Foreign Direct Investment and PE Funding in
India
By
Sidharth Vashist
Resurgent India Ltd.
Agenda
 About Resurgent India
 FDI in India
 Private Equity Overview
 Various Private Equity Strategies
 Benefits of PE Investments
 Private Equity in India
 Retail- A Case Study
RESURGENT INDIA LTD
step to future
- the enlightened path
GOLDEN GROUP
The Golden Group is the anchor group within which Resurgent India, Ginni System
and JMP Associates function. The group stands for values and etiquettes which the
group wants the follower companies to imbibe in their work culture.
The Vision “Working and moving together towards a better social and economical world”
The Mission –
“Our mission is to break into the golden circle of the globally acclaimed
Consultancy Companies by achieving sustainable and profitable growth through
delivery of exceptional consultancy services to customers by our outstanding
people who take pride in the quality of our services, our business ethics, and our
passion to exceed customer’s expectations”
“Ginni Systems Ltd.” Incorporated
founded in 1992, is one of the
emerging IT solution company,
specializing in business solutions in
systems and software
“Resurgent India”, a knowledgeoriented full service investment
bank and financial consulting firm
that provides services in area of
Debt, Equity and Transaction
Advisory
Our Presence
“JMP Associates” Incorporated in
the year 1999, JMP Associate is a full
service accounting firm, specializing
in taxation, auditing, management
consultancy and outsourcing.
About Resurgent India
Resurgent India is a knowledge-oriented full service investment bank
and financial services firm promoted by professionals who have a
successful track record of entrepreneurship. Our offering to clients rests
on the pillars of

Demonstration of sector expertise demonstrating understanding of
key business drivers and domain knowledge

Superior transaction execution capabilities & in-depth understanding
of various capital syndication alternatives

Well established network including leading global & domestic
private equity funds, banks, and financial institutions
Sectors
Others
12%
Industrial
24%
Consumer
24%
Real Estate
22%
Infrastructu
re
18%
Our Service Offerings
Equity
Solutions
• Private Equity
• Mergers & Acquisitions (Domestic,
Inbound, Outbound)
Debt
Solutions
• Term Loans
• Working Capital
• Factoring
• Non Fund Based Solutions
Transaction
Advisory
• Business & Financial Restructuring
• Business Plan
• Due Diligence
• Business Valuation
Deals: Product Wise
Equity
27%
“We entrusted the responsibility of our financial planning to Resurgent
India Ltd. Apart from arranging the funds, the company has very good
analytical ability which combined with their hard work and strong
banking relationships has been really fruitful for our company."
Sanjay Sahni, MD, Ritu Wears [Retailer]
Transaction
Advisory
10%
Debt
63%
Key Management Team
Mr. Jyoti Prakash Gadia
•
•
•
The Founder and Managing Director
Board member of companies like SRS, Vmart, Ginni Systems.
His qualification includes CFA, CA, CS,
MBA (Finance) and AICWA.
Mr. Manish Kedia
•
•
•
Leads the Debt Syndication business
He has been working with Resurgent since
start of his career. His past transaction
experience includes retail and real estate.
He is a CA by profession.
Mr. Prashant Lohia
•
•
Independent Director at Resurgent India Ltd
and Managing Director of Ginni Systems
Ltd.
Expeience in Systems Implementation,
Information Technology
Mr. Subhash Chandra Saraf
•
•
•
Independent director
Partner in CA firm Saraf & Chandra.
His qualifications includes CA, M.COM,
LLB, FCA, DISA(ICA).
Mr. Kavish Sarawgi
•
•
•
Leads the Private Equity and Mergers and
Acquisition practice
He has experience in investment banking,
business consulting and private equity
syndication.
He is an MBA in Finance from IIM- L .
Mr. Arjun Roy
•
•
Independent Director in Resurgent India
Ltd.
Head of R&D division in Ginni Systems Ltd.
Our Credentials: Debt Solutions
Sole Advisor
Sole Advisor
Sole Advisor
Sole Advisor
Debt
Syndication
Debt
Syndication
Debt
Syndication
Debt
Syndication
Sole Advisor
Sole Advisor
Sole Advisor
Sole Advisor
Debt
Syndication
Debt
Syndication
Debt
Syndication
Debt
Syndication
Sole Advisor
Sole Advisor
Sole Advisor
Sole Advisor
Debt
Syndication
Debt
Syndication
Debt
Syndication
Debt
Syndication
Our Credentials: Equity Solutions & Transaction Advisory
Sole Advisor
Sole Advisor
Business
Valuation
Business
Valuation
Sole Advisor
Sole Advisor
Business
Valuation
Ad Treaty
Sole Advisor
Sole Advisor
Private Equity
Private Equity
Sole Advisor
Sole Advisor
Sole Advisor
Sole Advisor
Business
Advisory
Business
Planning
Project Report
Restructuring
Clientele
Consumer &
Retail
Infrastructure
Real Estate
Industrial
Others
Our Strengths

