PE/VC Agenda. India Trend Book

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1 PE/VC Agenda India Trend Book

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3 Contents Why invest in India the macro view 12 Investment activity - highlights and trends 24 PE/VC exits cross a new high 30 Distressed Assets - an opportunity for PE? 36 The evolving regulatory and policy framework 44 The Indian PE/VC sector the road ahead 46 Appendices

4 Preface Growing 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 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$4.3 billion in 2016, further adding to the already high level of dry powder available with PE/VC funds. Snapshot of PE/VC activity Investments Value (US$mn) 26,458 16,203 Number Funds raised Value (US$mn) 5,774 4,313 Number Exits Value (US$mn) 13,013 6,668 Number 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%. Q 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, 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 Q Although pure play PE investments declined from US$5.6 billion in Q to US$4.8 billion in Q1 2018, they are almost 26% more than the US$3.9 billion invested in Q 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$100 million mark. PE/VC investment in India - Quarterly trends ,450 5,139 6,003 5,043 4,310 3,658 3,097 5,138 4,179 6,214 8,686 7,379 7,916 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 US$ million No. of Deals

5 Activity on PE/VC exits in Q has been comparatively muted, climbing down 51% from Q 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. PE/VC Exits in India Quarterly Trend ,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 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 US$ million No. of Deals 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 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 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. Outlook If 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%. 1 EY PE Capital Briefing January EY 2018 Global Private Equity Survey 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 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 rerating 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 We hope you enjoy reading this report. Happy Investing Vivek Soni National Leader, Private Equity Services

6 01 Why invest in India the macro view

7 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 leader India, 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 shortterm 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. Exhibit 1: India s GDP growth: actual vs. potential FY14 FY15 FY16 FY17 FY18 FY19 FY20 CSO OECD IMF Potential GDP (OECD) World Bank Source (Basic Data): MOSPI, OECD; World Bank; Economic Survey , Ministry of Finance, Government of India. ES Exhibit 2: Real GDP growth (%) AD component 1H FY15 2H FY15 1H FY16 2H FY16 1H FY17 2H FY17 1H FY18 2H FY18 PFCE GCE GFCF EXP IMP GDP 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. 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. PE/VC Agenda - India Trend Book

8 2. Structural and supply-side reforms: sustained productivity-enhancing effects As 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. Exhibit 3 : Policy wheel Mainly demand side policies with supply implications Tax cuts Market based pricing of government resources Make in India Smart Cities Skill Supply side policies Sustaining momentum, augmenting productivity India Digital India Power sector reforms FY19 Budget along with outlays for selected programs Subsidy reduction Institutional and regulatory fulcrum: e.g., FRBMA, RERA, Bankruptcy Law Monetary policy Fiscal policy GST FDI policies Pushing aggregate demand Demand side policies Exchange rate policy Trade policies Deficit financed infrastructure spending Government expenditure restructuring Mainly supply side policies with demand implications 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 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 8 PE/VC Agenda - India Trend Book

9 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 Further liberalization of FDI has been progressively taken up since then. Exhibit 4 highlights how FDI inflows into India have been gathering momentum Exhibit 4: Gross FDI inflows (US$ billion) * 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 Governmentapproval route include space, biotechnology, mining and some defense sectors. Source: (Basic data): RBI; * Data forecasted for FY18 based on the data that was available till December 2017 PE/VC Agenda - India Trend Book

10 3. India s FY19 Budget: a demand-side push toward growth The 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 extrabudgetary 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). Exhibit 5: Role of budgetary and extra-budgetary resources FY (RE) % of GDP 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 ,24,463 Expansionary effect of financing outlays by budgetary and extra-budgetary resources Agriculture and rural livelihood program Schematic outlays for education, health and social protection sectors ,48, ,600 Capital outlay on infrastructure ,02,830 Total outlay ,66,487 Memo Nominal GDP (INR crore) 16,847,455 18,722,302 Source: Union Budget documents and MOSPI 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. Dr. DK Srivastava Chief Policy Advisor 10 PE/VC Agenda - India Trend Book

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12 02 Investment activity - highlights and trends

