1. PRIVATE EQUITY
Concepts AndTypes

2. MEANING
▪Investment into private companies
not quoted on stock exchange.
▪Firms invest in underperforming
companies with high growth
potential.
▪Can be used for development of
new products and technologies,
expand working capital.

3. CHARACTERISTICS
▪ Limited liquidity.
▪ Investment follows high risk and high
return objective.
▪ After the minimum investment period,
the private equity fund can sell the stakes
of the company to realize the gain.
▪ Private equity market is not transparent.

4. ILLUSTRATION
▪ A private equity fund XYZ wants to
invest in a Start Up Company ABC Pvt
Ltd, incorporated in 2014, which is a food
delivery service, operating mainly from
7pm to 7am, with a primary focus on
students and night shift office goers
(BPOs). ABC Pvt Ltd is planning on
expanding its operations to App based
services and larger delivery area, and is
looking for investments for the same.

5. Types of Private Equity
Venture
Capital
Leveraged
Buyout
Angel
Investors
Growth
Capital
Mezzanine
Capital

6. VENTURE CAPITAL
▪ Money invested in new companies.
▪ The companies are startup companies
which have difficulty in attracting
finance.
▪ Different stages in which the venture
capital funds finance companies:

7. Seed stage
–
Financing
for research
and
developmen
t of initial
idea.
Start-up
stage –
Finance for
product
developmen
t and initial
developmen
t.
Expansion
stage –
Finance for
growth and
expansion
Replaceme
nt capital –
The venture
capital
funds
purchase
shares from
another
investor

8. ANGEL INVESTORS
▪ They are high net worth individuals.
▪ Invest in new idea and help bring the
new idea into the market.

9. LEVERAGED BUYOUT
▪Investments consist in acquiring a
stake in a private company with an
intention to exercise influence on
the company.
▪Leverage - partly financed with a
certain amount of debt in addition
to equity.

10. GROWTH CAPITAL
▪ Investment in relatively mature
companies that are looking for capital
to expand or restructure operations,
enter new markets or finance a
significant acquisition without a
change of control of the business.

11. MEZZANINE CAPITAL
▪ Hybrid of debt and equity financing.
▪ It is basically debt capital that gives
the lender the right to convert the
loan into equity in case of non-
repayment in time and in full.

12. LEGAL REGIME

13. Laws regulating private equity in India are:
A) SEBI-
▪ SEBI (AIF) Reg. 2012
▪ SEBI (Investment Advisors)
Reg. 2012
▪ SEBI (FVCI) Reg.2000
▪ SEBI (SAST) Reg. 1997
C) FIPB
B) RBI
▪ FEMA, 1999
▪ Transfer or Issue of Security
by a Person Resident
Outside India, Regulations,
2000
D) IncomeTax,Act, 1961.

14. SEBI (AIF) Reg. 2012
Private equity funds placed under category II .The various
requirements as per the regulations are :
PARTICULARS REQUIREMENTS
Registration Any fund established in India
Form Trust, LLP, company
Investment in companies incorporated
outside India
Permitted (subject to RBI guidelines)
Maximum investors 1000 (per scheme)
Investment in associates Permitted only with approval of 75% of
investor by value of their investment
Investment in other CategoryAIF In Category I AIF and Category II AIF
Investment in other Fund of Funds Not Permitted

15. PARTICULARS REQUIREMENTS
Leverage / Borrowings Not permitted except for meeting temporary funding
requirement subject to leverage of not more than 30
days, not more than 4 occasion in a year and not more
than 10% of the corpus
Tenure Minimum 3 years, may be extended upto 2 further
years by approval of 2/3rd unitholders.
Investment in one investor company Shall not invest more than 25% of its investible funds
in one investee
company
Tax “PassThrough” The income from such funds will not be exempt under
capital section 10(23FB) of the IncomeTax Act, 1961
Taxation of such hands would depend on the legal
status of the fund i.e. company limited liability
partnership or trust.

16. PARTICULARS REQUIREMENTS
Valuation AIF must disclose to the investors the valuation procedure and the
methodology for valuing assets.
Valuation should be carried out by an independent valuers once in every 6
months.This period can be extended to one year with the approval of 75%
of the investors by value.
Reporting Within 180 days from the end of the year, an annual report is required to
be presented to the investor.
merchant banker Category II Alternative Investment Funds may enter into an agreement
with merchant banker to subscribe to the unsubscribed portion of the
issue or to receive or deliver securities in the process of market making
underChapter XB of the Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements) Regulations, 2009.

