By Sidharth Vashist Resurgent India Ltd. Foreign Direct Investment and PE Funding in India.

BySidharth Vashist

Resurgent India Ltd.

Foreign Direct Investment and PE Funding in India

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

step to

future- the enlightened path

RESURGENT INDIA LTD

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 knowledge-oriented full service investment bank and financial consulting firm that provides services in area of Debt, Equity and Transaction Advisory

“JMP Associates” Incorporated in the year 1999, JMP Associate is a full service accounting firm, specializing in taxation, auditing, management consultancy and outsourcing.

Our Presence

About Resurgent IndiaResurgent 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

Our Service Offerings

“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]

Key Management Team

Mr. Jyoti Prakash Gadia

• The Founder and Managing Director• Board member of companies like SRS,

V- mart, Ginni Systems.• His qualification includes CFA, CA, CS,

MBA (Finance) and AICWA.

Mr. Arjun Roy

•Independent Director in Resurgent India Ltd. •Head of R&D division in Ginni Systems Ltd.

Mr. Prashant Lohia

•Independent Director at Resurgent India Ltd and Managing Director of Ginni Systems Ltd.•Expeience in Systems Implementation, Information Technology

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. Subhash Chandra Saraf

•Independent director•Partner in CA firm Saraf & Chandra.•His qualifications includes CA, M.COM, LLB, FCA, DISA(ICA).

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.

Our Credentials: Debt Solutions

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Sole Advisor

Debt Syndication

Our Credentials: Equity Solutions & Transaction Advisory

Sole Advisor

Business Valuation

Sole Advisor

Business Valuation

Sole Advisor

Business Advisory

Sole Advisor

Business Advisory

Sole Advisor

Ad Treaty

Sole Advisor

Ad Treaty

Sole Advisor

Restructuring

Sole Advisor

Restructuring

Sole Advisor

Private Equity

Sole Advisor

Private Equity

Sole Advisor

Business Valuation

Sole Advisor

Business Valuation

Sole Advisor

Private Equity

Sole Advisor

Private Equity

Sole Advisor

BusinessPlanning

Sole Advisor

BusinessPlanning

Sole Advisor

Project Report

Sole Advisor

Project Report

Sole Advisor

Business Valuation

Sole Advisor

Business Valuation

Clientele

Consumer & Consumer & RetailRetail

IndustrialIndustrial

InfrastructureInfrastructure

Real EstateReal Estate

OthersOthers

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

Well established relationships with Banks, PE Fund Houses, Investment banks, HNIs

Have association with CII, CFO World, Australian Trade Commission etc.

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

Established Relationship

Core Competency

Comprehensive Service

FDI in India

Investment Routes

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

Investment through prior approval of

Government

FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment 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 74%

Greenfield 100%

Air Transport Services

Non Resident Indians 100%

Others 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%

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- Automatic Route...

Sector Wise Regulation in Foreign Investment- Prior Govt. Approval

Sectors CapNew 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 100%

Courier services other than those under the ambit of Indian Post Office Act, 1898 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

New investment by an existing

collaborator in 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

Investment by way of Share Acquisition

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

Participation by International

Financial Institutions

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 Fund

Private Equity Firm (General Partner)

Limited Partners (Pension Funds, Insurance Companies, HNIs, Fund of Funds, etc.)

Investment 1 Investment 2 Investment 3

Evaluating Various Funding Options

Options

Pref

eren

ce

Private Equity

IPO

FCCB

Strategic Merger

Get a financial investor to

increase business

Market is valuing IPOs of

good companies at a

premium

Access to low cost funds

Integration of business with a like minded

player

Grow in size and enhance

market credibility

Available only to listed

companies

Low

High

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

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

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)

AVERAGE SALES GROWTH IN EUROPE

AVERAGE SALES GROWTH IN US

Source: AT Kearney, Industry reports

Strategies by PE Investors to Generate Value

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 1: IMPROVE PERFORMANCE

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

STRATEGY 2: REGROUP AND FOCUS

Strategies by PE Investors to Generate Value…

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

STRATEGY 3: BUY AND BUILD

Benefits of Private Equity Investment

PE Investment prior to an IPO

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 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

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

Patient money 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 creationContrary 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

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

Huge scope for catch-up to global levels 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

Private Equity Growth AvenuesFuture 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

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

• INR 85,000 crore Indian FMCG market is one of the

important sectors and has registered a robust growth rate

• Home to about 20% of the global population under 25

• 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

Verticals Revenue(USD Bn) Growth(07-08)

Food and Beverages 231.9 74.4%

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%

IBEF report :Dec 08

Source Private Equity In Numbers: Business Outlook in collaboration with E&Y

FDI routes in retail

Available routes for foreign players to enter the retail sector

Strategic LicenseAgreement

Cash-and-CarryWholesale Retailing

Distribution Franchisee Route Manufacturing Joint Venture

This route involves a foreign company entering into a licensing agreement with a domestic retailer or partneringwith Indian promoter owned companies

100 per cent Foreign Direct investment is allowed in wholesale trading which involves building of a large distribution network

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

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

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

CO

UN

TER

Run by Lotte’s

Billing SupportPartner*

* 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

Customer

Billing SupportPartner*

TenantsNokia, Nike, Van Heusen,

Swarovski, LG, Adidas,Louis Vuitton, Mont Blanc,

Reebok, Shoprite, AirtelCorum

Lotte Department Store

Monthly FixedRentals

Revenue

(after due deduction of all fees)

Bill Money

Space

* 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

Master Franchisee

Store 1 Store 2 Store 3 Store n


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 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.

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.

LotteKorea Lotte Cash & Carry India

Cash and Carry operations of Lotte in India

IndianFranchisee





Lotte Manpower will supply manpower to operations of Indian franchisee thereby controlling quality and people

LotteKorea Lotte Cash & Carry India

Cash and Carry operations of Lotte in India

IndianFranchisee

LotteManpower





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

Lotte Korea

SPV for Real Estate

Indian Franchisee

Lotte Cash and Carry India

Bharti WalMart Structure

Supply Chain

Bharti will manage all the retail front end stores and the same shall be fed by a cash and carry business run by WalMart

WalMart will operate the cash and carry business and bring technology and expertise in the JV.

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.

The Bharti WalMart JV company will manage the supply chain including the cold chain and the logistics.

BHARTI WAL MART

Bharti WalMartJV Company

Resurgent India LimitedB-3, Bali Bhawan, 2nd Floor

Lajpat Nagar II, New Delhi 110 024

Tel No: +91 11 29811303Fax No.: +91 11 4135 4882www.resurgentindia.com

THANKS

By Sidharth Vashist Resurgent India Ltd. Foreign Direct Investment and PE Funding in India.

Documents

Transcript of By Sidharth Vashist Resurgent India Ltd. Foreign Direct Investment and PE Funding in India.