13 PE/VC investments at a new all-time high in was a record year for PE/VC investments in India, recording an all-time high of US$26.5 billion. In value terms, investments rose by 63% compared to 2016, while the number of deals remained at similar levels (595 deals vs. 588 deals in 2016). Investments surpassed the previous record set in 2015 by 35%. This rise in value terms was despite a 22% drop in the number of deals compared to 2015 (595 deals in 2017 vs. 767 deals in 2015). Exhibit 6: PE/VC investments in India ,627 3,657 8,430 9,641 7,546 9,116 11,683 19,635 16,203 26, Value (US$ million) Volume 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 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. 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 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 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 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 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 Also, except for credit investments, the increase in average deal size has happened across deal segments PE/VC Agenda - India Trend Book

14 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$22 million in 2017). With global funds flush with dry powder after raising a record level of funds in 2017, the only constraint on private equity globally has been the availability of targets as opposed to capital availability. Exhibit 7: Top 10 PE/VC Investment deals in 2017 Target Investor Amount (US$m) Deal stake % Investment month Stage Target sector Flipkart SoftBank 2, Aug-17 Growth E-commerce Paytm SoftBank 1,400 NA May-17 Growth Financial services DLF Cyber City Developers Limited ANI Technologies Private Limited (Ola Cabs) Bharti Infratel Limited GIC 1, Aug-17 Growth Real estate Tencent, Softbank 1,100 NA Oct-17 Growth E-commerce KKR, CPPIB Mar-17 PIPE Telecom Axis Bank Limited Bain Capital Dec-17 PIPE Financial services GlobalLogic CPPIB Jan-17 Growth Technology IndoSpace CPPIB 500 NA May-17 Buyout Real estate Logos India ICICI Lombard General Insurance Company Limited Ivanhoé Cambridge (the real estate subsidiary of CDPQ) and QuadReal Property Group Warburg Pincus LLC, Clermont Group, IIFL Special Opportunities Fund 400 NA Oct-17 Start-up Logistics May-17 Growth Financial services Exhibit 8: Deals greater than US$100 million Exhibit 9: Average and median deal size Year US$ billion # of deals Average Median PE/VC Agenda - India Trend Book

15 Exhibit 10: Percentage share by value (US$ billion) 68, 14% 19, 72% 1, 4% 1, 4% 2, 8% 3, 11% 8, 50% 1, 6% < US$10 million US$10 million - US$20 million US$20 million - US$50 million US$50 million - US$100 million > US$100 million 2, 15% 4, 23% 1, 6% Exhibit 11: Percentage share by # of deals 56, 12% 45, 9% 65, 13% 252, 52% 33, 7% 53, 11% 77, 16% < US$10 million US$10 million - US$20 million US$20 million - US$50 million US$50 million - US$100 million > US$100 million 253, 52% 68, 14% 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 with the GPs backed by them. This trend, which started about five years ago in India, witnessed increased traction in 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 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 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 A recent LP survey conducted by EMPEA 6 indicates that almost two-third of the LPs surveyed are seeking to co-invest with emerging market PE funds in 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. 6 PE/VC Agenda - India Trend Book

16 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, Aug-17 Growth Real estate GIC Global Logic Jan-17 Growth Technology CPPIB IndoSpace NA May-17 Buyout Real estate CPPIB Logos India NA Oct-17 Start-up Logistics Ivanhoé Cambridge (subsidiary of CDPQ) ReNew Power Ventures Private Limited NA Nov-17 Growth Renewables CPPIB Kotak Mahindra Bank Limited Mar-17 PIPE Financial services CPPIB,CDPQ Bharti Infratel Limited Mar-17 PIPE Telecom CPPIB Cube Highways and Infrastructure Pte. Limited Manipal Health Enterprises Private Limited NA Nov-17 Start-up Infrastructure ADIA Aug-17 Growth Healthcare Temasek Can Fin Homes Limited Mar-17 PIPE Financial services GIC 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 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. Startup 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 Similarly, logistics received US$649 million in investments across 14 deals in 2017 compared to US$124 million across 12 deals in E-commerce continued to be the sector to receive the largest amount of start-up funding at US$819 million, of which US$500 million was on account of investment by Softbank in budget stay aggregator Oyo Rooms. The number of e-commerce deals, however, continues to be on a sharp decline (45 deals in 2017 vs. 80 deal in 2016 vs. 169 deals in 2015) Exhibit 13: Start-up deals in India US$ billion # of deals PE/VC Agenda - India Trend Book