Team of 25 experienced professionals

Experience of working on complex financial products/structures

A huge SME client base, as we have catered to more than 250 clients

Have catered to clients across various industries
Established
Relationship

Well established relationships with Banks, PE Fund Houses, Investment banks, HNIs

Have association with CII, CFO World, Australian Trade Commission etc.
Core
Competency

Our core competency lies in Capital Syndication

Have worked together with clients from the time they were small SMEs to large MNCs

We work with companies across stages from start-up to growth and beyond

We also provide on going advice on business planning and restructuring
Team
Clientele
Comprehensive
Service
FDI in India
Investment Routes
Entry Strategies for Foreign
Investors
As an Indian
Company
Joint Ventures
As a Foreign
Company
Wholly Owned
Subsidiaries
Channel of
communication b/w
head office and Indian
entities
Established
distribution set up
Available financial
resource
Established contacts
to smoothen the
setting up of
operations
Liaison
Office/Representative
Office
In sectors where
100% foreign direct
investment is
permitted
Collects information
about possible market
opportunities
Provides information
about the company and
its products to
prospective customers
Project Office
Branch Office
Foreign Companies
planning to execute
specific projects in India
can set up temporary
project/site offices
Foreign companies
engaged in the
manufacturing and
trading activities abroad
are allowed to set up
Branch Offices
Such offices cannot
undertake any activity
other than the activity
related to execution of
the project
Is not allowed to carry
out manufacturing but is
permitted to subcontract
the same to an Indian
manufacturer
FDI Policy
Investment
under Automatic
Route
FDI in sectors/activities to the extent permitted under automatic route does
not require any prior approval either by the Government or RBI
The investors are only required to notify the Regional office concerned of RBI
within 30 days of receipt of inward remittances and file the required
documents with that office within 30 days of issue of shares to foreign investors
FDI in activities not covered under the automatic route, requires prior
Government approval and are considered by the Foreign Investment
Investment
through prior
approval of
Government
Promotion Board (FIPB)
Application for all FDI cases, except Non-Resident Indian (NRI) investments and
100% Export Oriented Units (EOUs), should be submitted to the FIPB Unit,
Department of Economic Affairs (DEA) and Ministry of Finance
Application for NRI and 100% EOU cases should be presented to Department of
Industrial Policy & Promotion
Sector Wise Regulation in Foreign Investment- Automatic Route
Sectors
Cap
Airport
Existing
Greenfield
74%
100%
Air Transport Services
Non Resident Indians
Others
100%
49%
Alcohol distillation and brewing
100%
Banking (Pvt. Sector)
100%
Coal and Lignite mining
100%
Coffee, Rubber processing and warehousing
100%
Construction and Development
100%
Floriculture, Horticulture and Animal Husbandry
100%
Specified Hazardous chemicals
100%
Industrial Explosives Manufacturing
100%
Insurance
26%
Mining
100%
NBFC
100%
Petroleum and Natural Gas
100%
Sector Wise Regulation in Foreign Investment- Automatic Route...
Sectors
Cap
Power Generation, transmission and distribution
100%
Trading
100%
SEZs and Free Trade Warehousing Zones
100%
Telecommunication
Basic and cellular services
49%
ISP with gateways, radio paging, end-end bandwidth
49%
ISP without gateway
49%
Manufacture of telecom equipment
100%
Sector Wise Regulation in Foreign Investment- Prior Govt. Approval
Sectors
Cap
New Investment by a foreign investor in a field in which the investor already has an existing joint venture or collaboration with
another Indian partner
Atomic Minerals
74%
Broadcasting
FM Radio
20%
Cable Network
49%
DTH
49%
Cigarette manufacturing
Courier services other than those under the ambit of Indian Post Office Act, 1898
100%
100%
Defense production
26%
Investment companies in infrastructure / service sector (except telecom)
49%
Petroleum and Natural Gas
26%
Tea Sector – including Tea plantation
100%
Trading items sourced from Small scale sector
100%
Single brand retailing
51%
Satellite establishment and operations
74%
Test marketing for equipment for which company has approval for manufacture
100%
FDI Policy- Other Important Guidelines
Investment by way
of Share
Acquisition
New investment by
an existing
collaborator in
India
Participation by
International
Financial
Institutions
A foreign investing company is entitled to acquire the shares of an Indian
company without obtaining any prior permission of the FIPB subject to
prescribed parameters/ guidelines
If the acquisition of shares directly or indirectly results in the acquisition of a
company listed on the stock exchange, it would require the approval of the
Security Exchange Board of India
A foreign investor with an existing venture or collaboration with an Indian
partner in particular field proposes to invest in another area, such type of
additional investment is subject to a prior approval from the FIPB
Equity participation by international financial institutions in domestic
companies is permitted through automatic route, subject to:
1. SEBI/RBI regulations
2. Sector specific cap on FDI
Private Equity Overview
What is Private Equity?