17. SECURITIES AND EXCHANGE BOARD OF INDIA
(INVESTMENT ADVISERS) REGULATIONS, 2013
 Rule 4 of the said regulation exempts alternate investment funds to comply
with its provisions.
SEBI (FOREIGNVENTURE CAPITAL INVESTORS)
REGULATIONS, 2000
 Private equity is no more in the same category of venture capital as
distinguished by the Alternate investment fund regulations,2012 it is
ambiguous to comment whether the provisions under the said regulations
would be applicable or not

18. SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND
TAKEOVERS) REGULATION, 1997
 Rule 29 requires disclosure when acquisition is done in the target company for
more than 5% to disclose it to SEBI to be duly filled as per their form.
RESERVE BANK OF INDIA
 As empowered by FEMA,1999 RBI issuedTransfer or Issue of Security by a
Person Resident Outside India, Regulations, 2000 to regulate foreign
investments in India.As per this foreign investment is allowed in private equity.
FOREIGN INVESTMENT PROMOTION BOARD (FIPB)
 Prior approval by FIPB is required.

19. INCOMETAX, ACT, 1961
 The private equity funds are no longer a part of venture capital funds and
so will not be exempted under section 10(23FB) of the IncomeTaxAct,
1961.

20. Private Equity Fund
Business Structuring andTaxation aspect

21. Business Structure
▪ While structuring an international or
multi-jurisdictional
transaction, care should be taken to
avoid ‘double taxation’.
▪ The structuring can be influenced by
tax as well as non tax factors.
▪ For taxation purpose, it is important
to understand the taxation systems
of both the countries
▪ It should also consist of the
domestic internal tax systems of the
countries involved in the transaction
and the manner in which the
general rules embodied in such
systems are affected by the
juxtaposition of the other systems
▪ It may also be necessary to
include some non-tax factors like
exchange controls, political
environment, investment
incentive programmes, legal
systems etc. in the database.

22. DOUBLE TAXATION
▪ ‘DoubleTaxation’ has been
defined as the "the imposition of
comparable taxes in two (or
more) states on the same tax
payer in respect of the same
subject matter and for identical
periods.
▪ The main reason for
the double taxation to occur is
that the taxpayer is a resident in
one country but has his
source of income in the other
country.
▪ Double taxation could also arise if
the taxpayer is
resident in more than one country
or has source of income in more
than one country.
▪ Different countries use different
criteria for taxation e.g. residence,
control and management,
source, situs of property,
domicile, etc. For these reasons, it
becomes essential to use and
to ensure that the taxpayer is
entitles to the benefits of DTAA
between the countries involved
in the transaction.

23. Another Important point to be considered in this aspect is that:
Whenever a national or resident of a third country avails of the benefit of
the DTAA between two countries, by setting up a conduit resident
company or otherwise, is this kind of structuring legal?
Structuring is often looked
with suspicion because in the
veil of structuring we are
basically using offshore
structure to minimise the tax
implications with an intricate
interplay of domestic tax
system and a DTAA.
IS STRUCTURING LEGAL ?
But it is important to
understand that while
domestic tax is an obligation,
foreign tax is cost.Therefore,
a tax payer is free to use all
legal means to organize his
affairs in a manner so as to
minimize this cost.

24. A “conduit company” is a holding company formed to
avoid paying tax on income to two different countries. If the home nation of
a business does not have a tax treaty with the country where a subsidiary is
located, the business might be required to pay tax on the same income to both
countries. To avoid this situation, a company may set up a holding company in a
country that has tax treaties with both nations. This conduit company would
serve as a pipeline for income from the subsidiary to the patent company.
The issue ofTreaty shopping raises the question of interpretation of
DTAAs
. The OECD interpretation of this issue is that 'conduit' company is a
resident of that country and has to be granted benefits of DTAA.
ISTREATY SHOPPING LEGAL?