17 IV. Buyout and credit deals lesser than 2016 but remain strong emerging trends Buyout and credit deals moderated from the highs of 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 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. Exhibit 14: Buyouts deals in India US$ billion # of deals Exhibit 15: Top buyout deals in 2017 Target Amount (US$ million) Deal stake % Investment month Target sector Investor IndoSpace May-17 Real estate CPPIB Carnival's Chandigarh Property Jul-17 Real estate Blackstone Aegis Limited Apr-17 Technology Capital Square Partners Hindustan Powerprojects Private Limited Apr-17 Power and utilities Macquarie Group Karvy Computershare Limited Aug-17 Financial services General Atlantic 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$300 million to Mytrah Energy. Credit deals by PE-investor-backed platforms are expected to increase with many investors showing interest in acquiring distressed assets and stressed loan portfolios from banks in wake of the resolution ecosystem put in place by the new IBC. Exhibit 16: Credit deals in India US$ billion # of deals PE/VC Agenda - India Trend Book

18 V 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 was the best year for growth capital, with US$13.5 billion invested across 159 deals, more than twice the value recorded in 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 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$795 million investment in Axis Bank for a 3.7% stake. VI. Investments rise across most sectors with the traditional favorites receiving a record level of investments All the major sectors recorded a significant increase in the value of investments in 2017 compared to the previous year. It was the best year in terms of the value of investments for most sectors. In 2017, sectors like financial services, real estate, e-commerce, technology, retail and consumer products, and healthcare recorded the highest ever investments by PE/VC investors in India, together accounting for 74% of all investments made during the year. Except for technology, which recorded a decline of 10%, all the other sectors mentioned above grew by over 50% in terms of value. Apart from these, sectors such as logistics, power and utilities and food and agriculture also witnessed good investment activity in 2017, which we expect to continue in Exhibit 17: Growth deals in India US$ billion # of deals Exhibit 19: Deal value (US$ billion) by sector in 2017 and % contribution to overall value Others, 4.7, 18% Retail and consumer, 0.8, 3% Healthcare, 1, 4% Power and utilities, 1.3, 5% Technology, 1.8, 7% Financial services, 7.2, 27% Real estate, 5.0, 18% E-commerce, 4.7, 17% Exhibit 18: PIPE deals in India US$ billion # of deals Exhibit 20: Deal value (US$ billion) by sector in 2016 and % contribution to overall value Others, 4.1, 25% Healthcare, 0.6, 4% Infra, 0.7, 4% E-commerce, 1.5, 9% Real estate, 3.2, 20% Financial services, 2.5, 16% Technology, 2.0, 12% Telecom,1.6, 10% 18 PE/VC Agenda - India Trend Book

19 Exhibit 21: Deal volume by sector in 2017 Others, 128, 22% Healthcare, 37, 6% Retail and consumer, 37, 6% Food and agri, 47, 8% Real estate 53, 9% Technology, 121, 20% Financial services, 112, 19% E-commerce, 60, 10% 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 firsttime managers. There were 15 fund raises by Indian PE/VC funds aggregating to US$2.4 billion in From a sector perspective, sector-agnostic funds comprised 60% of total value of funds raised by PE/VCs in Exhibit 23: Funds raised and announced (US$ million) ,075 5,774 Exhibit 22: Deal volume by sector in 2016 Others, 151, 26% Technology, 114, 19% ,548 4,313 Food and agri, 27, 5% Retail and consumer, 28, 5% Healthcare, 35, 6% E-commerce, 91, 15% Financial services, 72, 12% Real estate, 70, 12% Announced Raised Exhibit 24: # of funds raised and announced 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. Announced Raised PE/VC Agenda - India Trend Book

20 Exhibit 25: Top 10 fund raises by PE/VCs during 2017 Name of the fund Amount (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 Sector Insights As 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 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. 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$558 million. Exhibit 26: Deals in the financial services sector 8.0 in India US$ billion # of deals 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. 20 PE/VC Agenda - India Trend Book