Private equity is a source of investment capital from high net worth individuals and institutions for the purpose of investing
and acquiring equity ownership in companies

Private Equity is the investment by specially created funds into companies (usually unlisted) with good growth potential

Partners at private equity firms raise funds and manage these monies for the purpose of yielding favorable returns for their
shareholder clients, typically with an investment horizon between four and seven years

PE funds invest at various growth stages of the company with different parameters

PE backed companies have been shown to grow faster


A combination of capital and experienced personal input from PE executives

Validation of the business model by the investor

Reduces the cost of further growth capital

Better credibility for the company in international market and in case of an IPO

Business opportunities within the network of the PE investor

Corporate governance established
Year 2006 saw PE/PIPE investments worth USD 7.5 Bn in India, up from USD 2 Bn a year ago


Seven months into 2007, the year has already seen PE investments of USD 6.0 Bn and is expected to touch USD 15.0 Bn by year end
IT and ITES attracted the maximum PE funds with USD 1.5 Bn investment; Manufacturing formed the next big chunk with
close to USD 1.0 Bn in PE investments
Structure of a PE Fund
Private Equity Firm
(General Partner)
Limited Partners (Pension Funds, Insurance
Companies, HNIs, Fund of Funds, etc.)
Private Equity Fund
Investment 1
Investment 2
Investment 3
Evaluating Various Funding Options
Get a financial
investor to
increase
business
Market is
valuing IPOs of
good
companies at a
premium
Grow in size
and enhance
market
credibility
Access to low
cost funds
Integration of
business with
a like minded
player
Available only
to listed
companies
Preference
High
Private Equity
IPO
FCCB
Strategic Merger
Low
Options
Various Private Equity Strategies
PE adds Value

PE investment has a positive impact on the value
creation in portfolio companies with impact on sales,
profitability and investments

Sales growth



Sales opportunities are significant and realized faster
with PE capital

Surveys reveal a PE backed company shows higher
growth in sales as compared to a non-PE backed
company
AVERAGE SALES GROWTH IN EUROPE
Profitability

In majority of cases where a PE has invested, there is a
significant improvement in profitability

Especially true in case of management buy-outs (MBOs)
where the impact of entrepreneurship spirit is
reinforced by PE
AVERAGE SALES GROWTH IN US
Investments

PE backed companies allocate valuable equity capital to
areas of future growth and value generation (like in
modern production facilities and in intellectual and
brand capital)
Source: AT Kearney, Industry reports
Strategies by PE Investors to Generate Value
STRATEGY 1: IMPROVE PERFORMANCE

The most popular strategy followed is to improve the business performance



Achieved through either increasing sales, or reducing costs or a combination of the two
Assets and bottom-line initiatives

Improve cash flow by restructuring assets and key resource areas and by reducing working capital

