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Project Report on: PRIVATE EQUITY Submitted By: NAME: SHAURYA POTDAR SEAT NO: __________ TYB.Com (FINANCIAL MARKETS) Semester V TH Submitted To: University Of Mumbai Project Guide: Dr.(Mrs.) Richa Jain Academic Year 2015-2016

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Project Report on

PRIVATE EQUITY

Submitted By

NAME SHAURYA POTDAR

SEAT NO __________

TYBCom (FINANCIAL MARKETS)

Semester VTH

Submitted To

University Of Mumbai

Project Guide

Dr(Mrs) Richa Jain

Academic Year

2015-2016

CERTIFICATE

This is to certify that the project entitled PRIVATE EQUITY is

successfully done by SHAURYAMPOTDAR During the Third Year Sixth

Semester of Bcom [Financial Markets] under University Of Mumbai through

the Thakur College of Science amp Commerce Kandivali (East) Mumbai ndash

400101

_______________ _______________ ______________

Co-ordinator Project Guide Principal

Date _________ Place ____________

____________________________

External Examiner

DECLARATION

I SHAURYAMPOTDAR from Thakur College of Science amp Commerce

student of TYBCom (Financial Markets) semester VI Examination Seat no-

_________ here by submit my project report on PRIVATE EQUITY

I also declare that this project which is the partial fulfillment of the

requirement for the degree of TYBCom (Financial Markets) of University of

Mumbai is the result of my own efforts with the help of experts

Date __________

ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project report on PRIVATE EQUITY

Firstly I take the opportunity in thanking almightily and my parents without whose continuous

blessings I would not have been able to complete this project

I would like to thank my project guide Dr Richa Jain for her great help valuable opinions

advice and suggestions in fulfillment of this project

I am also grateful to my co-ordinator Mrs RashmiV Shetty for always encouraging and given

me new hope to do this project

I convey my deep appreciation to them for sparing their valuable time and efforts so as to

make me capable of presenting this project

I am thankful to our college for all the possible assistance and support by making available the

required books and the internet room which have proved useful to me in successfully

completing my project

I hope that I have succeeded in presenting this project to the best of my abilities

EXECUTIVE SUMMARY

Much has happened in the Indian and International capital market in the last 17 years With its foundations

laid in socialist based economy of four decades with strict government control over private sector

participation foreign trade and foreign direct investment India opened its gates to the outside world in the

early 1990s Since then its economy and financial markets underwent radical changes largely in response to

the economic crisis of the late 1980s The government control on foreign trade and investment were

loosened and the barriers to entry in the days of the license raj were relaxed

The emergence of Securities and Exchange Board of India (SEBI) as the supreme capital market regulator

showed Indiarsquos commitment to come across as a strong economic force through establishing market best

practices of enhanced corporate disclosure and increased investor protection

The establishment of National Stock Exchange (NSE) a state-of-the art exchange

with sophisticated technology to improve trading practices and reduce unethical dealings supported by a

strong legal framework and technological base to strengthen the governance structure has been the highlight

of the Indian capital market in the last decade The opening up of the economy has increased the flow of

Foreign Direct Investment (FDI) and has put India on the global map as a new-age economic force to

reckon with

The increased level of sophistication in the market has been duly supported by increasingly complex

instruments like derivatives and other structured products While the recent global meltdown has made us

aware of the perils of sophisticated markets the learning has been to follow a path of caution while

maintaining a steady pace

INDEX

Sr No Particulars Pg No

I Acknowledgement 1-5

II Abstract 6-14

III Objective 15-21

IV Definition 22-23

V Private Equity Current Scenario 24-25

VI Types of Private Equity 26-27

VII The stages of Private Equity 28

VIII Process of Private Equity Investment 29

IX Advantages of Private Equity 30

X Disdvantages of Private Equity 31-33

XI Ways of investment (Entry Route) 34-36

XII Ways of Exit 37-40

Sr No Particulars Pg No

XIII Major Private Equity Deals in Indiatrade Warburg-Pincus amp Bharti Tele Venturestrade Dalmia Cement amp KKR

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

CERTIFICATE

This is to certify that the project entitled PRIVATE EQUITY is

successfully done by SHAURYAMPOTDAR During the Third Year Sixth

Semester of Bcom [Financial Markets] under University Of Mumbai through

the Thakur College of Science amp Commerce Kandivali (East) Mumbai ndash

400101

_______________ _______________ ______________

Co-ordinator Project Guide Principal

Date _________ Place ____________

____________________________

External Examiner

DECLARATION

I SHAURYAMPOTDAR from Thakur College of Science amp Commerce

student of TYBCom (Financial Markets) semester VI Examination Seat no-

_________ here by submit my project report on PRIVATE EQUITY

I also declare that this project which is the partial fulfillment of the

requirement for the degree of TYBCom (Financial Markets) of University of

Mumbai is the result of my own efforts with the help of experts

Date __________

ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project report on PRIVATE EQUITY

Firstly I take the opportunity in thanking almightily and my parents without whose continuous

blessings I would not have been able to complete this project

I would like to thank my project guide Dr Richa Jain for her great help valuable opinions

advice and suggestions in fulfillment of this project

I am also grateful to my co-ordinator Mrs RashmiV Shetty for always encouraging and given

me new hope to do this project

I convey my deep appreciation to them for sparing their valuable time and efforts so as to

make me capable of presenting this project

I am thankful to our college for all the possible assistance and support by making available the

required books and the internet room which have proved useful to me in successfully

completing my project

I hope that I have succeeded in presenting this project to the best of my abilities

EXECUTIVE SUMMARY

Much has happened in the Indian and International capital market in the last 17 years With its foundations

laid in socialist based economy of four decades with strict government control over private sector

participation foreign trade and foreign direct investment India opened its gates to the outside world in the

early 1990s Since then its economy and financial markets underwent radical changes largely in response to

the economic crisis of the late 1980s The government control on foreign trade and investment were

loosened and the barriers to entry in the days of the license raj were relaxed

The emergence of Securities and Exchange Board of India (SEBI) as the supreme capital market regulator

showed Indiarsquos commitment to come across as a strong economic force through establishing market best

practices of enhanced corporate disclosure and increased investor protection

The establishment of National Stock Exchange (NSE) a state-of-the art exchange

with sophisticated technology to improve trading practices and reduce unethical dealings supported by a

strong legal framework and technological base to strengthen the governance structure has been the highlight

of the Indian capital market in the last decade The opening up of the economy has increased the flow of

Foreign Direct Investment (FDI) and has put India on the global map as a new-age economic force to

reckon with

The increased level of sophistication in the market has been duly supported by increasingly complex

instruments like derivatives and other structured products While the recent global meltdown has made us

aware of the perils of sophisticated markets the learning has been to follow a path of caution while

maintaining a steady pace

INDEX

Sr No Particulars Pg No

I Acknowledgement 1-5

II Abstract 6-14

III Objective 15-21

IV Definition 22-23

V Private Equity Current Scenario 24-25

VI Types of Private Equity 26-27

VII The stages of Private Equity 28

VIII Process of Private Equity Investment 29

IX Advantages of Private Equity 30

X Disdvantages of Private Equity 31-33

XI Ways of investment (Entry Route) 34-36

XII Ways of Exit 37-40

Sr No Particulars Pg No

XIII Major Private Equity Deals in Indiatrade Warburg-Pincus amp Bharti Tele Venturestrade Dalmia Cement amp KKR

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

I SHAURYAMPOTDAR from Thakur College of Science amp Commerce

student of TYBCom (Financial Markets) semester VI Examination Seat no-

_________ here by submit my project report on PRIVATE EQUITY

I also declare that this project which is the partial fulfillment of the

requirement for the degree of TYBCom (Financial Markets) of University of

Mumbai is the result of my own efforts with the help of experts

Date __________

ACKNOWLEDGEMENT

It gives me immense pleasure in presenting the project report on PRIVATE EQUITY

Firstly I take the opportunity in thanking almightily and my parents without whose continuous

blessings I would not have been able to complete this project

I would like to thank my project guide Dr Richa Jain for her great help valuable opinions

advice and suggestions in fulfillment of this project

I am also grateful to my co-ordinator Mrs RashmiV Shetty for always encouraging and given

me new hope to do this project

I convey my deep appreciation to them for sparing their valuable time and efforts so as to

make me capable of presenting this project

I am thankful to our college for all the possible assistance and support by making available the

required books and the internet room which have proved useful to me in successfully

completing my project

I hope that I have succeeded in presenting this project to the best of my abilities

EXECUTIVE SUMMARY

Much has happened in the Indian and International capital market in the last 17 years With its foundations

laid in socialist based economy of four decades with strict government control over private sector

participation foreign trade and foreign direct investment India opened its gates to the outside world in the

early 1990s Since then its economy and financial markets underwent radical changes largely in response to

the economic crisis of the late 1980s The government control on foreign trade and investment were

loosened and the barriers to entry in the days of the license raj were relaxed

The emergence of Securities and Exchange Board of India (SEBI) as the supreme capital market regulator

showed Indiarsquos commitment to come across as a strong economic force through establishing market best

practices of enhanced corporate disclosure and increased investor protection

The establishment of National Stock Exchange (NSE) a state-of-the art exchange

with sophisticated technology to improve trading practices and reduce unethical dealings supported by a

strong legal framework and technological base to strengthen the governance structure has been the highlight

of the Indian capital market in the last decade The opening up of the economy has increased the flow of

Foreign Direct Investment (FDI) and has put India on the global map as a new-age economic force to

reckon with

The increased level of sophistication in the market has been duly supported by increasingly complex

instruments like derivatives and other structured products While the recent global meltdown has made us

aware of the perils of sophisticated markets the learning has been to follow a path of caution while

maintaining a steady pace

INDEX

Sr No Particulars Pg No

I Acknowledgement 1-5

II Abstract 6-14

III Objective 15-21

IV Definition 22-23

V Private Equity Current Scenario 24-25

VI Types of Private Equity 26-27

VII The stages of Private Equity 28

VIII Process of Private Equity Investment 29

IX Advantages of Private Equity 30

X Disdvantages of Private Equity 31-33

XI Ways of investment (Entry Route) 34-36

XII Ways of Exit 37-40

Sr No Particulars Pg No

XIII Major Private Equity Deals in Indiatrade Warburg-Pincus amp Bharti Tele Venturestrade Dalmia Cement amp KKR