21 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 Dec-17 PIPE Bain Capital ICICI Lombard General Insurance Company Limited HDFC Standard Life Insurance Company Limited May-17 Growth Warburg Pincus, Clermont Group, IIFL 356 NA Nov-17 PIPE UC-RNT Fund, other anchor investors Kotak Mahindra Bank Limited Mar-17 PIPE CPPIB,CDPQ SBI Cards and Payments Services Private Limited Dec-17 Growth Carlyle Real estate The real estate sector saw significant investment activity in 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 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 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 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$981 million raised in Exhibit 28: Deals in the real estate sector in India US$ billion # of deals PE/VC Agenda - India Trend Book

22 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, Aug-17 Growth GIC IndoSpace 500 NA May-17 Buyout CPPIB Carnival's Chandigarh Property Jul-17 Buyout Blackstone Phoenix Group, Marvel Group and Jatia Group 196 NA Mar-17 Growth Altico Capital Shriram Properties, IT SEZ May-17 Buyout Xander E-commerce 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$3.6 billion. In the absence of these deals, e-commerce would have recorded an even lower performance compared to last year. In wake of the many me too kind of e-commerce businesses sprouting up and the high valuations, investors are shifting their focus on scalability, sustainability and profitable growth. Consequently, the number and scale of e-commerce deals have seen a proportionate decline. Exhibit 31: Top deals in the e-commerce sector in 2017 Target Amount (US$ million) Exhibit 30: Deals in e-commerce sector in India US$ billion Deal stake % Investment month Financing stage # of deals Investor Flipkart 2, 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) Apr-17 Start-up SoftBank ANI Technologies Private Limited (Ola Cabs) 102 NA May-17 Growth Falcon Edge, UC-RNT Fund Technology Technology companies received US$1.8 billion of investments across 121 deals in 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$720 million investment into Global Logic for a 48% stake. Exhibit 32: Deals in the technology sector in India US$ billion # of deals PE/VC Agenda - India Trend Book

23 Exhibit 33: Top deals in the technology sector in 2017 Target Amount (US$ million) Deal stake % Investment month Financing stage Investor GlobalLogic Jan-17 Growth CPPIB Aegis Limited 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 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 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. 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. 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 Food and agriculture related companies recorded 47 deals in the sector compared to 27 in The deal size, however, remained on the smaller side with the largest deal being US$50 million. * Retail and consumer products PE/VC Agenda - India Trend Book

24 03 PE/VC exits cross a new high

25 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$6.7 billion achieved in This strong exit activity was driven by open markets and IPOs backed by buoyant capital markets, which rose by close to 30% in Chart 34: Exits in India US$ billion # of deals 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 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 saw the largest PE/VC exit in India with Qatar Foundation Endowment selling its 5% stake in Bharti Airtel for US$1.5 billion. Exhibit 35: Top exits via open market in 2017 Target Amount (US$ 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) Nov-17 Financial services Goldman Sachs Max Financial Services Limited Sep-17 Financial services Goldman Sachs Genpact Limited Aug-17 Technology Bain Capital, GIC Dalmia Bharat Limited Apr-17 Cement and building products KKR Exhibit 36: Open market exits in India US$ billion # of IPOs A similar increase was seen in PE/VC backed IPOs in 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 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 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 PE/VC Agenda - India Trend Book

26 Exhibit 37: Exits by PE/VC funds via IPOs in India , , , , OFS by PE/VC (US$ million) # of IPOs Exhibit 38: Exits via IPO in 2017 Target Exit amount (US$ million) Exit stake % Target sector Seller ICICI Lombard General Insurance Company Limited Financial services Fairfax AU Small Finance Bank Limited Financial services Kedaara, IFC, Warburg Pincus and ChrysCapital Eris Lifesciences Limited Pharmaceuticals ChrysCapital Indian Energy Exchange Limited Power and utilities Aditya Birla Capital, Multiples and others Godrej Agrovet Limited 88 6 Food and agriculture Temasek Future Supply Chain Solutions Limited Logistics SSG Capital Matrimony.Com Limited E-commerce Mayfield, Bessemer and others Khadim India Limited Retail and consumer products Reliance Alternative Investments Fund Mahindra Logistics Limited Logistics Kedaara Capital Dixon Technologies India Limited Power and utilities India Business Excellence Fund-I S Chand and Company Limited Education Everstone Capital Security and Intelligence Services India Limited Shankara Building Products Limited 42 5 Business services CX Capital Industrial products Reliance Alternative Investments Fund Tejas Networks Limited Technology Cascade Capital, Intel Capital and others MAS Financial Services Limited 35 9 Financial services DEG, Netherlands Development Finance Co. and Sarva Capital 26 PE/VC Agenda - India Trend Book