PE investors take rational view on many legacy products and structures that may have become redundant in the emerging market
conditions and change them as per the changing market conditions

Other measures include off-shoring processes to low cost countries, outsourcing to suppliers, lean manufacturing, shared service
centers, salary restructuring, strategic sourcing, etc.
Top-line initiatives

Improve sales by internal restructuring which requires minimal cash resources and hence is very appealing to PE investors

Organizational structures are changed to reflect the innovation capability of the management
STRATEGY 2: REGROUP AND FOCUS

This strategy aims at re-engineering the existing business by reducing complexity and by concentrating on core competencies

This strategy can be applied at all levels of the business value chain


At business level – Businesses are separated or are integrated with other firms

At supply chain level – non-competitive processes are outsourced

At product level – Successful products are continued and weaker products are discontinued
PE investors focus their energy on improving internal operations and management to effect the required changes
Strategies by PE Investors to Generate Value…
STRATEGY 3: BUY AND BUILD

This strategy is gaining popularity among PE investors to quickly achieve size and scale of a large company

Key to successful buy and build strategy is to enhance margins by improving competitive position (gaining better bargaining
position in pricing and sourcing)

Other value enhancements include tapping cross selling and branding potential, growth from geographic expansion and new
products, partnering and licensing new business models and strategies

Helps create jobs as company enters into newer markets and through higher penetration of existing markets
Benefits of Private Equity
Investment
PE Investment prior to an IPO
Sale to
Strategic
Buyer
Exit Strategy
for PE
Investor

IPO remains the most preferred exit route for a PE
investor

PE investment provides comfort to investors (both retail
as well as institutional) at the time of the IPO
IPO
Sale to
another PE
fund

Business model that has been closely evaluated by a PE
investor

Validation of internal processes, systems and corporate
governance practices

Validation of capabilities of the management team

Presence of a representative director of PE fund brings
high credentials to the Board of the company at the time
of an IPO

PE prepares the company to handle the ongoing
regulatory filing requirements

Also gives management an experience of managing
investors

PE funds put additional efforts to prepare the company
for IPO, both in terms of their industry relationships as
well as business growth
Other Benifits
Quick and
affordable source
of fund
Patient money
PE investment do not require any collateral for the investment as against a
compulsory collateral requirement for a loan
Though the return on investment is higher in the range of 20-25% p.a., it still is
affordable as, as the company grows, the promoter wealth also increases in the
same ratio as the PE investor, when compared to getting no benefit despite
paying 15-18% interest for a loan
PE investors are medium to long-term investors and hold on to their
investments through a complete business cycle
Small capital
PE funds are in a position to offer small investments, something that SMEs are
very interested in
Sales growth
It has been researched that a company with a PE investment shows a better
sales growth as compared to a non-PE backed company
Job creation
Contrary to perception that PE investors maximize returns by eliminating jobs
or by breaking up the organization, PE often create significant number of jobs
by growing the sales and geographic reach of the company
Private Equity in India
Private Equity: Snapshot of Indian Market

India – Increasing attractiveness as a PE destination




Strong economic growth leading to a majority of Indian
companies looking for growth capital
PE has fast emerged as an alternate source of funds for
companies to support expansion plans
Large Global PE investors are either setting up dedicated Indian
funds or increasing allocations for India
Indian investments in their global portfolios
PE investments in India
18000
439
16000
14000
12000
280
10000
17129
8000
146
6000

Growing Private Equity space in India


From a modest $1.05 billion in private equity investments in
2002 to $17.1 billion in 2007, India today brooks no resistance
to its position as one the world’s most attractive private equity
investment destinations

Fund sizes have increased from US$ 25 – 100 mn, to about US$
400 – 1,000 mn

Increasing deal sizes: average investment size up from US$ 4 mn
to US$ 50 mn
110
78
4000
2000
1160
937
591

Indian PE is approx. 1% of GDP; Mature markets like US and UK
have a PE to GDP ratio of 1.5-2%
This indicates the tremendous scope for growth, not just on
account of the underlying GDP growth but also on account of
catch-up to global levels
10800
56
470
71
1650
6700
2200
0
2000 2001 2002 2003 2004 2005 2006 2007 2008
Size(USD Mn)
Number of Deals
PE - Industry Wise break Up 2004-2008
Huge scope for catch-up to global levels

