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

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Presentation on theme: "By Sidharth Vashist Resurgent India Ltd. Foreign Direct Investment and PE Funding in India."— Presentation transcript:

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

2 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

3 step to future - the enlightened path RESURGENT INDIA LTD

4 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

5 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

6 Our Service Offerings Private Equity Mergers & Acquisitions (Domestic, Inbound, Outbound) Equity Solutions Term Loans Working Capital Factoring Non Fund Based Solutions Debt Solutions Business & Financial Restructuring Business Plan Due Diligence Business Valuation Transaction Advisory “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]

7 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. 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. 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. 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. 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. 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.

8 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

9 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 Business Planning Sole Advisor Business Planning Sole Advisor Project Report Sole Advisor Project Report Sole Advisor Business Valuation Sole Advisor Business Valuation

10 Clientele Consumer & Retail Industrial Infrastructure Real Estate Others

11 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

12 FDI in India

13 Investment Routes Entry Strategies for Foreign Investors As an Indian Company Joint Ventures Established distribution set up Available financial resource Established contacts to smoothen the setting up of operations Wholly Owned Subsidiaries In sectors where 100% foreign direct investment is permitted As a Foreign Company Liaison Office/Representative Office Channel of communication b/w head office and Indian entities Collects information about possible market opportunities Provides information about the company and its products to prospective customers Project Office Foreign Companies planning to execute specific projects in India can set up temporary project/site offices Such offices cannot undertake any activity other than the activity related to execution of the project Branch Office Foreign companies engaged in the manufacturing and trading activities abroad are allowed to set up Branch Offices Is not allowed to carry out manufacturing but is permitted to subcontract the same to an Indian manufacturer

14 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

15 Sector Wise Regulation in Foreign Investment- Automatic Route SectorsCap Airport Existing74% Greenfield100% Air Transport Services Non Resident Indians100% Others49% Alcohol distillation and brewing100% Banking (Pvt. Sector)100% Coal and Lignite mining100% Coffee, Rubber processing and warehousing100% Construction and Development100% Floriculture, Horticulture and Animal Husbandry100% Specified Hazardous chemicals100% Industrial Explosives Manufacturing100% Insurance26% Mining100% NBFC100% Petroleum and Natural Gas100%

16 SectorsCap Power Generation, transmission and distribution100% Trading100% SEZs and Free Trade Warehousing Zones100% Telecommunication Basic and cellular services49% ISP with gateways, radio paging, end-end bandwidth49% ISP without gateway49% Manufacture of telecom equipment100% Sector Wise Regulation in Foreign Investment- Automatic Route...

17 Sector Wise Regulation in Foreign Investment- Prior Govt. Approval SectorsCap 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 Minerals74% Broadcasting FM Radio20% Cable Network49% DTH49% Cigarette manufacturing100% Courier services other than those under the ambit of Indian Post Office Act, % Defense production26% Investment companies in infrastructure / service sector (except telecom)49% Petroleum and Natural Gas26% Tea Sector – including Tea plantation100% Trading items sourced from Small scale sector100% Single brand retailing51% Satellite establishment and operations74% Test marketing for equipment for which company has approval for manufacture100%

18 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

19 Private Equity Overview

20 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

21 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 1Investment 2Investment 3

22 Evaluating Various Funding Options Options Preference 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

23 Various Private Equity Strategies

24 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

25 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

26 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

27 Benefits of Private Equity Investment

28 PE Investment prior to an IPO Sale to Strategic Buyer IPO Sale to another PE fund 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

29 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 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

30 Private Equity in India

31 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

32 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

33 Retail Sector- A Case Study

34 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 VerticalsRevenue(USD Bn)Growth(07-08) Food and Beverages % Clothing and textile % Consumer Durables % Jewellery and Watches % Home Décor9.53.0% Beauty Care6.93.0% Footwear3.31.1% Books, Music and Gifts2.60.8% IBEF report :Dec 08 Source Private Equity In Numbers: Business Outlook in collaboration with E&Y

35 FDI routes in retail Available routes for foreign players to enter the retail sector Strategic License Agreement Cash-and-Carry Wholesale Retailing Distribution Franchisee Route ManufacturingJoint Venture This route involves a foreign company entering into a licensing agreement with a domestic retailer or partnering with 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

36 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

37 Lotte Department Store – Structure 1 Customer Billing Support Partner* Tenants Nokia, Nike, Van Heusen, Swarovski, LG, Adidas, Louis Vuitton, Mont Blanc, Reebok, Shoprite, Airtel Corum Lotte Department Store Monthly Fixed Rentals Revenue (after due deduction of all fees) BillMoney 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

38 Lotte Department Store – Structure 2 Lotte Department Store Master Franchisee Store 1Store 2Store 3Store n

39 Lotte Department Store – Structure 3 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. Lotte Korea Lotte Cash & Carry India Cash and Carry operations of Lotte in India Indian Franchisee

40 Lotte Department Store – Structure 4 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. Lotte Manpower will supply manpower to operations of Indian franchisee thereby controlling quality and people Lotte Korea Lotte Cash & Carry India Cash and Carry operations of Lotte in India Indian Franchisee Lotte Manpower

41 Lotte Department Store – Structure 5 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. 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

42 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 WalMart JV Company

43 Resurgent India Limited B-3, Bali Bhawan, 2 nd Floor Lajpat Nagar II, New Delhi Tel No: Fax No.: THANKS


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