India Awards: Legal Advisor of the Year – AZB & Partners

Despite a dismal macroeconomic outlook for India, AZB & Partners had a busy year on the M&A front in 2012, although ongoing uncertainty regarding the country's legislation on foreign direct investment (FDI) has hampered private equity deal flow somewhat.

"At the beginning of the year we thought it wouldn't be an exciting year for corporate lawyers in India as things had been very sluggish in both Europe and America, " says HardeepSachdeva, a partner with AZB in Mumbai. "However, contrary to our expectations, things turned out to be very good."

Sachdeva says AZB had been kept busy by virtue of fresh inflows of foreign capital to certain sectors, while in other areas transactions have been driven by consolidation. One deal that stands out is Mitsui Sumitomo Insurance's acquisition of New York Life's 26% stake in a joint venture with Max India, a multi-business corporate dealing in healthcare and life insurance, for INR27 billion in April. AZB was the Japanese player's legal advisor.

The law firm's most significant PE deal was Warburg Pincus' acquisition of Indian non-banking financial company (NBFC) Future Capital Holdings. The US private equity investor, a longstanding client of AZB, acquired a 68.4% stake in the business for $136 million from Pantaloon Retail, a subsidiary of Future Group.

VembuVaidyanathan, Future Capital's managing director who owns 10% of the business, describes the deal as the largest ever management buyout in India.

However, Sachdeva notes his firm has been dealing with fewer private equity deals compared to last year. "I think it is combination of several factors," he says. "The mood among investors in Europe and America is already not very good but the fact that there have been quite a few policy ambiguities in India has further affected investor sentiment."

One of these ambiguities has been the use call and put options on FDI transactions. This time last year the Department of industrial Policy and Promotion (DIPP) had ruled that any investment with a built-in option could not be used as part of an FDI transaction.

Investments made by offshore PE funds often include a provision allowing the fund to exit through a buyback or a put and call option. Under the interpretation, these equity investments were considered external commercial borrowing (ECB), which is subject to cap and limits. The DIPP's ruling was revoked within a month following petitions from the industry, yet it remains a contentious issue.

"Over the last year there has been a big divide between DIPP and the Reserve Bank of India (RBI) about the enforceability of put options and call options in any investment agreement." says Sachdeva. "While the view of DIPP has been to withdraw the ruling, the RBI's view hasn't changed and it has been sending notices to Indian companies informing them of this."

Sachdeva is convinced that ambiguity over this rule has led to some private equity deals abandoned, adding that among those affected are companies in the online retail sector. "This sector was previously been booming, with some 9-10 companies started by India entrepreneurs thanks to angel funding and PE investment. Now it seems the sector has taken a step back as it has been left behind by this new policy."

Another regulatory issue on foreign private equity firms' radar is the General Anti-Avoidance Rules (GAAR), promulgated by the Indian government to crack down on investors who use treaty jurisdictions for tax avoidance rather than business purposes.

However, Sachdeva is encouraged by the government's decision to postpone GAAR for one year as it will give PE players more time to prepare themselves. He notes that GPs aren't looking to avoid clear statutes pertaining to tax - they just want clarity on where they stand with regard to GAAR and reassurances that it will be implemented in a fair and just manner.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• Advisory
• South Asia
• India
• AVCJ Awards