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Foreign PE funds may come under surveillance
February, 18th 2008

The department of industrial policy and promotion (Dipp) is working on ways to monitor investments of overseas private equity (PE) funds in India. This follows a suggestion from capital market regulator SEBI on the need to check unhealthy practices like asset stripping which erode value of companies. A beginning is likely to be made by tracking duration of investment and entry as well as exit patterns.

Since foreign investment in several segments is allowed through the automatic route, one way of sourcing information is to ask foreign PE funds to report their investments and repatriation. We are examining various modalities for tracking PE deals. But we will not resort to any regulatory measure which could send wrong signals to foreign investors, a Dipp official said. The process of tracking such funds would be undertaken only if it is considered feasible.

Large chunks of foreign investment come through M&A deals rather than greenfield investment and this simply replaces investment rather than brining in fresh funds. Foreign investment is intended to bring benefits to Indian companies by bringing with it updated technology and better management. If Indian companies suffer due to certain practices of overseas PE funds, corrective measures are required, said the official.

It has been seen in many cases that foreign PE funds take over management rather than staying as financial investors. In such cases, the government would watch the outcome of such management takeover on the health of the company. While PE funds are focused on turnaround and profitability, the governments concern extends to areas like job creation. Management takeover happens when PEs go for larger stake rather than sticking to just 10-15%, like pure financial investors usually do.

Sebi had earlier said that overseas funds picking up controlling stakes in listed Indian companies through the secondary market can lead to asset stripping as identities of many of the foreign investors involved with such funds are not disclosed. In many cases, the ultimate source of funds are not verifiable, the regulator had said.

According to Datasource, total PE deals announced in 2007 amounted to $19.03 billion, of which Temasek accounted for $2.5 billion. As many as 386 PE deals were struck last year mainly in real estate, infrastructure and financial services, but the information technology and outsourcing segments led the volumes charts. Some of the major funds active in Indian market include Temasek, GIC, Blackstone Group, Warburg Pincus, Carlyle Group and Actis Capital. According to an Assocham study, investment by overseas private equity funds is set to touch $48 billion in India by 2010.

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