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

I am also grateful to my co-ordinator Mrs RashmiV Shetty for always encouraging and given

me new hope to do this project

I convey my deep appreciation to them for sparing their valuable time and efforts so as to

make me capable of presenting this project

I am thankful to our college for all the possible assistance and support by making available the

required books and the internet room which have proved useful to me in successfully

completing my project

I hope that I have succeeded in presenting this project to the best of my abilities

EXECUTIVE SUMMARY

Much has happened in the Indian and International capital market in the last 17 years With its foundations

laid in socialist based economy of four decades with strict government control over private sector

participation foreign trade and foreign direct investment India opened its gates to the outside world in the

early 1990s Since then its economy and financial markets underwent radical changes largely in response to

the economic crisis of the late 1980s The government control on foreign trade and investment were

loosened and the barriers to entry in the days of the license raj were relaxed

The emergence of Securities and Exchange Board of India (SEBI) as the supreme capital market regulator

showed Indiarsquos commitment to come across as a strong economic force through establishing market best

practices of enhanced corporate disclosure and increased investor protection

The establishment of National Stock Exchange (NSE) a state-of-the art exchange

with sophisticated technology to improve trading practices and reduce unethical dealings supported by a

strong legal framework and technological base to strengthen the governance structure has been the highlight

of the Indian capital market in the last decade The opening up of the economy has increased the flow of

Foreign Direct Investment (FDI) and has put India on the global map as a new-age economic force to

reckon with

The increased level of sophistication in the market has been duly supported by increasingly complex

instruments like derivatives and other structured products While the recent global meltdown has made us

aware of the perils of sophisticated markets the learning has been to follow a path of caution while

maintaining a steady pace

INDEX

Sr No Particulars Pg No

I Acknowledgement 1-5

II Abstract 6-14

III Objective 15-21

IV Definition 22-23

V Private Equity Current Scenario 24-25

VI Types of Private Equity 26-27

VII The stages of Private Equity 28

VIII Process of Private Equity Investment 29

IX Advantages of Private Equity 30

X Disdvantages of Private Equity 31-33

XI Ways of investment (Entry Route) 34-36

XII Ways of Exit 37-40

Sr No Particulars Pg No

XIII Major Private Equity Deals in Indiatrade Warburg-Pincus amp Bharti Tele Venturestrade Dalmia Cement amp KKR

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

EXECUTIVE SUMMARY

Much has happened in the Indian and International capital market in the last 17 years With its foundations

laid in socialist based economy of four decades with strict government control over private sector

participation foreign trade and foreign direct investment India opened its gates to the outside world in the

early 1990s Since then its economy and financial markets underwent radical changes largely in response to

the economic crisis of the late 1980s The government control on foreign trade and investment were

loosened and the barriers to entry in the days of the license raj were relaxed

The emergence of Securities and Exchange Board of India (SEBI) as the supreme capital market regulator

showed Indiarsquos commitment to come across as a strong economic force through establishing market best

practices of enhanced corporate disclosure and increased investor protection

The establishment of National Stock Exchange (NSE) a state-of-the art exchange

with sophisticated technology to improve trading practices and reduce unethical dealings supported by a

strong legal framework and technological base to strengthen the governance structure has been the highlight

of the Indian capital market in the last decade The opening up of the economy has increased the flow of

Foreign Direct Investment (FDI) and has put India on the global map as a new-age economic force to

reckon with

The increased level of sophistication in the market has been duly supported by increasingly complex

instruments like derivatives and other structured products While the recent global meltdown has made us

aware of the perils of sophisticated markets the learning has been to follow a path of caution while

maintaining a steady pace

INDEX

Sr No Particulars Pg No

I Acknowledgement 1-5

II Abstract 6-14

III Objective 15-21

IV Definition 22-23

V Private Equity Current Scenario 24-25

VI Types of Private Equity 26-27

VII The stages of Private Equity 28

VIII Process of Private Equity Investment 29

IX Advantages of Private Equity 30

X Disdvantages of Private Equity 31-33

XI Ways of investment (Entry Route) 34-36

XII Ways of Exit 37-40

Sr No Particulars Pg No

XIII Major Private Equity Deals in Indiatrade Warburg-Pincus amp Bharti Tele Venturestrade Dalmia Cement amp KKR

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

INDEX

Sr No Particulars Pg No

I Acknowledgement 1-5

II Abstract 6-14

III Objective 15-21

IV Definition 22-23

V Private Equity Current Scenario 24-25

VI Types of Private Equity 26-27

VII The stages of Private Equity 28

VIII Process of Private Equity Investment 29

IX Advantages of Private Equity 30

X Disdvantages of Private Equity 31-33

XI Ways of investment (Entry Route) 34-36

XII Ways of Exit 37-40

Sr No Particulars Pg No

XIII Major Private Equity Deals in Indiatrade Warburg-Pincus amp Bharti Tele Venturestrade Dalmia Cement amp KKR

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

trade Air-Deccan amp ICICI Ventures and CItrade Paras Pharmaceuticals amp Actistrade Shriram Transport Finance amp TPGtrade Gokaldas Exports Ltd amp Blackstone

XIV Success of Private Equity in India 43-44

XV Future of Private Equity in India 45-46

XVI Worldrsquos Top 10 Private Equity Firms 47-48

XVII Comparing the Indian PE environment to other countries

49-51

XVIII Introduction of Khandwala Securities Limited 52-53

XIX References 54

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

OBJECTIVES OF THE STUDY

To find out the different instruments of capital markets in Indian economy

To find out difference between various instruments

To discuss about the international capital markets

To know the role of regulatory bodies in the international capital market

To understand the difference between capital market and money market

To understand the factors responsible for the growth of international capital market

To offer suggestions to beginners for investing in capital markets

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

INTRODUCTION

India has been witnessing dramatic shift in the size and composition of foreign investment inflows over the couple of years Institutional investors in developed countries for their portfolio diversification are continuously seeking new destinations and innovative and alternative asset class The Private Equity is the best alternative for raise money from an investment

The Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds

The major PE investments influencing the deal values are Real Estate ITIT Services and Energy sectors The other sectors which have significantly contributed to private equity deal value are Logistics and Telecom The most active sectors in terms of deal volume were ITIT Services and Manufacturing Other sectors contributing significantly to deal volume were Banking Finance and Insurance and Real estate

The PE investment pattern follows various stages which are seed start-up expansion and replacement stages It also follows a definite process which is Deal Origination (Deal Sourcing) Due Diligence Deal Negotiation Deal Closing (Acquisition) Post Acquisition Monitoring and Exit (IPO Trade Sale or Buy back)

The Indian Private Equity sector consists of many historical deals so far Among them ldquoWarburg Pincus ndash Bharti Tele Venturerdquo deal was beginning of the PE era in India By this deal WP earned 450 return on its investment which is the biggest earning by any PE fund worldwide On the other hand Bharti Tele Ventures Ltd has result as huge growth in its subscribers and became 2nd largest telecom company in India After the deal with Warburg Pincus Bharti spread its business worldwide Currently Bharti have its operations not only in India but also in Bangladesh Sri Lanka and 15 countries in South Africa Subsequently Bharti became 5th largest telecom service provider all over the world

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The project would deal with understanding the role of private equity in India analyzing their investment strategies their success in the Indian financial market future of Private Equity in India regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project also includes the understanding of competitive profile of different players in Private Equity in India and the different types of funding done by them in India like - seed funding expansion capital and buyout financing financing restructuring of companies and providing mezzanine capital These all types are discussed in ldquoMajor Private Equity Deals in Indiardquo

The project is consists of top PE firms in the world According to Private Equity International (PEI) the largest private equity firm in the world today is TPG based on the amount of private equity direct-investment capital Some other players in this ranking are Goldman Sachs Capital Partners The Carlyle Group Kohlberg Kravis Roberts The Blackstone Group and

Warburg Pincus

The project also includes the understanding of the Private Equity model of investments and analyzing the reason for investments in selective sectors With India becoming a preferred investment destination this heightened level of private equity activity is likely to continue for some time to come

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

OBJECTIVE

The objective of this project is to study the role of private equity in India analyzing their investment strategies their particular strategies by studying their entry strategies into India financial markets regulatory norms in India and how it is beneficial of Indian companies An attempt will also be made to understand their investment patterns

The project would also deal with some of the major deals in India this would help to understand the investment pattern and than the exit strategies of the PE firms

The project would also help to understand us what could be the scenario of the private equity investments in the near future and comparison of the Indian scenario with rest of the world

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

DEFINITIONThe Private Equity sector is broadly defined as investing in a company through a negotiated process Investments typically involve a transformational value-added active management strategy Typical forms of private equity include venture capital growth and mezzanine capital angel investing and private equity funds Private equity investors seek to obtain a substantial interest in a company in order to have an active role in firmsrsquo strategic decisions Their goal is to boost the value of a company and walk away with substantially more money at the time of liquidating their investment

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies Capital for private equity is raised from institutional investors and can be used to fund new technologies expand working capital within an owned company make acquisitions or to strengthen a balance sheet

The term private equity encompasses a range of techniques used to finance commercial ventures in ways that do not involve the use of publicly tradable assetssuch as corporate stock or bonds

Private Equity Funds Private equity funds are investment companies that as a rule do not trade in publicly-traded securities Instead they normally seek equity stakes (that is partial ownership) in private companies They may also invest in so-called private placements of securities from public companies Private equity buyers are extremely focused on cash-flow and have a reputation as cost-cutters

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

PRIVATE EQUITY CURRENT SCENARIOIndia has a very vibrant Venture Capital (VC) Private Equity (PE) industry with USD325 billion invested across more than 1500 VCPE deals from January 2006 till date

Economists estimate that India needs about USD 1 trillion of investment over the next five years to sustain a GDP growth of above 9 percent This translates to USD 60-100 billion of VCPE investments requirement over three years against which industry estimates that PE investments would be in the range of USD 9-10 billion in the year ending December 31 2010

After a turbulent 2009 private equity investments in India displayed steady signs of recovery in the first quarter of 2010 The latest quarter registered the highest value of deals since 2009