25. ISTREATY SHOPPING LEGAL? (contd.)
▪ But it is not always that treaty shopping is legal or a conduit
company has to be given away the benefits of DTAA
between two countries.
▪ Many DTAAs include anti-abuse or anti-treaty shopping
provisions which prevent the non- treaty partner country
residents to take advantage of the DTAA.
▪ For example, the India-U.S. tax treaty provides an article on
'Limitation of Benefits', which restricts the benefits of the
DTAA only to residents of both India and the U.S.
▪ Similar clause has been inserted in the India-Singapore
DDTA.

26. Offshore Fund Vehicles
Tax Haven Countries :The
best destinations to
strategize setting up
private equity fund
vehicles?
▪ Tax havens are those
countries which have nil or
low rate of taxation.They
are often used to route a
transaction between two
countries with a high rate of
taxation. Many countries
have announced a list of
countries which they
consider as 'Tax havens'.
Examples ofTax Haven Countries:
Singapore
Mauritius
Ireland
Netherlands
United Arab Emirates
And many others………

27. Mauritius
 Mauritius has emerged as a favorite
destination for overseas investment
into Indian corporates, currently
accounting for about 40 % of total
foreign inflows into India.
 Mauritius has special relevance
because of the BIPA (Bilateral
Investment Promotion and Protection
Agreement) between India and
Mauritius. Currently, India does not
have a BIPA with countries such as the
US or the Cayman Islands.
 The BIPA provides a number of benefits
including fair and equitable treatment,
compensation for losses, protection
against expropriation, ability to
repatriate capital and returns, efficient
dispute resolution framework, etc.
 The tax treaty between Indian and
Mauritius includes a provision that
exempts a resident of Mauritius from
Indian tax on gains derived from the sale
of shares of an Indian company.
Presently, the capital gains tax relief
under the India- Mauritius tax treaty
continues to be available

28. SINGAPORE
▪ Favorable Geographical position
and Socio-CulturallyAccepted
(security or otherwise)
▪ Ease of doing Business,
Transparency in Business
Governance, Regulatory
Transparency, Financial stability,
openness
▪ Easy to list a fund on the Singapore
stock exchange
▪ The availability of talent pool of
investment professionals makes it
easier to employ / relocate
productive personnel in Singapore
▪ India-Singapore DDTA provides no
tax on the capital gains however
subject to certain conditions
known as LoB
▪ India grants underlying tax credit
(of taxed paid by Singapore Sub) if
the Indian shareholder holds more
than 25% of share capital.
▪ India also grants credit forTax
Spared by SingaporeGovernment
in certain cases. Singapore also
grants credit forTax Spared by
Indian Government u/s. 10A, 10B,
80-I, 80-IA or like provisions

29. Ireland
▪ Ireland is a tax-efficient
jurisdiction when investment into
the Indian company is in the form
of debt or convertible debt
instrument. Interest, royalties and
Fees forTechnical Services (FTS)
arising in India and paid to an Irish
resident may be subject to a lower
withholding tax of 10% under the
Ireland India tax treaty.
▪ This is a significant relief from the
withholding under Indian
domestic law which can be as high
as 42% for Interest and around
27% for royalties and FTS.
▪ Ireland can, therefore, be
explored for debt funds or real
estate funds that provide
structured debt and also film
funds that provide production
financing for motion pictures
where cash flows received from
distributors could be in the
nature of royalties.
However, the characterization of
income would need
to be assessed on a case to case
basis.

30. NETHERLANDS
▪ Netherlands emerges as an efficient
jurisdiction for making portfolio
investments.
▪ In certain situations, the India
Netherlands tax treaty provides relief
against capital gains tax in India (that
follows a source based rule for
taxation of capital gains) i.e. Gains
arising to a Dutch resident arising
from the sale of shares of an Indian
company to non resident buyer would
not be taxable in India.
▪ Such gains would be taxable if the
Dutch resident holds more than 10%
of the shares of the Indian company in
case of sale to Indian residents.
▪ For a Dutch entity to be entitled to relief under
the India-Netherlands tax treaty, it has to be
liable to tax in the Netherlands except for Dutch
Limited Liability Companies, public companies
or Cooperatives investing or doing business in
India.
▪ In the case of KSPG Netherlands [2010] 322 ITR
696 (AAR), even a conduit company is allowed
to reap the benifits of treaty shopping and
therfore cannot be exempted fromthe benifits
of the Netherlands- India tax treaty.

