in the Indian mid-market enables us to create a robust deal origination pipeline for our PE/VC clients, acting as the tip of the spear of what is India’s dominant PE Services practice.

• # 1 advisor on deal count in Financial advisory league tables across databases

• Consistently maintaining a significant lead from closest compete

• Adjudged as the Investment Bank of the Year at the VC Circle Awards 2017

* as per Global Brand Survey, conducted by an independent research agency commissioned by EY** for most number of deals

EY Closest compete

41 4349

33

1821 20 19

2014 2015 2016 2017

3438

34

2621

28

21

15

2014 2015 2016 2017

29

40 39

29

1824

1912

2014 2015 2016 2017

Merger market Thomson Reuters Bloomberg

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48 PE/VC Agenda - India Trend Book - 2018

Funds

Transaction Advisory Services

Portfolio Services

Fund assurance(Assurance and Tax Structuring)

Buyside advisory(M&A and valuations,Fraud, Investigation and Dispute Services)

Partners(Personal tax)

Fund Raising(Audit of fund performance)

Growth(Strategic Options, Technology Security, IT Strategy, Operational Improvement, Market Entry Options & Working Capital Management)

Distressed(Bank intermediary, working capital, cost reduction)

Transition(Transaction Integration, GAAP Conversion, Governance, Controls Assessment, MIS Development, Process Advisory, Standard Operating Procedures)

Exit readiness(IPO, GAAP Conversion, SOX Compliance, VDD, Sale Mandates, Clause 49)

Buyside support(Financial Due Diligence, Tax Structuring and Diligence, Business DD, Environmental Compliance, CDM Human Capital, Valuations)

Assurance(Assurance, Tax Compliance, Risk Management, Corporate Governance Advisory, Internal Audits and Fraud reviews)

We offer an array of services to Private Equity funds and their portfolio/investee companies through our various service lines.

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49PE/VC Agenda - India Trend Book - 2018

EY has established six distinct solutions reflecting the holistic set of challenges that PE firms face across all levels of the organization – the management company, the funds and their portfolio companies.

Operating model and automation

Integrated due diligence

Alternative asset managers need to drive efficiency through multi-

year target operating models and infrastructure strategies to remain competitive. These align with strategic growth plans by leveraging vendor and service

provider activities. EY defines and monitors data analytics and key

performance indicators to annually assess data governance and risk

against these target models.

Private equity firms conduct diligence on assets across

strategic, financial, tax, operational and HR issues. Firms historically

used issue-based advisors, managing different parties and

consolidating findings at the end of the process. Employing EY’s

integrated diligence approach at the early stages of a transaction

provides more effective, comprehensive diligence on an

asset, giving firms a distinct competitive advantage.

Large asset managers have hundreds of non-US legal entities in multiple countries, and continually create new ones – all with different

compliance obligations. Many are outsourced and require local knowledge. EY gathers the data, leverages local EY teams familiar

with accounting and tax laws, performs data analytics to identify trends, risks and opportunities and

monitors filing requirements.

Private-equity firms face increasing pressure to attract

fresh capital. This requires generating greater investment returns and demonstrating a

consistent track record in creating value in their portfolio. EY’s value creation solution addresses these challenges across all five stages of the deal life cycle, including deal origination, diligence, inception, optimization and exit strategy.

The intense competition for a limited number of deals raises stakes to win for private equity firms. A proprietary investment

approach, driven by sector insights, enables firms to

confidently place winning bids that generate appropriate returns. EY’s global origination team turns

opportunities into actionable strategies. Our proprietary

knowledge and advanced analytics help develop strategic capital options to help firms achieve

success.

Private equity firms must plan exits rigorously in order to successfully monetize their

investment during the exit process in today’s challenging environment. Executives must identify key short-

and long-term priorities prior to undertaking an IPO or alternative transaction. EY can advise deal teams and portfolio companies on exit alternatives, assess exit

readiness, prepare a business for exit/IPO and create a value story

for targeted buyers.

Global compliance and reporting

Value creation

Deal origination

Exit readiness and IPO

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Focused advisory solutions for private equity backed portfolio companiesGrowth Navigator - Achieving your growth ambitions

Having a broader perspective on the drivers of growth in your business and finding innovative ways to accelerate and sustain that growth can give you a competitive advantage. That’s why we’ve developed EY Growth Navigator™, an interactive experience that uses the EY 7 Drivers of Growth to help you and your leadership team assess your business’s current and aspirational position, and create a strategic road map to help you get there.