For the quarter ended March 2010 total announced deal value was $1943 mn a jump of more than 185 from $675 mn in Q1 2009 Total deal count in Q1 2010 also increased by35 to 88 deals up from 65 in Q1 2009 Interestingly despite the enormous growth in deal value on a quarter-on-quarter basis the deal count decreased by 11 to 88 downfrom 99 in Q4 2009

2005 2006 2007Year

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Value (in $mn)

442 379 716 691 1246

2605

1526

1697

2555

2734

5508

5184Volume 66 44 45 65 114 93 81 100 166 88 105 149

Year2008 2009 2010

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Value (in $mn) 5229 2065 3345 1604 675 1138 1178 1413 1943

Volume 190 113 133 84 65 62 73 99 88

(Source VCCEdge)

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

(Source VCCEdge)

(Source VCCEdge)

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

SECTORAL BREAKDOWN

Top Sectors by Deal Value for the year 2009 ($mn)

Real estate ITIT Services and Energy were the most targeted sectors for investment with deals worth $065 billion $062 billion and $054 billion respectively Together they accounted for more than 40 of total private equity deal value during the year 2009

Sector Volume Deal Value ($mn)

Average Deal Size

Real Estate 20

657

438ITIT Services 4

7621

159Energy 1

6538

414Logistics 1

5354

236Telecom 5 33

684Banking Finance amp

Insurance32

244

84

Manufacturing 34

242

93

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The major PE investments influencing the deal values of these sectors were investmentsin Aricent Inc Indiabulls Real Estate Ltd Mohtisham Estates and Ind Barath PowerInfra Pvt Ltd The other sectors which have significantly contributed to private equitydeal value in the year 2009 are Logistics and Telecom accounting for 15 of total dealvalue

Top Sectors by Deal Volume for the year 2009

The most active sectors in terms of deal volume were ITIT Services and Manufacturingwhich lead with 17 and 11 of deal volume respectively in 2009 Other sectorscontributing significantly to deal volume were Banking Finance and Insurance andReal estate accounting for 11 and 7 of deal volumes respectively As seen in the year2008 2009 too saw large number of deals in ITIT Services Manufacturing BankingFinance and Insurance and Real estate

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

TYPES OF PRIVATE EQUITY

Private Equity investments can be divided into the following categories

1 Leveraged Buyout

Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itselfcommitting all the capital required for the acquisition To do this the financial sponsorwill raise acquisition debt which ultimately looks to the cash flows of the acquisitiontarget to make interest and principal payments Acquisition debt in an LBO isoften non-recourse to the financial sponsor and has no claim on other investmentmanaged by the financial sponsor Therefore an LBO transactions financial structure isparticularly attractive to a funds limited partners allowing them the benefits ofleverage but greatly limiting the degree of recourse of that leverage

2 Venture capital

Venture capital is a broad subcategory of private equity that refers to equityinvestments made typically in less mature companies for the launch earlydevelopment or expansion of a business Venture investment is most often found in theapplication of new technology new marketing concepts and new products that have yetto be provenVenture capital is often sub-divided by the stage of development of the company

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

ranging from early stage capital used for the launch of start-up companies to late stageand growth capital that is often used to fund expansion of existing business that aregenerating revenue but may not yet be profitable or generating cash flow to fund futuregrowthEntrepreneurs often develop products and ideas that require substantial capital duringthe formative stages of their companies life cycles Many entrepreneurs do not havesufficient funds to finance projects themselves and they prefer outside financing Tocompensate the risk of failure venture capitalists seeks higher return from theseinvestments Venture Capital is often most closely associated with fastgrowingtechnology and biotechnology fields

3 Growth capitalGrowth capital refers to equity investments most often significant minorityinvestments in relatively mature companies that are looking for capital to expand orrestructure operations enter new markets or finance a major acquisition without achange of control of the businessCompanies that seek growth capital will often do so in order to finance atransformational event in their life cycle These companies are likely to be more maturethan venture capital funded companies able to generate revenue and operating profitsbut unable to generate sufficient cash to fund major expansions acquisitions or otherinvestments The primary owner of the company may not be willing to take the

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

financial risk alone By selling part of the company to private equity the owner can takeout some value and share the risk of growth with partners4 Distressed and Special SituationsDistressed or Special Situations are a broad category referring to investments in equityor debt securities of financially stressed companies The distressed categoryencompasses two broad sub-strategies including1048707 Distressed-to-Control or Loan-to-Own strategies where the investor acquiresdebt securities in the hopes of emerging from a corporate restructuring in control ofthe companys equity1048707 Special Situations or Turnaround strategies where an investor will providedebt and equity investments often rescue financing to companies undergoingoperational or financial challenges5 Mezzanine capitalMezzanine capital refers to subordinated debt or preferred equity securities that oftenrepresent the most junior portion of a companys capital structure that is senior to thecompanys common equity This form of financing is often used by private equityinvestors to reduce the amount of equity capital required to finance a leveraged buyoutor major expansion Mezzanine capital which is often used by smaller companies thatare unable to access the high yield market allows such companies to borrow additionalcapital beyond the levels that traditional lenders are willing to provide through bank loans In compensation for the increased risk mezzanine debt holders require a higherreturn for their investment than secured or other more senior lenders

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

6 SecondariesSecondary investments refer to investments made in existing private equity assetsThese transactions can involve the sale of private equity fund interests or portfolios ofdirect investments in privately held companies through the purchase of theseinvestments from existing institutional investors By its nature the private equity assetclass is illiquid intended to be a long-term investment for buy-and-hold investorsSecondary investments provide institutional investors with the ability to improvevintage diversification particularly for investors that are new to the asset classSecondaries also typically experience a different cash flow profile diminishingthe effect of investing in new private equity funds Often investments in secondaries aremade through third party fund vehicle structured similar to a fund of funds althoughmany large institutional investors have purchased private equity fund interests throughsecondary transactions Sellers of private equity fund investments sell not only theinvestments in the fund but also their remaining unfunded commitments to the funds

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The Stages of Private Equity

Private Equity investments can be classified intobull Seed stage Financing provided to research assess and develop an initial conceptbefore a business has reached the start-up phasebull Start-up stage financing for product development and initial marketingbull Expansion stage financing for growth and expansion of a company which isbreaking even or trading profitablybull Replacement capital Purchase of shares from another investor or to reducegearing via the refinancing of debtThe above stages can be explained by the diagram which is shown below -

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Process of Private Equity Investment

The Private Equity Process in 6 Steps1 Deal Origination (Deal Sourcing)2 Due Diligence3 Deal Negotiation4 Deal Closing (Acquisition)5 Post Acquisition Monitoring6 Exit (IPO Trade Sale or Buy back)Deal Origination or as some call it lsquoDeal Sourcingrsquo is how Deal Makers get their deals apotential deal can either come through a company owner approaching them or from anintermediary who will try to bring both parties (Company and Deal Maker) to make thedeal In some cases they may just approach companies who are expanding fast andwish to grow further In a year Deal Makers come across hundreds of potential deals -but only a few are selectedDue Diligence is what you could call lsquodoing your homeworkrsquo Before starting detailednegotiations investor try to make sure everything is fair and secure Although Auditors

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

and Consultants are appointed to conduct the Financial Tax Legal and Technical DueDiligence - they also work side by side to understand the target company and itsindustry better All the information collected at this time is then used duringnegotiationAt the Deal Negotiation phase investor set out the terms and conditions (covenantsrepresentations and warranties) and other deal terms that defines (or makes the deal)Contracts such as Investment Agreement Share Purchase Agreement ManagementAgreement Advisory Agreement etc are drafted to include all items that put the dealtogetherDeal Closing is probably the easiest part but also contains an element of risk Itrsquos theconclusion of the deal the signing of all Agreements and transferring funds from thebuyer to seller conducting other administrative functions (usually done by a separateentity) like updating any articles of association etcPost Acquisition Monitoring requires the Deal Team (those who have worked onputting the deal together) to closely monitor the company both from an operationaland financial point of view against the expansion plan and budgets that were setup earlier by the company Improvements to business from Corporate GovernanceFinancial Reporting and Information Flow to Strategy are made at each level througheither the companyrsquos management or its boardAs the company matures (usually after 2 - 4 years) with the presence of the Deal Teaminvestor prepare it for an Exit - either an IPO or a Trade Sale (sale to a larger partymulti-national or conglomerate) or in rare cases a Buy Back by the owners By this timethe company will have grown quite a bit with still plenty of room to grow further(Therersquos a saying in a deal - always leave something extra for the person buying - itmakes everyone happy)

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

And once investor have exited the company they return their money with the profitthey gained for company after taking their fees for all the effort put in the aboveprocessAlthough this may seem like a linear process - it isnrsquot exactly so primarily becauseinvestors deal with a number of companies and each one is at a different stage in theprivate equity process

lsquo

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Advantages of Private Equity

Investing in a private equity fund has a lot of advantages compared to other investmentareas here are some advantages of private equity for not only investors but also thecompanies that private equity firms acquire

Advantages for Investors1048707 By definition private equity firms work outside the public eye and do not haveto follow the same transparency standards that public firms and funds mustadhere to This allows private equity firms to reform the companies without theconstraint of having to report quarterly to the SEBI ROC or similar distractions1048707 Private equity firms generally perform very rigorous due diligence on potentialinvestments By utilizing a team of researchers the private equity firm is able toidentify most risks that would not otherwise be found1048707 The management receives carried interest a portion of the profits so managersand their staff are motivated to produce good results to investors Althoughcarried interest is often criticized for taking money from the investors it is a verybig incentive for managers1048707 Economic Scenario- India is one of the fastest growing economies in the worldwith enormous growth potential in many industries This means that capitalrequirements are high translating into an ideal hunting ground for PE funds 1048707 Abundance of skilled labor - India offers a huge advantage in the form of itshighly talented and skilled labor pool which can lead to the success of the firmsin which investment is made through the private equity route The funds are notjust bullish about the businesses in India but have also grabbed a fair share ofhighly rated managers like Vivek Paul Rajeev Gupta Avnish Bajaj AkhilGupta and Nikhil Khattau PE funds are invariably on the lookout for high

