The recent episode involving the private equity major Bain Capital Partners, auditing firm EY (formerly Ernst and Young) and Lilliput Kidswear, highlights the difficult environment for global PE funds in India. Bain Capital has sued EY in a US court for wrongly advising it to invest $ 60 million in the Indian kidswear company. This is not a lone instance — other PE firms such as Saif Partners, AIG Global Real Estate and Apollo Global Management have also been involved in legal disputes over their investments in new enterprises or real estate projects here. It is true that startup funding is fraught with risk, irrespective of the country the fund operates in. But PE players in India have had more than their due share of troubles. Many have invested prior to 2008 and hence are holding on to big losses. Corporate governance issues, a very slow judicial system and regulations that aren’t too friendly to their operations are also challenges.

These factors are beginning to take a toll on the PE funds flowing into the country. PE and venture capital fund investments in India are down almost a third since 2011. This cannot be shrugged aside as inconsequential since PE deals account for a large portion of the money coming in as foreign direct investment. Over the last couple of years, when the primary market for equity issues was virtually non-existent, these funds had stepped in to meet the funding needs of Indian entrepreneurs. A record number of 696 deals were struck by PE and VC funds in 2013, a year that witnessed only three primary offers through the main exchanges. While the funds need to manage the mix of their personnel to include those with adequate understanding of local markets to overcome the kind of challenge faced by Bain Capital in the Lilliput case, there is still a lot that the Government can do to make it easy for them to function in India. Inability to exit their investments has been a major concern for PE players. This has been due to both dull primary markets as well as promoter unwillingness to make public offers. The recent SEBI move, allowing non-promoters to sell their stakes through the exchanges, will help resolve this issue to some extent in already listed companies. But the scope of this facility is limited only to the top 200 companies. The regulator can consider extending it to the top 500 companies, giving PE funds the choice to override a reluctant promoter in more companies.

The uncertainty surrounding taxing entities investing through the Mauritius route is another factor that deters PE fund flows into India. The Centre needs to clearly spell out eligibility criteria for claiming tax exemptions under the double taxation avoidance treaty. This will help the funds decide if they need to route their investment through other destinations. Also, following the Parthasarathy Shome Committee recommendation that retrospective amendments to tax laws be eschewed as a principle will help restore confidence among these investors.

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