Route to Market (RTM) – Deliver a successful strategy for your business

EY identifies focused opportunities for optimizing cost and growth after full assessment; designs new RTM, including different approaches for different segments (customers, regions, seasonal demand); identifies the optimal concessionaires’ model taking into account different distribution approaches; and supports the implementation of the RTM by providing IT specs and additional services (e.g., stock management options).

Performance improvement

Depending on objectives and business context, EY helps the client develop a combination of short-term and long-term strategies to reduce costs, optimize process and bring in efficiency and effectiveness across all layers of business to deliver positive impact on EBITDA by ensuring optimal utilization of both tangible and intangible resources.

Cyber security

EY assists internal teams to build cyber awareness and conduct company-wide training, as well as training of board of directors. EY supports in building regulations and compliance requirements with audit and readiness services. EY helps transform the security program and integrate information security and IT risk across the enterprise as well as help implement globalized data protection strategies to protect information that matters, with consideration of regulatory and industry compliance.

Analytics - Generate insights to make smarter, faster decisions

EY helps clients build data and information strategies using various analytics tools to deal with big data to address various areas of business, ranging from opportunity sizing and feasibility, operations and customer modelling, executive

decision making, merger acquisition and valuation. EY helps across the capability value chain ranging from strategy, implementation, hosting and running the analytics functions.

IPO readiness – The first step in the IPO value journey

EY’s IPO readiness service is the first step in what we describe as the “IPO value journey” and is designed to guide the client through a successful transformation from private to public status.

Achieving readiness will ensure a strong debut in the capital markets. Getting IPO readiness right means implementing change throughout the business, organization and the corporate culture. As a public company, the client will be subject to increased filing requirements, transparency, compliance, scrutiny by investors and analysts, and overall accountability for delivering on promises.

Successful businesses start to prepare typically 12 to 24 months before the IPO — in many cases with an IPO readiness assessment.

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51PE/VC Agenda - India Trend Book - 2018

EY has been a first mover in the Restructuring space, with the practice established in 2012

Our offerings include• Formal insolvency appointment

• Investment advisory under IBC (Buy-side)

• Short Term Cash Flow forecasting and management

• Business and Strategy Review

• Interim Management

• Debt Restructuring, Externalization of Debt, Refinancing

• Investment process management for stressed assets

• As part of Financial Restructuring

• During IBC

• Bonds and other structured products

• Turnaround

• Liquidation and Wind Down

• Crisis Stabilization

• New Debt Syndication

Select credentials• Financial Restructuring for various stressed assets, engaging with investors, banks and

promoters for sustainable restructuring

• We have been appointed/ proposed as RP’s in 15 cases – one of the highest in the market

• Key IBC cases being managed by RP’s from EY Restructuring LLP include:

• Amtek Auto Limited and 2 of its subsidiaries

• Bharti Shipyard Limited

• Mandhana Industries Limited

• Coastal Projects Limited

• Orchid Pharma Limited

• Sharon Bio-Medicine Limited

• Kohinoor (Real Estate)

• Ruchi Soya Industries Limited

• Actively engaged by investors in case of buy side transactions in IBC cases

• Conducting Operational diligences on behalf of PE investors

• EBITDA expansion projects

• Fund raising projects

Appendix B

Our Restructuring Practice

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52 PE/VC Agenda - India Trend Book - 2018

More than 100 debt and operational restructuring assignments delivered in India with a total debt impact of around

US$100 billion

First to successfully work on all the schemes introduced by the Government or RBI to deal with NPLs (SDR, S4A, IBC)

1

Working closely with the Government to implement changes

100 + knowledge sharing sessions on policy/regulations

update for clients

Ability to provide completely integrated services

Build relationships by doing the right thing

Sensitive to changing times

High on advocacy. Consistently issuing thought leadership

documents, industry papers and conducting conferences for clients

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53PE/VC Agenda - India Trend Book - 2018

Around 150 people

08 Partners/Associate Partners

Directors/Senior Managers

Managers

Seniors

Staffs/Assistants

15

24

52

42

Started in 2012

Sought after subject matter experts by the media

5 registered Insolvency professionals (IPs) and few more in pipeline

More than 5000 hours in last 12 months spent in training the team

Geographical presence with team in all major cities of India

We have proven methodology to address various scenarios

Qualifications: CA, MBA, Engineers, CFA, lawyers, CS, Insolvency professionals

Sector / industry specialization is core to our team strength

External panel of Industry experts, CFO, CEO, COO, IPs

Team Strength

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Our pan-India presence

Chandigarh

Delhi NCR

Ahmedabad

Mumbai

Pune

Bengaluru

Kochi

Chennai

Hyderabad

Kolkata

Jamshedpur

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Our offices

Ahmedabad2nd floor, Shivalik Ishaan Near C.N. VidhyalayaAmbawadiAhmedabad - 380 015Tel: + 91 79 6608 3800Fax: + 91 79 6608 3900