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

profile managers not only to manage their own funds but also as theirrepresentative on the board of companies in which they have invested1048707 Success of several sectors - India has firmly established itself as the worldrsquos ITsuperpower with almost all major software development companies having anIndian development centre It is also becoming the the hub of back officeoperations and a leading provider of BPO and KPO services This has led togreater confidence in the future growth potential of Indian companiesPRIVATE EQUITY IN INDIAPage 191048707 Mature Financial markets - Capital markets have stabilized in the recent pastwith regulators like SEBI keeping a firm watch on the market development Thismeans both increased opportunities as well as an easier and painless exit routefor PE funds The emergence of entrepreneurs in India who consider PE their fulltime occupation is also a positive sign Besides there are well establishedcorporate houses diversifying their surplus investment as a strategy for theirassets allocation through PE funds without involving themselves directly in theoperations of target companies1048707 Successful MampAs- A recent spate of mergers and acquisitions has given rise toyet another way of exiting from Indian companies for private equity investors1048707 Successful track record - The first generation of private equityplayers have realized significant success in the last several years For instanceWarburg Pincus earned huge returns out from its investments in Indiancompanies like Bharti Telecom

Advantages for Company1048707 Private equity managers are paid very well and so it is easy to attract highcaliber experienced managers that tend to perform very well The same goes forlower level employees at private equity firms they tend to be the top youngbusiness school graduates This helps the company to utilize best talent in theindustry without shelling out even a single penny from its pocket1048707 PE helps a company to prepare for stock market listing (IPO) as the exit route ofinvestment It opens up enormous opportunities for companies to raise fundsThe continuous scrutiny by stock market participants SEBI amp ROC facilitates

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

efficiency improvement and proper strategic decisions1048707 PE helps those companies which cannot raise money from the market By privateequity company get money from the investors which help in the growth of thecompany

Disadvantages of Private Equity

Disadvantages for Investors1048707 Difficult to access for small amp medium investors- private equity LimitedPartnership funds may only be marketed to institutions and very wealthyindividuals in addition the minimum investment accepted is usually more thanpound1mn

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

1048707 Relative illiquidity ndashPrivate Equity funds normally invest in a unlisted spaceand they find it difficult to exit the investment at their wish since it requireconcentrated efforts to find a suitable investor for unlisted company Even in thelisted space the impact cost remains very high due to sheer magnitude of scale1048707 A long term investment perspective is necessary to achieve gains for a privateequity investment programme because the investment programme depends onthe company growth It depends on the gap between entry and exit of theinvestor1048707 Political condition - India being divided into a number of states causes aninvestment decision to be affected by politics Changes in regulation andinfrastructure development are often sidelined due to friction and conflictbetween the state and the federal government1048707 Competition from China - China is a direct competitor of India and most of theprivate equity investors eyeing the Asian region draw a comparison across boththe countries to decide where their money should be parked The new state-ofthe-art airports in China bear a stark contrast to the abysmal conditions of theterminals in Indiarsquos main cities1048707 High costs - private equity managers charge relatively high fees for managingcapital committed by external investors (generally around 2) and if the fundperforms well take a sizeable proportion (generally 20) of realised returns inexcess of investment hurdle ratesPRIVATE EQUITY IN INDIAPage 21

Disadvantages for Company1048707 It is a lengthy process since private equity managers conduct detailed marketfinancial legal environmental and management due diligence which could takeseveral months before they make final decisions on investing1048707 Entrepreneurs have to give up some of their companyrsquos shares to a private equityinvestor ie control Because investor have some control over the company so it

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

is not easy for the entrepreneur to take decision independently He have to takeadvice of the investor to take decision and it causes delay in the process1048707 The private equity managers have control over the timing of a sale of (a part of)the business1048707 Lack of promotion in investment across sectors - PE funds arebeing channelized into only a few sectors like IT infrastructure amp real estate andtelecommunications to the exclusion of the remaining industries desperately inneed of funds for growth

Ways of Investment

There are two types of listed private equity investment companies - those which invest directly in companies and those that invest in funds which invest in companies (fund of funds) Some private equity investment companies invest in both direct investments and funds offering a hybrid of the two approaches set out belowDirect investorsThe investment company has a private equity team who invest directly in companies subject to the stated objective of the company The managersrsquo aim is to help these companies develop and progress and sometimes restructure in order to increase the long-term value of the companies so these companies can be sold at a profitFund of funds investorsIn a fund of funds the investment company invests in a portfolio of private equity funds which invest in companies Funds of funds aim to diversify across a range of investment strategies and different sectors providing access to a range of managers

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Top 10 Private Equity Dealsbull The top 10 private equity deals accounted for more than 36 of total privateequity deals in 2009 In 2008 top 10 deals accounted for about 40 of total dealvalue for the yearbull The largest deal by value was KKRrsquos $255 mn buyout of Aricent followed bySiva Ventures investment in S Tel Ltd and TPGrsquos $200 mn investment inIndiabulls Real Estatebull Top deals occurred across various sectors with 3 of the top 10 deals in RealEstate

Top Private Equity deals in 2009S NO Industry Target Buye

rPrice ($mn)1 ITIT Services Aricent Inc Kohlberg Kravis Roberts amp Co 25

52 Telecom S Tel Ltd Siva Ventures Ltd 2303 Real Estate Indiabulls Real

Estate LtdTPG Capital Inc 20

04 Logistics Krishnapatnam

Port Co Ltd3i India Infrastructure Fund 16

15 Real Estate Mohtisham

EstatesOman Investment Fund 12

5

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

6 Agriculture Karuturi GlobalLtd

Emerging India Focus FundsIndia Focus Cardinal Fund Elara India Opportunities Fund Monsoon India Inflection Fund Ltd

124

7 Hospitality amp

Travel

CapriconHospitality ServicesPvt Ltd

New Silk Route Partners 124

8 Healthcare amp

Service

Max India Goldman Sachs 115

9 Real Estate Century RealEstate Seven StarHotel Project

Goldman Sachs Whitehall RealEstate Fund

104

10 Energy Ind-Barath PowerInfra Pvt Ltd

Bessemer Venture Partners IndiaCiti Venture Capital International Sequoia Capital

100

Ways of Exit

There are different ways in which a private equity investor can exit from an investmentA Trade saleA trade sale also referred to as MampA (Mergers amp Acquisitions) of privately held

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

company equity is the most popular type of exit strategy and refers to the sale ofcompany shares to industrial investorsThe trade sale is agreed in private and makes both the buyer and the seller lessvulnerable to the external pressures of a stock market flotation It is often advisable tokeep the transaction a closely guarded secret because clients suppliers and employeesmay interpret a trade sale negatively These negative signals become even stronger ifthe negotiations failB Entrepreneur or Management Buy-OutThe Buy-Out of the funds stake by its management team is becoming more and moresuccessful as an exit strategy It is a very attractive exit for both the investment managerand the companyrsquos management team if the company can guarantee regular cash flowsand can mobilize sufficient loans The accounting and financial aspects of this exit needto be studied very carefullyC Sale of the investment to another financial purchaser (called asecondary market investor)One financial investor may sell his equity stake to another one when the company hasreached the stage of development or when the current development of the company nolonger corresponds to the investment criteria of the original fund This can also occur ifthe financial support required maintaining the companyrsquos development has exceededthe capacity of the fund This strategy has the advantage of enabling an exit when theteam does not want a trade sale or a stock market flotationD IPO (Initial Public Offering) flotation on a public stock marketA stock market flotation may be the most spectacular exit but it is far from being themost widely used even in stock market boomsPRIVATE EQUITY IN INDIAPage 25A stock market flotation should correspond with a genuine wish to make the company

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

more dynamic over the long term and to profit from the growth possibilities offered bya stock market Therefore the equity share placed on the market (the float) must besufficiently large to ensure liquidity ndash the reward for appealing to the market Aflotation is not an end in itself but the beginning of a long process of developmentA stock market flotation always leaves company open to the risk of an unwanted bidwhereas equity held by an investor that company has chosen can be better managed Ifcompany decides to opt for this route it must be minutely prepared over a long periodE LiquidationThis is obviously the least favorable option and occurs when the efforts of the head ofthe company and the investors to save the company have not succeeded

Top Private Equity Exits in 2009S NO Target Selle

rType Price ($

mn)1 DLF Assets Pvt Ltd

DE Shaw CompositeInvestments (Mauritius) Ltd

Buyback 470

2 ICICI Bank Ltd Temasek Holdings Pte Ltd GICSpecial Investment Pte Ltd

Open Market 460

3 Shriram TransportFinance Co Ltd

ChrysCapital lll LLC Open Market 221

4 XCEL Telecom PvtLtd

Q Investments LP MampA 150

5 CognizantTechnology SolutionCorp

Sequoia Capital India Open Market 60

6 Edelweiss CapitalLtd

Galleon Special OpportunitiesMaster Fund SPC Ltd

Open Market 5493

7 India Infoline Ltd Orient Global Tamarind FundPte Ltd Orient GlobalCinnamon Capital Ltd

Open Market 519

8 Max India Ltd Warburg Pincus India Pvt Ltd

Open Market 5059 Financial Software

amp System Pvt LtdCarlyle Asia Venture Partners l

SecondarySales

51

10 Mindtree Ltd Capital International GlobalEmerging Markets PrivateEquity Fund LP

Open Market 47

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Private Equity Exits Breakdownbull 2009 saw 96 exits compared to 44 in 2008 not including the PE stake sale inCenturion Bank of Punjab to HDFC Bank Total exit value rose to $22 billion in2009 compared to $093 billion in 2008bull Funds utilized the sharp rise in the stock markets to cash out and return somemoney to LPrsquos There were 66 open market exits and only one IPO exit ndash the partsale of Warburg Pincusrsquo stake in DB Corp

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Major Private Equity Deals in India

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Warburg Pincus amp Bharti Airtel Ltd

