The going may just get tough for private equity (PE) players, what with over $20 billion worth of exits due in 2012. What is complicating matters for players is the proposed General Anti-Avoidance Rule (GAAR) that will override the India-Mauritius tax treaty. Since most PE investments in the country have been routed through Mauritius, a capital gains tax of 20% will be liable on all exits after April 2012. It should not come as a surprise if we see a slack in deal making.
For now, however, the numbers look robust. That is because most of the transactions were conducted prior to the GAAR announcement. Data from Grant Thornton, a business consultancy, reveals 118 deals were struck during the quarter, compared with 75 for the same period last year. For Q4FY12, IT and ITES was the most active sector in volume terms with 34 deals. Banking and financial services also saw 17 transactions. The largest deal, by a large margin, was the $100 million fund infusion by Accel Partners and Tiger Global in ecommerce major Flipkart Online Services.
There has also been increased activity in lower mid-market companies. This is evident from the fall in deal value. Also, in Q4FY12, the cumulative deal value stood at $2 billion — down by a substantial 23% from $2.61 billion in Q4FY11. “Promoters of lower mid-market companies do not want to hold up their growth plans and are moving forward to close transactions,” says Jayanta Banerjee, managing partner at ASK Pravi Capital Advisors.
In a hurry to close deals, they are also lowering their valuation expectations. Raja Lahiri, partner, transaction advisory services, Grant Thornton, points out, “There’s been a change in promoter expectations.”
However, going ahead, Lahiri believes the GAAR legistation and the taxation of offshore share transfers could cloud deal closures. “Deals will have to be re-priced,” he points out. But given the fact that there are over 100 active PE funds in India vying for a slice of the pie, should that really be a worry?