399
376
Transportation &
Logistics, 1926.84,
5%
Financial
Services,
10626.36,
24%
Non Financial
Services, 2735.45,
Others, 1544.26,
6%
4%
IT & ITES,
5796.82, 13%
Computer
Hardware, 537.63,
1%
Healthcare,
2353.39, 5%
Telecom &
Media,
7574.85,
17%
Manufacturing,
4249.22, 10%
Engineering &
Construction,
6751.1, 15%
500
450
400
350
300
250
200
150
100
50
0
Private Equity Growth Avenues
Future Outlook



We have seen a slowdown in activity in the first half of ’09. Market could pick up in the second half given capital demand

Indian companies will require external funding to finance projects and growth plans

Lending from banks is tight due to lender reluctance; borrowers are wary of leverage
Attractive investment opportunities exist as valuations lower

Anecdotally, private company valuation expectations are coming down, but there is still a gap between promoter and PE valuations

Indian companies have committed to expansion projects. Sectors most in need of funds are real estate, infrastructure, health care
and industrials

Relatively positive outlook for domestic consumption has led to investment for growth particularly for FMCG companies
PE funds are focused on the portfolio but given minority stakes, the ability to influence the portfolio is lower than in other
markets
Key drivers in place

Regulations : Investments not permitted in areas like power distribution, airports, railways etc – now history