About Bharti Airtel LtdBharti Airtel provides telecommunication services primarily to retail corporate and small and medium scale enterprises in India It offers global system for mobile communication (GSM) services broadband and telephone services national and international long distance services and enterprise servicesThe companys mobile communication services include information services short message and prepaid and post paid services as well as wireless application protocol Enabled Internet access and roaming services Its telephone services include telephone services dial-up services special phone plus services unified messaging and audio conference services and broadband services comprise integrated services digital network leased line virtual private networks and wireless fidelity networksThe company also offers long-distance voice and data communication services as well as enterprise services such as voice services mobile services satellite services managed data and Internet services and managed e-business servicesAs of Mar 31 2009 it provided telecommunications services to approximately 96649000 customers consisting of GSM mobile broadband and telephone customersBharti Airtel had strategic alliances with SingTel and Vodafone partnerships with Ericsson and Nokia and an information technology alliance with IBM The company was founded in 1995 It was formerly known as Bharti Tele-

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Ventures and changed its name to Bharti Airtel in April 2006 The company is based in New Delhi India Bharti Airtel is a part of Bharti EnterprisesBetween September 1999 and July 2001 Warburg Pincus invested $292 mn to finance Bhartis growth through acquisition and expansion of existing properties Since the initial investment in Bharti in September 1999 it has become the largest private sector telecom company in India and has undergone a number of changesFirst the company has formulated a focused acquisition strategy acquired three companies and successfully won bids for 15 new licenses Second all the key support functions and processes (like human resources finances marketing and technology) have been strengthened with experienced professionals heading these functions Lastly in spite of tough market conditions the company made a successful initial public offering on the Indian stock exchanges in February 2002 and raised $172 mn

Top 10 ShareholdersS No Holder

s

1 Bharti Telecom Limited 45302 Pastel Limited 15583 Indian Continent Investment Limited 6274 Life Insurance Corporation of India 4235 Europacific Growth Fund 1686 Fidelity Management and Research and Funds 1267 Copthall Mauritius Investment Limited 0978 JP Morgan Asset Management and Funds 0989 ICICI Prudential 08210

Emerging Markets Fund 07

3Total 7782

International FootprintsIts area of operations includes3 countries in the Indian Subcontinent Bangladesh India and Sri LankaBangladesh- In March 2010 Bharti agreed to buy 70 percent of Bangladeshs WaridTelecom from Abu Dhabi Group for an initial investment of US $300 millionIndia- In India the companys mobile service is branded as Airtel It has nationwide

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

presence and is the market leader with a market share of 3007 (as of May 2010)Sri Lanka- In December 2008 Bharti Airtel rolled out 35G services in Sri Lanka inassociation with Singapore Telecommunications Airtels operation in Sri Lanka knownas Airtel Lanka commenced operations on the 12th of January 200915 countries in AfricaBurkina Faso Chad Democratic Republic of the Congo Republic of the Congo GabonGhana Kenya Madagascar Malawi Niger Nigeria Sierra Leone Tanzania Ugandaand ZambiaPRIVATE EQUITY IN INDIAPage 30About ZainZain is a leading telecommunications operator across the Middle East providing mobilevoice and data services to over 314 million active customers as at 31 March 2010 with acommercial presence in 8 countries Zain is listed on the Kuwait Stock Exchange Zainoperates in the following countries Bahrain Iraq Jordan Kuwait Saudi Arabia andSudan In Lebanon the company manages lsquomtc-touchrsquo on behalf of the government InMorocco Zain has a stake in Wana Telecom through a joint ventureZain-Bharti DealZain with its African and Middle East businesses had been considered a natural targetfor Bharti which has thrived in an Indian market with low incomes and tariffs and aheavily rural population -- characteristics shared by African nationsMobile phone penetration in half of Africas countries was below 40 percent as ofAugust and a dozen countries had penetration below 30 percent according to aresearch reportOffloading the operations excluding those in Morocco and Sudan would mark astrategic reversal for Zain which has spent more than US $12 billion expanding inAfrica since 2005This transaction has resulted in aggregate net cash proceeds of US $8968 billion Zainconfirms that it has received US $7868 billion of cash proceeds from Bharti

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Over the next 6 months Zain expects to receive up to an additional US $400 millionupon certain milestones being achieved The balance of US $700 million is due one yearfrom completion as per the original agreements signed on 30th March 2010PRIVATE EQUITY IN INDIAPage 31

About Warburg PincusOver the last 30 years Warburg Pincus has become one of the leading private equityand venture capital firms in the world The firmrsquos experience is unparalleled inbuilding successful businesses Working in partnership with management teamsWarburg Pincus takes an active role in building businesses The firm operates globallyto source new investment opportunities provide strategic advice and guidance andfund the growth of attractive opportunities since its inception Warburg Pincusrsquostrategy has been tobull Develop broad investment capabilities internallybull Create a network of talented and experienced business peoplearound the worldbull Provide superior rates to return for its limited partners over the longtermWarburg Pincus is a global leader in the industry it helped create Private equity Withmore than 40 years of experience its track record of continuous and successful investingis unmatched by any other private equity firmStriving to create sustainable value in partnership with superior management teams itwork with companies to formulate strategy conceptualize and implement creativefinancing structures recruit talented executives and draw on best practices from thefirmrsquos portfolio companiesIt takes a different approach to investing beginning with a thorough evaluation ofmacroeconomic and industry fundamentals Private equity at Warburg Pincus meansinvesting at all stages of a companyrsquos life-cycle From founding start-ups and fosteringgrowth in developing companies to leading complex recapitalizations or large-scale

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

buy-outs of more mature businesses This growth-oriented philosophy is incorporatedacross each of its investment sectors With an investment horizon of five to seven yearsit takes an unusually long-term perspective Matched with its size and scope of fundsunder management this approach enables the firm to provide substantial resources toits portfolio companies This is a critical advantage in the face of constantly changingeconomic conditions and financial marketsPRIVATE EQUITY IN INDIAPage 32The firm has been industry-focused for more than two decades With more than 160investment professionals worldwide Warburg Pincus provides deep expertise in arange of investment sectors including financial services healthcare industrialtechnology media and telecommunications energy consumer and retail and realestateThe firm also works with its consultants entrepreneurs-in-residence and advisoryboards whose expertise can be tapped at any timeIn addition to the support provided by its investment professionals Warburg Pincusenhances its involvement with management by providing portfolio companies withvalue-added services in capital markets IT strategy and assessment and marketingWarburg Pincus has been the lead investor in more than 100 companies that havecompleted initial public offerings Over the last few years the firmrsquos global portfolio hasgenerated more than $20 billion annually in equity and debt financings on a globalbasis The firmrsquos IT Strategy and Assessment group is available to evaluate and advisebusinesses on their technology strategy Warburg Pincus also provides companies withmarketing expertise to develop brand-building programs and strategic communicationsplatforms for internal and external audiencesKey-Points1048707 It has invested over US $ 11 billion in over 400 companies in 29 countries

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

providing equity capital across the life cycle of the enterprise from start-upthrough growth financings and including acquisitions and restructurings1048707 Warburg Pincus operates from 8 offices in 7 countries covering the United StatesEurope Asia and Latin America1048707 With the proposed investment Warburg Pincus will have investedapproximately US $ 530 mn in India making the country the firmrsquos premierinvestment destination in Asia1048707 The investment in Bharti Enterprises of approx US $ 300 mn is the secondhighest investment ever made by Warburg Pincus in any company anywhere inthe worldPRIVATE EQUITY IN INDIAPage 33

The DealThe Investment (1999-2001)Between September 1999 and July 2001 Warburg Pincus invests $292 mn in Bharti Tele-Ventures in return for an 1858 per cent stake the first tranche being invested inSeptember 1999The Bharti IPO (January 2002)Bharti goes public (Warburg stake diluted)The other exits (2004-2005)bull August 2004 Warburg sells a 335 per cent stake for about $208 mnbull March 2005 Warburg sells another 6 per cent stake for $560 mn marking thelargest ever equity deals in single scrip on an Indian stock exchangebull October 2005 Warburg sells its final 565 stake to UK-based Vodafone for$8475 mnThis is the timeline of Warburg Pincus exit from Bharti Tele-VenturesTotal realization $1616 bnProfit $1324 bn - 450 per cent return on investmentPRIVATE EQUITY IN INDIAPage 34Opportunities viewed by Warburg PincusThe deal with Bharti Tele Ventures Ltd had a lot of opportunities for Warburg Pincusbull National Telecom Policy encouraging1048707 Domestic Private Investment1048707 Foreign Direct Investmentbull Competition to Fixed Line Service Providers1048707 High Installation Fees1048707 Order Backlog

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

bull Mobile Telephony considered as a status symbolbull Markets were Price Elasticbull No Player having Pan-India presencebull Telecommunication is a pre-requisite for GrowthChallenges faced by Warburg Pincusbull Lack of Regulatory Claritybull Economic viability of Telecommunication Projectbull Restriction on Licensesbull Monthly Fixed License fee to governmentbull High tariff charges-Expensive for usersbull No investor interest ndash No clarity on Exit routebull Bharti having presence only in North IndiaPRIVATE EQUITY IN INDIAPage 35Strengths and Opportunities of AirtelStrengthsbull Bharti Airtel has more than 200 million customers (June 2010) It is the largestcellular provider in India and among top 5 in the world and also suppliesbroadband and telephone services - as well as many other telecommunicationsservices to both domestic and corporate customersbull Today they are among the top 5 largest Wireless amp Cellular Company in world withexpanded footprints of over 25 countries in two of the largest continents spread overSouth Asia and Africa Bharti Airtel has strategic alliances with Nokia Sing Teland a host of all other international service providers They have access toEmerging Africa which means that they can replicate their Indian businessstrategy and knowledge to other parts of the worldOpportunitiesbull The Rural LandscapeThe Indian telecom industry is the 2nd largest wireless markets in the world afterchina The focus on rural penetration and customer affordability will beinstrumental in driving the next phase of growth in India An increasing numberof rural customers are contributing to the growth in telecom sectorbull New technologies and paradigmsNew technologies also play vital role in growth of telecom sector Technologieslike HSPA WiMAX and Wi-Fi has already adopted by customers 3G and BWAauction are in the process currently Besides this DTH and IPTV technologies areviewed as long term perspective by telecom operatorsbull Strong strategic partnership

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

PRIVATE EQUITY IN INDIAPage 36Airtel have a strategic alliance with SingTel Ericsson Nokia and IBM Thepartnership with SingTel was to provide quality service to the customersPartnership with Ericsson and Nokia was for providing better equipments IBMhas been working closely with Airtel to transform its IT system