27 Exhibit 38: Exits via IPO in 2017 (Cont d) 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 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: SEBI website Note: There are close to 15 other PE backed companies that are planning to file DRHPs in 2018 PE/VC Agenda - India Trend Book

28 Secondary exits gain traction Apart 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$3.4 billion across 44 deals, which was almost a seven-fold increase in value compared to Investments made by Softbank, CPPIB and other large buyout funds contributed to this rise. Five out of the 10 largest secondary exits in India happened in This has enhanced the credibility of the India investment story, as larger funds are willing to take on bigger bets at rich valuations, bring in the required capitalization while providing an exit to early investors. Exhibit 40: Exits via secondary sale in India US$ billion # of IPOs 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 Jan-17 Technology Apax CPPIB ICICI Lombard General Insurance Company Limited May-17 Financial services Fairfax Warburg Pincus, Clermont Group and IIFL Capital First Limited 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 Strategic exits moderate from the highs of 2016 In 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 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. 28 PE/VC Agenda - India Trend Book

29 Exhibit 42: Strategic exits in India US$ billion # of deals 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 PE/VC Agenda - India Trend Book

30 04 Distressed Assets - an opportunity for PE?

31 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 year IBC 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 nonperforming assets comprising, inter-alia, assets among the 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 timebound 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: Apr14 Jun16 Jul16 Feb18 Joint Lenders Forum (JLF) mechanism introduced by RBI S4A scheme was introduced by RBI National Company Law Tribunal (NCLT) notified RBI withdraws existing restructuring guidelines Jul14 May16 Dec16 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 Dec17 Listing of security receipts (SRs) of Asset Reconstruction Company (ARC) allowed Aug14 Mar16 Jan17 Bankruptcy Law Reforms Committee (BLRC) formed; RBI revised from 5/95 to 15/85 structure for ARC sale SDR scheme introduced by RBI asset quality review exercise started by the RBI Stressed asset touched 11.5% (Gross NPA + Retructured advances) No new cases referred to CDR in FY16 Final report and draft bill submitted by BLRC First CIRP case admitted by NCLT under IBC Jun15 Mar16 Mar17 Sep15 Nov15 Jun17 Stressed asset remains at 12% RBI identifies 12 large cases to be resolved under IBC Nov17 IBC amended: now also applicable to personal guarantors; sec29a inserted to disqualify certain delinquent promoters Aug17 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 PE/VC Agenda - India Trend Book

32 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, 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 Resolution process Default Appointment of a resolution professional Moratorium period (180/270 days) Formation of Committee of Creditors 75% of the creditors to No approve Yes Implement the resolution plan Goes into liquidation 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. 32 PE/VC Agenda - India Trend Book

33 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 class The 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, tieup with strategic buyers etc. The transaction perspective Commercial and Legal The 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 AION- Apollo and ICICI Lone Star and IL&FS CPPIB and Kotak Mahindra* SREI Alternative Investment August 2016 August 2016 February 2017 January 2016 February 2016 US$1,000 million US$825 million US$550 million US$525 million 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 PE/VC Agenda - India Trend Book

