India Awards: Legal Advisor of the Year – Khaitan & Co

Haigreve Khaitan, a partner at Khaitan & Co., is faced with explaining the implications of these changes to clients. The lack of clarity can be frustrating and it erodes investor confidence.

"There is no stable, long term market in terms of regulation and tax regimes - these things have to be guaranteed," Khaitan says. "The regulators lack understanding because there is not enough consultation with the industry. There should be more open dialogue and participation from all interested parties."

The month-long confusion over the use of put and call options on foreign direct investment (FDI) transactions was a classic case of poor communication.

The Department of Industrial Policy and Promotion (DIPP) had ruled that any investment instruments with built-in options could not be used as part of FDI - only equity shares that are fully, compulsorily and mandatorily convertible preference shares would qualify.

Investments made by offshore private equity funds often include a provision that allows the fund to exit through a buyback or a put and call option. Under the new interpretation, such equity instruments were considered external commercial borrowing (ECB), which is subject to caps and limits.

"The problem was we didn't know what the regulators had in mind," says Khaitan. The DIPP's principal target was supposedly real estate transactions that met FDI requirements but were in fact ECBs and private equity investors were merely caught in the crossfire. The ruling came into effect on October 1 but was revoked within a month following petitions from the industry.

While the regulatory situation is far from ideal, progressive has still been made in 2011. For example, the Securities & Exchange Board of India's (SEBI) increase in the ownership threshold that automatically triggers a takeover bid for a company from 15% to 25% offers PE investors more leeway.

Khaitan is similarly positive about the Indian private equity industry as a whole, arguing that a tougher fundraising environment should translate into better valuations from an investor perspective. He also thinks recent corruption and governance concerns can be overcome.

"The India investment story has been dampened in recent months but as long as it remains intact there should be more than enough capital."

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