Laws on Private Equity:
In India, a plethora of legislative provisions at federal, provincial and local or municipal level intermesh and have relevance in the private equity context. The key statutes – in particular, at the federal level – that have territorial application across India, both horizontally across industry sectors and vertically through all segments of (especially) foreign or cross-border private equity investments into India, include the following:
The Companies Act, 2013 governs, in particular, the conditions and procedures relating to the issuance and transfers of shares and other securities, as well as providing for governance provisions for boards and shareholders.
The Income Tax Act, 1961 governs all direct taxation-related aspects of private equity transactions, including applicable taxes on income generated, capital gains tax, tax benefits, exemptions from tax liability and methods to determine the valuation of shares and other securities – this legislation is to be read together with the applicable double taxation avoidance treaty or agreement (if any).
The Foreign Exchange Management Act, 1999 (FEMA) enables the Reserve Bank of India (RBI), India's central bank, to monitor and regulate all foreign investments into target companies in India, acting in this regard under or pursuant to powers granted to it under the Reserve Bank of India Act, 1934 and related banking laws and regulations.
The Consolidated Foreign Direct Investment (FDI) Policy is issued and amended from time to time by the Department for Promotion of Industry and Internal Trade of the government of India, along with various rules, regulations, guidelines, master circulars and other delegated provisions issued either by the government of India or by the RBI, especially pursuant to FEMA, in particular regulating FDI into India.
Regulations issued by India's securities markets regulator, the Securities and Exchange Board of India (SEBI), govern and regulate private equity investments into a listed entity, such as:
the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018;
the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011; and
the SEBI (Alternative Investment Funds) Regulations, 2012.
In relation to the due diligence processes and reviews typically conducted in connection with and prior to the conclusion of private equity transactions, the laws typically relevant include all labour laws, environmental laws and rules providing for necessary registrations with various governmental authorities, subject to the industry or field in which the target carries out its business and operations.
While transactions arising from heightened private equity and venture capital interest, and more recently debt fund interest, in Indian industry continue to increase, the governance of such transactions is also changing as the industry grows. This includes regulations in relation to anti-competition, tax exemptions and benefits, and prohibition of stock manipulation. One would do well to consider sectors that have advanced significantly as a result of the COVID-19 pandemic and its regulatory and economic repercussions, such as robotics and automation, other deep technology entities, online education and education more broadly, healthcare and medical – all of which are now more relevant than ever before.
In closing, two specific aspects appear to impact on the maximisation of opportunities while managing potential issues or limitations in the Indian context:
the need for both private equity investors and targets to manage more effectively, for their respective benefit, both the due diligence and the disclosure processes, in order to identify, address and contain or adjust pre-existing liabilities and especially any pre-existing unknown risks that may subsequently arise; and
the need to construct systems, processes and mechanisms within the target that promote growth while being mindful of good corporate governance and transparency in operations and outcomes, so as to unlock value in a way that is sensitive to all stakeholders, internally and externally, in the wider society and polity.
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