PE Impact on BhartiThe deal of Warburg Pincus amp Bharti Tele ended not only with the increase in profit forWP but also high growth in subscribers of Bharti Tele VenturesIn partnership with Warburg Pincus Bhartirsquos management team was able to completeadditional cellular property acquisitions and extend its leading position in India Todaythey are among the top 5 largest Wireless amp Cellular Company in world with expandedfootprints of over 25 countries in two of the largest continents spread over South Asiaand AfricaWP also worked with management to secure a strategic partnership with SingaporeTelecom which subsequently committed support in the management of the operationsThe company was listed on Indian stock exchanges in February 2002 Now known asBharti Airtel the company has a market capitalization in excess of $35 billion and is adominant player in the Emerging Markets telecommunications with a customer base ofmore than 200 million (including operations in Africa and other South Asian countries)ldquoPartnership with Warburg Pincus helps management focus Theyrsquove helped us look at things ina different light And they know how to move a company from something small to somethingmuch largerhelliprdquo

Sunil Mittal Chairman and Group Managing Director

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Dalmia Cement ndash KKR

About KKRFounded in 1976 and led by Henry Kravis and George Roberts KKR is a leading globalalternative asset manager with $522 billion in assets under management as ofDecember 31 2009 With over 600 people and 14 offices around the world KKRmanages assets through a variety of investment funds and accounts covering multipleasset classes KKR seeks to create value by bringing operational expertise to its portfoliocompanies and through active oversight and monitoring of its investments KKRcomplements its investment expertise and strengthens interactions with investorsthrough its client relationships and capital markets platforms KKR is publicly tradedthrough KKR amp Co (Guernsey) LP (Euro next Amsterdam KKR)KKR has invested more than over $11 billion in India since 2006 which includesinvestments in Aricent a global innovation technology and services company BhartiInfratel a telecom infrastructure provider and Coffee Day Resorts operator of the CafeacuteCoffee Day chain of cafes in India

About Dalmia Cement (Bharat) LtdDCBL has business interests in two major segments Cement and Sugar It has cementplants in southern states of Tamil Nadu (Dalmiapuram amp Ariyalur) and AndhraPradesh (Kadapa) with a capacity of 9MTPA A leader in cement manufacturing since1939 DCBL is a multi spectrum cement player with double digit market share and apioneer in super specialty cements used for Oil wells Railway sleepers and Air strips

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The company also produces around 160 MW of Power through thermal and renewableenergy with an aim to increase the power generation from non-conventional methodsPRIVATE EQUITY IN INDIAPage 41Over the past 7 decades the company has earned the trust of the employeesdistribution chain as well as all its stakeholders DCBLrsquos vision has been acknowledgedby the existing Private Equity investor Actis who has been on the Board and addingvaluable insights for the organisational growth The company is looked upon andrespected for being a value-based organization DCBL has been recognized andawarded Hewittrsquos Best employer for the year 2009 It has been ranked among the TopTen in the Manufacturing industry DCBL is Head Quartered in New Delhi It hasemployee strength of more than 3500 people

PE Impact on DCBLDalmia Cement (Bharat) Ltd (DCBL) and Kohlberg Kravis Roberts amp Co LP (togetherwith its affiliates ldquoKKRrdquo) announced the signing of a definitive agreement under whichKKR has agreed to invest up to Rs 7500 mn in DCBLrsquos wholly owned unlistedsubsidiary (ldquoCompanyrdquo) which will house post restructuring DCBLrsquos 9MTPA cementmanufacturing capacity DCBLrsquos stake in OCL India Limited (53MTPA capacity) alongwith the upcoming green field projects of 10MTPA across the country The use ofproceeds will be for both organicinorganic growth and de-leveragingldquoWhen we realigned our businesses in March 2010 one of our goals was to createseparate pure play entities that could thrive on their own and have flexibility to raisecapital This transaction with KKR is not just about capital but the foundation of a longterm relationship It will enable us to enhance our capacity and market share throughorganic as well as inorganic routes while benefiting from KKRrsquos global network andproven value creation capabilitiesrdquo said Mr Puneet Dalmia MD of Dalmia Cement

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

(Bharat) LimitedldquoWe are excited to be working with a dynamic and entrepreneurial family with asuccessful execution track record in India While the cement industry by nature iscyclical this is a long-term investment in a great family business its management teamand in Indiarsquos economy This is a way to invest behind and contribute to the continueddevelopment of Indiarsquos residential commercial and public sector infrastructurerdquo saidMr Sanjay Nayar CEO of KKR India

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Air Deccan - ICICI Ventures amp Capital International

Air Deccan was established in 2003 with the objective of setting up a budget airline thefirst of its kind in India Price sensitivity and the aspirations of the typical Indianconsumer were cited to be the main reasons for a budget airlineInitially the companyrsquos operations revolved around the founder Captain G RGopinath Modeled on Southwest Airlines in the US and Ryan Air in Britain AirDeccan positioned itself as an airline for the masses Seeking capital for growth AirDeccan obtained PE investment from ICICI Ventures which invested USD 30 mn in2004 for a 19 percent equity share Air Deccan also received PE investment from CapitalInternational an American PE firm which it hoped would provide a global presenceand learning from the operations of similar airlines in other countriesBoth ICICI and Capital International played an active role in formulating strategy Withthe PE firmsrsquo assistance Air Deccan appointed a person from Ryan Air to run thebusinessThe funds were intended to build capacity in a phased manner Accessing PE funds wascritical for being able to raise the much needed debt and to guarantee leases withoutwhich project implementation would have been difficultThe funds were also used to enhance plane capacity quickly by ordering 60 airbuses onpurchase and leased bases By 2007 Air Deccan flew into 68 cities as compared with theincumbent Government owned Indian Airlines coverage of 45 citiesThe high capacity was both an advantage (as it became an attractive acquisition targetfor Kingfisher) and a disadvantage (as it adversely impacted the company financiallydue to the economic slowdown and unforeseen spike in fuel cost)PRIVATE EQUITY IN INDIAPage 43

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The airline industry began to face significant changes in its operating environment from2005 Large rises in fuel prices and competition from other budget airlines like Spice JetIndigo and Go Air adversely affected Air Deccanrsquos profitability With ICICI Venturesrsquoassistance some of the aircraft that had been purchased were re-contracted on a leasebasis thereby improving cash flowsIn 2006 Air Deccan offloaded 25 percent of its equity in an IPO The IPO took placeduring a very difficult time for Indian equity markets Fortunately with ICICIrsquos supportin the form of stepped up funding as well as marketing to other investors the issue wascompleted at the offer price At its peak the market capitalization of Air Deccanreached USD 11 billionBy late 2007 the ongoing pressure of competition and lower than expected growthforced Air Deccan into significant losses In 2008 the company was merged intoKingfisher Airlines a premium domestic airline Kingfisher was attracted by AirDeccanrsquos large fleet that enabled Kingfisher to rapidly scale up its operations Althoughthe initial understanding was that Air Deccan would be the budget brand of Kingfisherit was later rebranded with the Kingfisher name

Impact of PE on Air DeccanThe PE investment in Air Deccan brought both operational and fiscal discipline PEfirms helped setup a proper organization structure and created a formal business planThe financing enabled Air Deccan to pursue its aggressive business model of running abudget airline

Impact of PE on the industryAir Deccan had a big impact on the industry Its no-frills flights focus on second-tiercities and aggressive pricing led to aggressive growth and spurred the entry ofcomparable budget airlines Its practices were imitated by established competitors and

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

became part of industry practice The result was a fall in the average cost of air travel inIndia To a significant extent these new business approaches were enabled by the initialround of funding and the models that were introduced by PE financiers seeking toimitate the success of budget airlines in other countries Thus we may conclude that PEsignificantly impacted the industry

Shriram Transport Finance-TPG

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Shriram Transport Finance (STF) Indiarsquos largest commercial vehicle finance companywas established in 1979 As of March 2010 the company runs 479 branches and servicecenters offering finance for purchasing commercial vehicles including trucks threewheelersand tractors The company also offers ancillary services including workingcapital and a cobranded credit card The company has been consistently profitable forseveral years For the financial year ended March 2009 STFrsquos revenue was INR 369billion and PBT was INR 29 billion It employed 12500 persons The company has beenquoted on the stock exchanges for several decades As of March 2010 its marketcapitalization was INR 916 billionThe truck financing business at the time and even as of 2010 was fragmented and highcostdue to the risks and transactions costs of lending to unorganized single-truckowners STF catered to this market but was also beginning to access the organizedborrowers that were coming into play as the trucking business became more organizedin India These factors had enabled STF to perform well in a regulatory environmentthat was significantly more favorable to banks than to NBFCs However the companywas undercapitalized at the time of receiving the PE investmentThe company subsequently received multiple rounds of PE investment In 2005 PE firmChrys Capital invested USD 30 mn for a 17 percent holding in STF It exited in 2008-09Global PE major TPG invested USD 100 mn in 2006 and as of 2010 remains an activeinvestor TPG was interested in the financial sector in India but the banking regulationsprevented it from buying a large holding in a regulated bank TPG was attracted bySTFrsquos stability in terms of customers and credit-ratings in the midst of the NBFCmeltdown at the time STF further attracted TPG because of its reputation of integrityefficient management and customer loyaltyPRIVATE EQUITY IN INDIAPage 47

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The first PE funds were used by STF to integrate its regional operations and controlthem from its home base in Tamil Nadu as well as to consider international expansionThe second round of investing from TPG brought in high standards of creditevaluation and corporate governance TPGrsquos portfolio of Asian finance firms such asFirst Bank Korea provided it with the experience to establish these stronger standardsThese were needed as the management was largely promoter dominated which madecredit rating agencies and investors somewhat cautious Also their securitizationbusiness was relatively undevelopedHelped by better practices STFrsquos portfolio which was at USD 1 billion in assets whenTPG invested had risen to USD 65 billion by 2010