Independent regulators add to investor comfort

Funds Availability

Government contribution : Viability Gap funding, project specific cess

Cost efficient borrowing with sufficient depth possible

Growing size of project executors of comfort to international lenders

Attitude : Willingness to pay commercial user charges

Growth Story : Sheer demand turning hitherto unviable opportunities into doable business plans
Retail Sector- A Case Study
PE Investments: Consumer Business
•
•
•
INR 85,000 crore Indian FMCG market is one of the
Verticals
important sectors and has registered a robust growth rate
Food and Beverages
231.9
74.4%
Home to about 20% of the global population under 25
Clothing and textile
29.0
9.3%
Consumer Durables
15.2
4.9%
Jewellery and Watches
19.4
4.3%
Home Décor
9.5
3.0%
Beauty Care
6.9
3.0%
Footwear
3.3
1.1%
Books, Music and Gifts
2.6
0.8%
Rural India accounts for more than 700 Million consumers,
or ~70 per cent of the Indian population, largely untapped
•
India is the largest milk producer in the world, yet only
around 15 per cent of the milk is processed
Revenue(USD Bn)
IBEF report :Dec 08
Consumer: PE Investments by Year
425.23
450
400
350
300
250
293.4
200
168.5
150
100
50
0
2006
2007
Size in USD Mn
2008
Source Private Equity In Numbers: Business Outlook in collaboration with E&Y
Key Growth Drivers
•
•
•
•
•
•
Increasing Urbanization
Easy Availability of credit
Changing Face of Indian consumerism
Higher disposable Incomes
The Mall Phenomenon
Metros on the growth Path
Growth(07-08)
FDI routes in retail
Available routes for foreign players to enter the retail sector
Strategic License
Agreement
This route
involves a
foreign
company
entering into a
licensing
agreement
with a
domestic
retailer or
partnering
with Indian
promoter
owned
companies
Cash-and-Carry
Wholesale
Retailing
100 per cent
Foreign Direct
investment is
allowed in
wholesale
trading which
involves
building of a
large
distribution
network
Distribution
An
international
company can
set up a
distribution
office In India
and supply
products to
the local
retailers.
Franchisee
outlets can
also be set up
in this route
Franchisee
Route
The entry
route, which
includes the
master
franchise and
the regional
franchise
routes is
widely used,
with a number
of
international
brands to set a
presence in
India
Manufacturing
Joint Venture
A company
can establish
its
manufacturing
unit in India
along with
standalone
retailing
outlets
International
firms can enter
into
agreements
with domestic
players and set
up base in
India. Share of
MNCs is
restricted to
49 per cent in
this route
Lotte Department Store – Structure 1 (Shop floor)
CENTRALISED
BILLING
COUNTER
Run by Lotte’s
Billing Support
Partner*
* The need to have a Billing Support partner arises because retailing by foreign companies is not allowed by law
in India
Lotte Department Store – Structure 1
Lotte Department Store
Monthly
Fixed
Rentals
Space
Tenants
Nokia, Nike, Van Heusen,
Swarovski, LG, Adidas,
Louis Vuitton, Mont Blanc,
Reebok, Shoprite, Airtel
Corum
Billing Support
Partner*
Revenue
(after due
deduction
of all fees)
Bill
Money
Customer
* The Billing Support Partner will run only the centralized billing operations like
any other franchisee would and will not be a contract supplier to Lotte
Lotte Department Store – Structure 2
Lotte Department Store
Master Franchisee
Store 1
Store 2
Store 3
Store n
Lotte Department Store – Structure 3
A foreign retailer can start a cash and carry business in India and appoint a franchisee. The franchisee in
turn procures all the products from the cash and carry business. The arrangement is explained
diagrammatically below.
Lotte
Korea
Lotte Cash & Carry India
Cash and Carry operations of Lotte in India
An Indian company can
be appointed a master
franchise partner in India.
The franchise agreement
is drafted in a manner
that the foreign retailer is
given the option to
buyout Indian company’s
franchisee business as
and when the FDI norms
are eased
Indian
Franchisee
Indian franchisee
procures all stocks and
supplies for sale in the
stores from Cash and
Carry India. The workers
manning the store are
also trained by Foreign
Retailer. The standards
and merchandising are all
as per specifications laid
down by Foreign Retailer.
Lotte Department Store – Structure 4
A foreign retailer can start a cash and carry business in India and appoint a franchisee. The franchisee in
turn procures all the products from the cash and carry business. The arrangement is explained
diagrammatically below.
Lotte
Korea
An Indian company can
be appointed a master
franchise partner in India.
The franchise agreement
is drafted in a manner
that the foreign retailer is
given the option to
buyout Indian company’s
franchisee business as
and when the FDI norms
are eased
Lotte
Manpower
Lotte Cash & Carry India
Cash and Carry operations of Lotte in India
Indian
Franchisee
Lotte Manpower will
supply manpower to
operations of Indian
franchisee thereby
controlling quality and
people
Indian franchisee
procures all stocks and
supplies for sale in the
stores from Cash and
Carry India. The workers
manning the store are
also trained by Foreign
Retailer. The standards
and merchandising are all
as per specifications laid
down by Foreign Retailer.
Lotte Department Store – Structure 5
A foreign retailer can start a cash and carry business in India and appoint a franchisee. The franchisee in
turn procures all the products from the cash and carry business. The arrangement is explained
diagrammatically below.
Lotte Cash and Carry
India
Lotte Korea
An Indian company can
be appointed a master
franchise partner in India.
The franchise agreement
is drafted in a manner
that the foreign retailer is
given the option to
buyout Indian company’s
franchisee business as
and when the FDI norms
are eased
SPV for Real
Estate
Indian
Franchisee
The SPV will buy and build the real
estate as per Lotte’s standards and the
same will then be given to the Indian
franchisee on long lease
Indian franchisee
procures all stocks and
supplies for sale in the
stores from Cash and
Carry India. The workers
manning the store are
also trained by Foreign
Retailer. The standards
and merchandising are all
as per specifications laid
down by Foreign Retailer.
Bharti WalMart Structure
The Bharti - WalMart JV will follow a similar structure to Shoprite. While WalMart will operate the cash
and carry business, Bharti will manage and run the front end retail operations. Within the JV WalMart will
help Bharti in infrastructure development, cold chains and logistics.
BHARTI
Bharti will manage all the
retail front end stores and
the same shall be fed by a
cash and carry business
run by WalMart
The Bharti WalMart JV
company will manage the
supply chain including the
cold chain and the
logistics.
WAL MART
Supply
Chain
Bharti WalMart
JV Company
WalMart will operate the
cash and carry business
and bring technology and
expertise in the JV.
THANKS
Resurgent India Limited
B-3, Bali Bhawan, 2nd Floor
Lajpat Nagar II, New Delhi 110 024
Tel No: +91 11 29811303
Fax No.: +91 11 4135 4882
www.resurgentindia.com