34 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). Exhibit 44: Status of 12 cases of RBI list and investors interest S Name of Company no. 1 ABG Shipyard Limited 2 Alok Industries Limited Debt (US$ billion) 3 Amtek Auto Limited 1.98 Corporation Bank 4 Bhushan Power & Steel Limited 5 Bhushan Steel Limited 6 Electrosteel Steels Limited 7 ERA Infra Engineering Limited 8 Essar Steel India Limited 9 Jaypee Infratech Limited 10 Jyoti Structures Limited 11 Lanco Infratech Limited 12 Monnet Ispat and Energy Limited Initiated by Initiated on Bids Received from Shortlisted Bidder, subject to approval by NCLT (where applicable) 1.71 ICICI Bank Liberty House Liberty House Group 3.30 SBI RIL jointly with JM Financial ARC Liberty House Group, Deccan Value Investors Liberty House Group 6.60 PNB Tata Steel, JSW, Liberty House Group 7.40 SBI Tata Steel, JSW Tata Steel 1.30 SBI Tata Steel, Vedanta, Edelweiss and Renaissance Group 1.04 Prideco Commercial Projects Private Limited N.A (Insolvency Application not admitted) 5.30 SBI Numetal Group, Arcelor Mittal 1.44 IDBI Multiple bids including JSW group, Adani group, Suraksha ARC, Deutsche Bank, Jaiprakash Associates, Jieyang Zhonguci (a Chinese company) 0.82 SBI Sharad Sanghvi and Kedar Capital 1.00 IDBI OPG Group, Prem Energy, Goyal Group and Diva Group 1.08 SBI 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) 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. 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. Further, the time period to evaluate and execute a deal is fairly limited, anywhere between 3 and 6 months, from inception to 34 PE/VC Agenda - India Trend Book

35 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 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 The way forward for investors The 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 businessfriendly; 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 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 timebound systems in place, the ball is in the court of bankers and investors to leverage the platform that IBC offers. PE/VC Agenda - India Trend Book

36 05 The evolving regulatory and policy framework

37 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 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). 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: 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 PE/VC Agenda - India Trend Book

38 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). gains arising from the transfer of shares occurring on or after 1 April 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: tns_ _sg_3.html&wt.z_nav=pagination 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 Source: Attachments/631/Press-Release-India-Signs-Multilateral-Convention-Implement- Tax-Treaty 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 The protocol introduces source-based taxation of capital 38 PE/VC Agenda - India Trend Book

39 IV. Key CBDT circulars/clarifications issued during calendar year 2017: 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 dayto-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 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. 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. Consistency principle will be followed while applying GAAR provisions in different years if the facts and circumstances remain the same. 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. PE/VC Agenda - India Trend Book

40 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 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 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. 40 PE/VC Agenda - India Trend Book

41 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 , 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. PE/VC Agenda - India Trend Book

42 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: 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: 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 Corporate Law rated: II. Ministry of Corporate Affairs (MCA) notifies crossborder 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. 42 PE/VC Agenda - India Trend Book

43 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, 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 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 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, Further, investment by FPIs in securitized debt instrument shall not be subject to the minimum three-year residual maturity requirement. 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 PE/VC Agenda - India Trend Book

44 06 The Indian PE/VC sector the road ahead

45 Nifty (January 2016 to March 2018) 12, ,084 10,000 7,791 8,000 8,551 8,033 9,304 9,766 10,044 10,114 7,030 6,000 4,000 2, Jan Apr Jul Oct Jan Apr Jul Oct Jan Mar-18 Source: NSE India 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 view To 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 view We 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 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 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. 14, 15 PE/VC Agenda - India Trend Book

46 07 Appendices

47 Appendix A Our Private Equity Services Practice EY 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 and also the Investment Bank of the Year, Private Equity award by VC Circle in 2012 and 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. Merger market Thomson Reuters Bloomberg EY Closest compete # 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 PE/VC Agenda - India Trend Book

48 We offer an array of services to Private Equity funds and their portfolio/investee companies through our various service lines. Partners (Personal tax) Fund assurance (Assurance and Tax Structuring) Fund Raising (Audit of fund performance) Buyside advisory (M&A and valuations, Fraud, Investigation and Dispute Services) Exit readiness (IPO, GAAP Conversion, SOX Compliance, VDD, Sale Mandates, Clause 49) Funds Transaction Advisory Services Portfolio Services Buyside support (Financial Due Diligence, Tax Structuring and Diligence, Business DD, Environmental Compliance, CDM Human Capital, Valuations) Transition (Transaction Integration, GAAP Conversion, Governance, Controls Assessment, MIS Development, Process Advisory, Standard Operating Procedures) Distressed (Bank intermediary, working capital, cost reduction) Assurance (Assurance, Tax Compliance, Risk Management, Corporate Governance Advisory, Internal Audits and Fraud reviews) Growth (Strategic Options, Technology Security, IT Strategy, Operational Improvement, Market Entry Options & Working Capital Management) 48 PE/VC Agenda - India Trend Book