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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 – Structure 2
Lotte Department Store
Master Franchisee
Store 1 Store 2 Store 3 Store n
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.
LotteKorea Lotte Cash & Carry India
Cash and Carry operations of Lotte in India
IndianFranchisee
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
LotteKorea Lotte Cash & Carry India
Cash and Carry operations of Lotte in India
IndianFranchisee
LotteManpower
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
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