Impact of PE on STFPE initially enabled a national strategy when Chrys Capital invested in STF Till thenSTFrsquos four regional entities operated independently Thus in the words of a companyinsider ldquoChrys Capital provided capital during the growth phase of STFrdquoTPGrsquos investment transformed the company through better internal managementpractices and corporate governance The same insider notes that where Chrys Capitalenabled growth TPG ldquoadded valuerdquo TPG helped in improving the credit rating of thecompany and developing the companyrsquos securitization business TPG therefore is anexample of a PE investor with deep pockets and experience in running financial firms inAsia and elsewhere bringing these advantages to STF

Impact of PE on the industrySTF is the countryrsquos largest player in commercial vehicle finance The primary impact ofthe PE investment on the industry was to begin the transformation of the business froma fragmented money-lender dependent business to a more organized business

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Paras Pharmaceuticals-Actis

Paras Pharmaceuticals is one of Indiarsquos leading OTC healthcare and personal carecompanies with a track record of introducing successful branded products Its twoleading brands MOOV (a pain relieving ointment) and DrsquoCold (a cough syrup) are both

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

in the top 10 OTC brands in India Personal care products are among the fastestgrowing consumer segments with a growth rate in recent years at 14 percent Parashave grown faster and expect to grow by 25 percent in FY 2010-2011Actis a PE firm invested USD 42 mn in 2006 for a minority stake raising it to a majorityshareholding in 2008 which they continue to hold Actisrsquo rationale for the initialinvestment was based on Parasrsquo ability to create strong brands in niche fast-growingareas They were impressed with the companyrsquos ability to compete effectively againstglobal organizations with innovative products for example the success of MOOV in amarket dominated by market leader Iodex (a Glaxo brand)Actisrsquo view of Paras noted above is shared by its promoters As a key company insidercommented ldquoA company goes through three stages incubation implementing theinitial vision and professionalizationrdquo At the second stage the team needs to be willingto take risks and follow the founderrsquos vision Professionals are likely to be too riskaverseto do so as failure would hurt their long-term career prospects At the thirdstage once the vision has been implemented professionals need to take chargeIt was at that third stage that Paras sought Actis as a PE investor to enable thetransformation to a professionally-run company In fact the money was the minor partof the transaction in a sense since it was used primarily to buy out the promoterrsquosholding rather than to be infused into the company (the company was already cashrich) Paras required the PE firm to possess a deep understanding of the industry aswell as understand the company both of which Actis possessed As a company insidernotes ldquoPE is expensive money it should only be used if it comes with other benefitsrdquoPRIVATE EQUITY IN INDIAPage 45PE backing provided the company credibility as a professionally run-organization and

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

there was an influx of younger highly trained talent that replaced family recruitsParasrsquo recruitment of the best quality professionals led to positive impacts onoperational management with a greater focus on efficiency tighter financial controlsbrand leveraging and an improved marketing and distribution strategyThe transformation of Paras from a family run to professional company faced thechallenges of cultural transformation and was not a simple task but accomplished byfocusing on these key areas and showed clear results EBITDA margins rose from 20percent prior to PE funding to about 30 percent afterwards Subsequent to the Actisinvestment the company has also expanded internationally especially in the MiddleEast and North Africa

Impact of PE on ParasAs is evident from the above Actisrsquo impact was transformative in the sense of changinghow the company was run while being supportive of a quality that was alreadyingrained that of conceptualizing and developing a range of high-margin products thatcould successfully compete with large players many of which are global organizationsActis achieved its transformation by getting to know the company and then bringing intalent in selected areas that were critical for raising margins and enabling the efficientintroduction of new products while retaining the innovative core intact Among themany positive effects was a change in practice in procurement governance andreporting thus enabling a stronger brand being built As a result revenue growth ratesrose to 40 percent and gross margins rose by 10 percent Actis also supported thestrategic shift in sales and distribution networks as well as international expansionCritically Actis was able to bring in a sophisticated board support through a domainexpert and bring on board a prominent business leader (who is their advisor) as an

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

advisor to the company

Impact of PE on the industryThe investment shows that a domestic company can succeed while competing withglobal organizations Although there are other successful examples such as DaburParas is a special case of achieving this through professionalizing a family-run firm in acredible way with a majority of non-family ownership while retaining the benefits ofincorporating the initial promoters into the core management structure

Gokaldas Exports Ltd ndash Blackstone Group

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Blackstone Group among the world largest buyout firms has accelerated itsinvestments in India pulling off its second buyout deal in less than three months bypicking up a 501 stake in Gokaldas Exports Ltd the countryrsquos largest garmentsexporter for $116 million and setting aside another $49 million for an open tendermandated under local securities laws for an additional 20 of the targetrsquos sharesThe holding of the promoters in Gokaldas Exports the Bangalore-based Hinduja family(not related to the Hinduja Group) will come down from 701 to 20 before the openofferBlackstone saw large opportunities in the garments outsourcing business and expectsfirms from its overseas portfolio and extended network to outsource manufacturing to a400-acre so-called special economic zone that Gokaldas is setting up at Kanakapuraoutside BangaloreldquoWe are associated with a large network of retailers through our global portfolio ofinvestments who may want to outsource to Indiardquo said Akhil Gupta managing directorof Mumbai-based Blackstone Advisors India Pvt LtdCompanies running operations from special economic zones or SEZs enjoy severalincentives The Gokaldas SEZ expected to employ around 50000 people will houseunits of several garment manufacturers The company will have a unit that will employaround 4000 people in the SEZldquoMore companies will outsource (to) usrdquo said Rajendra Hinduja managing director ofGokaldas Exports referring to the benefits of the sale ldquoWe will get access to textilePRIVATE EQUITY IN INDIAPage 49companies in the US that have investments from Blackstonerdquo The names of suchcompanies were not immediately available Gokaldas earns more than 96 of itsrevenue from exports to global brands such as Tommy Hilfiger Nike and Adidas andto large retailers such as Wal-Mart Inc and Gap Inc

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The Bangalore-based garments firm earned a profit of Rs703 crore on revenue of Rs10449 crore for the year to MarchArmed with a stake over 70 in Gokaldas the buyout firm expects to play a moreactive role in the company than most of its peers in private equity who typically playthe role of financial investors Gupta said that apart from participating at the boardlevel (Blackstone will have three board positions at Gokaldas) Blackstone will getinvolved in actively managing the company by adding professionals bringing in globalbest practices such as Six Sigma and beefing up the companyrsquos marketing operations inthe USBlackstone which will pay Rs275 per share or a premium of 25 for the shares ofGokaldas had initially prospected the Bangalore target as a lsquogrowth dealrsquo with theintention of acquiring a minority stake Blackstone has invested $525 million excludingGokaldas in India and intends on deploying $2 billion up to 2010In terms of deal size this transaction ranks third in India for Blackstone whose localportfolio is led by a $275 million investment in media house Ushodaya Enterprises LtdThe financier invested $50 million in mid-sized drug maker Emcure PharmaceuticalsLtdGokaldas employs over 54000 people in 46 factories and is among the largestemployers in the garments business

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Success of Private Equity in India

Though the Sensex closed 2009 with a 81 per cent gain thanks to renewed FII inflows inthe second half of the year this recovery in the primary markets did not help the PEactivity The number of Private Equity deals (PE) in 2009 slid to a 4-year low accordingto a new report on PE activity in IndiaDespite a surge in the secondary market in response to negative investor sentimentsthe PE market witnessed just 191 deals in 2009 compared to 312 and 405 PE deals in2008 and 2007 respectively This was a decline of 39 over 2008 and 53 on 2007 levelsIn terms of deal value 2009 raised $335 billion from the market mdash the lowest in the lastfour years mdash as compared to $1059 billion in 2008 and $1903 billion in 2007 Out of the

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

191 deals as many as 118 came in the second half of 2009 garnering $18 billion andaccounting for more than 50 of the total deal value in 2009Telecom Media amp Technology emerged as the hottest sector of 2009 It accounted for 60deals in 2009 Telecom Media amp Technology sector witnessed 314 of total dealsfollowed by Industrials and Real Estate amp Infrastructure with 225 and 115India accounted for 6 per cent of total global PE deals volume in 2009 while only 2 percent in terms of deal value The deal activity in India declined by 39 per cent and 68 percent in terms of deal volume and deal size respectively in 2009 as compared to 2008Some reasons for success of private equity in India are

Better environment for investment- The Indian economy has been enjoying a period ofsustained growth at around 8 per cent a year The latest boom has attracted theattention of private equity houses who have been participating in an unprecedentednumber of investment deals In sharp contrast to the time private equity funds investedin India from a base overseas (for example Singapore) many private equity firms havenow established a presence in the country spurred on by a bullish market and somespectacular and well documented exits This reflects the importance of understandingPRIVATE EQUITY IN INDIAPage 51local markets and working closely with promoters (families or controllingshareholders) as well as the benefits of local decision making

Innovative ideas- The Indian private equity market is different from that of Europe orthe United States in that small family-owned and family-managed businesses accountfor a high proportion of the market and therefore investment opportunities are higherthan Europe and US The next generation having different mindset and they believe ininnovation ie Ranbaxy which sold its stake in Daiichi was result of innovative

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

mindset The average deal size in India is significantly lower than in China or SouthKorea for instance but 6000 companies are listed on Indian exchanges a huge numberby any standard and the rising performance of the stock market since 2004 has resultedin substantial wealth creation for families with majority stakes in listed companiesImprovement in management skills- Among non-listed family companies there hasbeen a traditional reluctance to share ownership and surrender control However thereare signs that private equity firms are willing to play a more active advisory role inparallel with their ability to raise growth capital mdash a prospect that owners andpromoters are starting to find attractive As well as providing capital and financialexpertise private equity firms are in a unique position to introduce new disciplines andmuch needed structural reforms for example looking closely at the quality ofmanagement teams or challenging companies to introduce leadership succession plansInvestorsrsquo role in decision taking- An aspect of private equity that companies findattractive is that they gain an investment partner who is able and willing to providecontinuous advice and support Here the Indian connection becomes important sincemany Indian companies understandably want Indian solutions to Indian problemsMany companies appreciate being able to have in-depth discussions with theirinvestment partners about a variety of business decisions for instance advertisinginvestment merchandising or retailingGlobalization- There has been phenomenal growth in the value of private equityinvestment in India over the past decade With an expanding domestic market andadditional opportunities brought by globalization the impact of private equity onIndian business is likely to increase further in the coming years