Bengaluru6th, 12th & 13th floor“UB City”, Canberra BlockNo.24 Vittal Mallya RoadBengaluru - 560 001Tel: + 91 80 4027 5000 + 91 80 6727 5000 + 91 80 2224 0696Fax: + 91 80 2210 6000

Ground Floor, ‘A’ wingDivyasree Chambers # 11, O’Shaughnessy RoadLangford Gardens Bengaluru - 560 025Tel: +91 80 6727 5000Fax: +91 80 2222 9914

Chandigarh1st Floor, SCO: 166-167Sector 9-C, Madhya MargChandigarh - 160 009 Tel: +91 172 331 7800Fax: +91 172 331 7888

ChennaiTidel Park, 6th & 7th Floor A Block (Module 601,701-702)No.4, Rajiv Gandhi Salai Taramani, Chennai - 600 113Tel: + 91 44 6654 8100 Fax: + 91 44 2254 0120

Delhi NCRGolf View Corporate Tower BSector 42, Sector RoadGurgaon - 122 002Tel: + 91 124 464 4000Fax: + 91 124 464 4050

3rd & 6th Floor, Worldmark-1IGI Airport Hospitality DistrictAerocity, New Delhi - 110 037Tel: + 91 11 6671 8000 Fax + 91 11 6671 9999

4th & 5th Floor, Plot No 2B Tower 2, Sector 126 NOIDA - 201 304 Gautam Budh Nagar, U.P.Tel: + 91 120 671 7000 Fax: + 91 120 671 7171

HyderabadOval Office, 18, iLabs CentreHitech City, MadhapurHyderabad - 500 081Tel: + 91 40 6736 2000Fax: + 91 40 6736 2200

Jamshedpur1st Floor, Shantiniketan Building Holding No. 1, SB Shop Area Bistupur, Jamshedpur – 831 001Tel: +91 657 663 1000BSNL: +91 657 223 0441

Kochi9th Floor, ABAD NucleusNH-49, Maradu POKochi - 682 304Tel: + 91 484 304 4000 Fax: + 91 484 270 5393

Kolkata22 Camac Street3rd Floor, Block ‘C’Kolkata - 700 016Tel: + 91 33 6615 3400Fax: + 91 33 2281 7750

Mumbai14th Floor, The Ruby29 Senapati Bapat MargDadar (W), Mumbai - 400 028Tel: + 91 22 6192 0000Fax: + 91 22 6192 1000

5th Floor, Block B-2Nirlon Knowledge ParkOff. Western Express HighwayGoregaon (E)Mumbai - 400 063Tel: + 91 22 6192 0000Fax: + 91 22 6192 3000

PuneC-401, 4th floor Panchshil Tech ParkYerwada (Near Don Bosco School)Pune - 411 006Tel: + 91 20 6603 6000Fax: + 91 20 6601 5900

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About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

Ernst & Young LLP is one of the Indian client serving member firms of EYGM Limited. For more information about our organization, please visit www.ey.com/in.

Ernst & Young LLP is a Limited Liability Partnership, registered under the Limited Liability Partnership Act, 2008 in India, having its registered office at 22 Camac Street, 3rd Floor, Block C, Kolkata - 700016

© 2018 Ernst & Young LLP. Published in India. All Rights Reserved.

EYIN1804-018 ED None

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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Ernst & Young LLPEY | Assurance | Tax | Transactions | Advisory

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Contacts

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Macroeconomics

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Vivek SoniPartner and National LeaderE: [email protected]

Narendra RohiraPartner, Transaction TaxE: [email protected]

Subramaniam KrishnanPartner, Tax & Regulatory ServicesE: [email protected]

Dilip DusijaAssociate PartnerE: [email protected]

Nachiket DeoPartner, Transaction TaxE: [email protected]

Abizer DiwanjiPartner and National LeaderE: [email protected]

Amit KhandelwalPartner and National LeaderE: [email protected]

Ajay AroraPartner and National Leader M&A PracticeE: [email protected]

Navin VohraPartnerValuation & Business ModelingE: [email protected]

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Allwyn D’SouzaManagerE: [email protected]

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