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Venture funds rue lack of exit route -- Want two-way fungibility of shares, access to listed cos

Kripa Raman

MUMBAI, Dec. 14

AN Indian company's potential for getting listed on, say, Nasdaq, might actually keep away venture capital funds and private equity funds from it.

They are now a little wary of investing in Indian outfits that are not listed domestically, but nevertheless have near term plans to list abroad.

The problem is, one cannot convert Indian shares into American Depository Shares or American Depository Receipts, they say. ``And when the stock becomes `ripe for selling' on Nasdaq or elsewhere, the fund finds itself holding a notional fortune, but at a dead end,'' says the partner at a private equity fund.

The common example pointed out is that of CDC Advisors, one of the investors in Satyam Infoway. At a time when Sify was quoting high on Nasdaq, CDC, apparently, wanted to exit. ``At that point, its investments in Sify were worth a couple of billion dolla rs. Now, after the Nasdaq crash and with Sify quoting pretty low, its investments have nosedived 95 per cent.''

``Lack of two-way fungibility of shares in India is becoming an issue with funds,'' says Mr Raj Dugar, Director, WestBridge Capital Advisors (India) Ltd.

``This is a critical aspect, many blue-chip investors find it difficult to get out, says the legal counsel for a UK-based venture fund. ``Typically, companies here make an ADR or ADS by issuing fresh shares. And, its earlier investors are stuck with illi quid investments. If it is a company incorporated abroad and whose Indian operations are through its subsidiary, then there would not be much of a problem.''

``It does hold back some investments,'' says Mr Saurabh Srivastava, President of Indian Venture Capital Association. He said the association would be making a formal appeal to the authorities on this matter.

Besides this issue, venture capital funds complain of other regulatory constraints which, if removed, will impart liquidity and depth to many scrips languishing undervalued.

``We want venture funds to be able to invest in listed companies,'' says Mr Pradip Shah of Indasia Fund Advisors Pvt Ltd. At present, venture funds are not allowed to do so.

Many private equity funds, which register through the Foreign Investment Promotion Board route and not through SEBI, have no such constraints. Analysts point out that listed companies such as BFL, Moser Baer and Nicholas Piramal and even HDFC Bank (in wh om Chase Manhattan bought shares through two of its private equity arms) have got private equity funding.

However, even here, private equity funds complain that regulatory constraints are making for an illiquid market. ``There are good technology companies that are quoting at 10 per cent of what they were at their peak. There are a lot of investors looking a t them,'' says the director of a private equity fund.

``First, as is not the case with an unlisted company, it is difficult to get a chunk of shares from the market at a compelling value,'' says Mr Dugar. ``In the US, you can make block transactions.''

Here, companies have to pay the average of 26 weeks' share price on the market when making a negotiated deal. ``Which means that if a stock has been steadily eroding from Rs 100 to Rs 10 today, then I might be paying Rs 55 for it,'' says the director of another private equity fund. ``The other option is to make a hostile bid, which is not our practice.''

Although venture funds admit that the very nature of their operations is within the domain of new (and unlisted) companies, they complain there are very few good ideas and opportunities going around and they might as well look at many listed companies wh ich could be mutually beneficial.