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Future of Private Equity in India

After a euphoric two years the second half of 2008 and the first half of 2009 havemirrored global trends difficult for PE investments in India Until last yearrsquos creditcrunch deal sizes had been increasing and were hotly competed for at high premiumsToday the PE landscape has changed due to the global financial crisis There have beenfewer exits and lower volumes Allocations to PE funds by Limited Partners (LPs) aredown some even requesting a rescheduling of existing commitments In responsesome PE funds notably some global funds have reportedly reduced their managementfees and reduced LP commitments

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

It is likely that India will continue to be among the developing worldrsquos largestdestinations for growth capital while control and buyout deals will be sought only bythe largest funds However deal volume and average deal size have declined driven bydeclining capital overall with recovery only in Q2 2009PE funds will find another change in their operating environment that global LPs arelikely to invest in fewer funds than before picking those whose management teamshave operating experience and a track record The reduction in capital from overseasmay be offset to an extent by the emergence of a number of domestic LPs investing fromfamily and corporate accounts Overall however a smaller PE industry is likely this is ahealthy development Previously about 350 funds were active The market wasoversupplied with capital relative to the quality of targetsThe future of PE is bright in India because India is an untapped market for privateequity The spending of infrastructure is in large amount in India Another reason foropportunities in India is that India is one of the few growing economies in the worldeven in recessionThe collapse of the IPO market is a factor leading to a shift in exit to lower-yieldingstrategic and secondary sales However older funds with investments three years orlonger on average are yet exiting with high returnsPRIVATE EQUITY IN INDIAPage 53Driven by less capital higher due diligence and lower deal closure the PE industry isturning to more intensive portfolio management Providing financial support is nowless important than operational and strategic support quality corporate governance andregulatory compliance As the PE industry settles into its new habitat of a tighterinvestment funnel and longer-term holdings investment choices will shift to domesticdemand-driven and non-cyclical industries like infrastructure healthcare andeducation

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

The logic of investing in scale and in locations of growth means that India will likely beat the forefront of a global PE recovery The year ahead should be viewed as anopportunity to build value in portfolio firms and thus to show that PE is an integralpart of Indiarsquos future

SEBI Guidelines

1048707 1 The Securities and Exchange Board of India (SEBI) issued its Regulations forVenture Capital in 1996 thus establishing the agencyrsquos authority over the fundsthe limits on their activities and incentives for them to finance and rescuetroubled companies There are no legal or regulatory differences betweenventure capital and private equity firms The Government first permittedfinancial institutions (Industrial Development Bank of India ICICI and IFCI)commercial banks (including foreign banks) and subsidiaries of commercialbanks to establish venture capital companies under guidelines issued in 1988 Inaddition under current central bank regulations banksrsquo investments in mutualfunds catering to venture capital funding are considered to be outside theceilings applicable to banksrsquo investments in corporate equity and debt1048707 2 Foreign venture capital funds have been permitted to operate in India since1995 They may either hold the shares of unlisted Indian companies directly (upto a maximum of 25 of equity) or route their investments through domesticventure capital funds and companies Before guidelines were issued inSeptember 2000 direct exposure by offshore private equity funds in shares ofunlisted companies was treated as a foreign direct investment and had to beapproved in line with the Governmentrsquos general policy on foreign investmentsIndocean Venture Fund (now Indocean Chase) originally set up by George Sorosand Chemical Bank in October 1994 was the first such overseas private equityfund

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

1048707 3 The regulatory environment for the private equity industry was simplified in1995ndash2000 Foreign institutional investors participated in the growth of theprivate equity industry through the foreign direct investment regulations of theGovernment and the simplified tax administration procedures under the Indo-Mauritius Double Taxation Avoidance Treaty While the foreign directinvestment route offered minimum investment restrictions for private equityPRIVATE EQUITY IN INDIAPage 55funds exit pricing and repatriation of capital were regulated by the Reserve Bankof India (RBI) To bring these capital flows under the regulation of the venturecapital industry new SEBI regulations were issued with simplified exit pricingand repatriation procedures for foreign investors1048707 4 Following amendments to the 2000 budget the Government has allowedprivate equity funds ldquopass-throughrdquo status meaning that the distributed orundistributed income of the funds is not taxed To avoid double taxation theincome of a private equity fund is taxed only in the hands of the investor1048707 5 SEBI was also made the sole regulatory authority and private equity fundsmust submit quarterly reports to it In September 2000 SEBI announced theguidelines that now govern venture capital investment based on the January2000 recommendations of the Chandra shekhar committee on venture capitalAfter another set of amendments in April 2004 the following rules now apply(i) Foreign venture capital investors can invest in India without the need forapproval from the Foreign Investment Promotion Board if they register withSEBI(ii) Each investor in a venture fund must invest at least Rs 500000 and each fundmust have at least Rs50 mn in capital(iii) A fund may invest in one company up to 25 of the fundrsquos capital It cannotinvest in associated companies of ventures that it finances(iv) A fund must invest 6667 (lowered from 75 in April 2004) of its investiblefunds in unlisted equity or equity-linked instruments The remaining 333 canbe invested in subscriptions to initial public offerings (IPOs) of companies or inPRIVATE EQUITY IN INDIA

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Page 56debt instruments of a company in which the venture fund has already made anequity investment(v) The April 2004 amendments removed the previous 1-year lockup period forIPO subscriptions They also allowed investments within the 333 category inpreferential allotments of equity shares of a listed company subject to a 1-yearlock-in and in equity shares or equity-linked instruments of a listed companythat is financially weak(vi) The removal of the profitability criterion as a listing requirement had animportant effect on the private equity industry as it provided an exit mechanismfor investors To replace the profitability requirement a firm would be delisted ifit did not earn a profit within 3 years of listing(vii) The acquisition of shares in a venture fund by the investee company or itspromoters is exempt from the provisions of the takeover code and will thereforenot mandate an open offer(viii) Mutual funds may invest 5 of the capital of an open-ended scheme and10 of the capital of a closed-ended scheme in a venture fund(ix) In April 2004 the SEBI also removed some previous restrictions and allowedventure funds to invest in real estate companies gold financing companies andequipment leasing and hire-purchase companies registered with the RBI1048707 6 These regulations have significantly improved the regulatory environment forprivate equity funds operating in India such as BTS India Private Equity FundIn addition they reflect the strong commitment of the Indian Government tosupport the provision of long-term equity finance to domestic entrepreneurialcompanies

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Worldrsquos Top 10 Private Equity Firms

According to an updated 2009 ranking created by industry magazine Private EquityInternational the largest private equity firm in the world today is TPG based on theamount of private equity direct-investment capital raised over a five-year window Asranked by the PEI 300 the 10 largest private equity firms in the world are

Because private equity firms are continuously in the process of raising investing anddistributing their private capital rose can often be the easiest to measure Other metricscan include the total value of companies purchased by a firm or an estimate of the sizeof a firms active portfolio plus capital available for new investments As with any listthat focuses on size the list does not provide any indication as to relative investmentperformance of these funds or managersAdditionally Preqin (formerly known as Private Equity Intelligence) an independent

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

data provider ranks the 25 largest private equity investment managers Among thelarger firms in that ranking were Alp Invest Partners AXA Private Equity AIGInvestments Goldman Sachs Private Equity Group and Pantheon The EuropeanPrivate Equity and Venture Capital Association (EVCA) publishes a yearbook whichanalyses industry trends derived from data disclosed by over 1 300 European privateequity funds

Comparing the Indian PE Environment to Other Countries

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Background

1048707 KSL is the torch-bearer of the seventy-year old financial services group ofKhandwala lineage1048707 Incorporated as specialized Broking Portfolio Management InvestmentBanking and related financial services arm of the Group in 19931048707 Top Management has combined wealth of experience in Indian Financial marketof several decades1048707 Innovative initiatives as Principal broking Member of National Stock Exchangein PMS and Indian Capital Market Developments1048707 Caters to several leading Foreign Institutional Investors Mutual Funds BanksCorporate and High Net-Worth Individuals

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Business Segments1048707 Market Intermediation1048707 Capital Market1048707 Futures amp Options1048707 Wholesale Debt Market1048707 Currency Derivates1048707 Investment Banking1048707 Merchant Banking1048707 Mergers amp Acquisition1048707 Strategic Partnership1048707 Capital Raising and Debt Raising Syndication1048707 Corporate Advisory and Restructuring1048707 Portfolio Management Services1048707 Wealth Advisory Services1048707 Investment Advisory Services

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Board of Directors1048707 Mr S M Parande Chairman1048707 Mr Paresh J Khandwala Managing Director1048707 Mr Rohit Chand Director1048707 Mr Kalpen Shukla Director1048707 Mr Ajay Narasimhan Vice Chairman amp Managing Director ndash TruMoneeFinancial LimitedRegistered amp Head Office MumbaiVikas Building Ground Floor Green Street Fort Mumbai- 400 023Tel No +91 22 2264 2300 Fax No +91 22 2261 5172Email corporatekslindiacom URL wwwkslindiacomBranch Office PuneC89 Dr Herekar Road Off Bhandarkar Road Pune- 411 004Tel No (91) (20) 2567 1404 Fax No (91) (20) 2567 1405E-mail punekslindiacomCorporate Office1st Floor White House Annexe White House 91 Walkeshwar Road WalkeshwarMumbai ndash 400 006Boardline +91 22 4200 7300 Fax No +91 22 4200 7378Branches1048707 HG 3 International Trade Center Majuragate Crossing Ring RoadSurat - 305002 GujaratBoardline +91 261 307 62761048707 201202 Shoppers Plaza Parimal Chowk Waghawadi RoadBhavnagar - 364001 GujaratBoardline +91 271 8222 1391

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009

Referencesbull wwwwikipediaorgwikiPrivate_equitybull wwwprivateequitycombull wwwindiavcaorgbull wwwprivateequityonlinecombull wwwpreqincombull wwwwarburgpincuscombull Private Equity Internationalbull Research by VCCEdge April lsquo10bull KPMG ndash PE Report May lsquo10bull Annual Report of Bharti Airtel 2008-2009