31. UNITED ARAB EMIRATES
 The DFSA regulations governing DIFC funds are based on
best practice from more established fund jurisdictions,
thereby bringing a level of familiarity and comfort to
investors.
 DIFC funds are classified asGCC (Gulf Cooperation
Council) vehicles.This enables them both to take
advantage of certain advantageous tax treatment
between the six members of the GCC, and to mitigate
local ownership and asset specific investment restrictions
that exist in the region with respect to "non-GCC"
investment.
 On the basis of current law and practice, any investment
fund established within the DIFC (and indeed, any
company incorporated within the DIFC) will be exempt
from any DIFC income, capital gains and corporation tax
for a guaranteed period of 50 years from the date of
enactment of DIFC Law No. 9 of 2004.This zero rate of
tax also extends to transfers of assets, profits or salaries
in any currency to any party outside the DIFC for the
same period of time
 The Dubai International Financial
Centre ("DIFC") has provided an
attractive alternative for
domiciling a collective instrument
vehicle within the Middle East
and North Africa
 It free zone established within
Dubai, in the UnitedArab
Emirates ("UAE"), with its own
laws, regulations, court systems
and, critically for those looking to
establish a fund here, its own
regulatory authority, the Dubai
Financial Services Authority
("DFSA").
 In most circumstances, DIFC
entities benefit from the UAE's
extensive, and continually
expanding, double taxation treaty
and agreement network

32. Tax Pass through for Alternative
Investment Funds (AIFs)
▪ The Budget 2013 through the
AIF Amendment Regulations
2013 brought tax pass through
status to category I of the AIFs
meaning that the income is tax
exempted at the fund level and
is taxed in the hands of the
investors.
▪ Category II or Category IIIAIFs
will be taxed according to the
structure of the fund
▪ Therefore to indirectly get
the tax pass through
benefits, investors started
structuring their funds in
the form ofTrusts.
▪ Under the IncomeTaxAct in
India, in case of business
trusts, pass-through may
be claimed in case the
trust is a determinate,
irrevocable trust with
several riders

33. InternalTax Compliances to be fulfilled?
INCOMETAXACT, 1961:
▪ Section 9 (1) (i) of the IncomeTax
Act, together with the recent
judgement of theVodafone
International Holdings by the SC
cleared the position regarding that
a share is legally situated at the
place of incorporation of the
company.Therefore while the
shares of an Indian company would
be considered situated in India, the
shares of a company incorporated
outside India
would ordinarily be viewed as
situated outside India.
▪ This position of law has now
completely changed amended
through the insertion of
Explanation 5 of theTax Act
through the insertion of
Explanation 5.
▪ Therefore now, where the shares of
an offshore company are deemed
to be capital assets situated in India
under Section.9(1)(i), the entire
gains arising of such transfer would
be subject to the charging
provisions of the Act, regardless of
the extent to which such shares
may also derive their value from
assets and revenue abroad

34. The SEBI (Alternative Investment
Funds)(Amendment) Regulations,2015
▪ However the FinanceAct,
2015 which propose again
to amend the AIF
Regulations, has now finally
brought in some clarity
related to the taxation
aspect of these AIFs.
▪ The bill has inserted a new
chapter, Chapter XII-FB has
been inserted in the Income
Tax Act, which provides the
provisions pertaining to
taxation of income of such
funds.
▪ However this chapter is
applicable only to Category
I and Category II AIFs
▪ It provides a tax pass
through structure to these
AIFs

35. DUE DILIGENCE BY A
PRIVATE EQUITY FUND
PRE INVESTMENT INVESTIGATION

36. WHAT IS DUE DILIGENCE
▪ “Due diligence” is an analysis and risk
assessment of an impending business
transaction. It is the process by which
confidential legal, financial and other material
information is exchanged, reviewed and
appraised by the parties to a business
transaction and is done prior to the
transaction.

37. IMPORTANCE OF DUE DILIGENCE
▪ Due diligence is used to investigate and evaluate a
business opportunity. It helps the investor take an
informed investment decision and mitigate risks
associated with the business transaction.
▪ Due diligence is designed to protect the interests
of the investor by providing objective and reliable
information on the target company before making
any written commitments.

38. OBJECTIVE OF DUE DILIGENCE
▪ The objective is to allow the investor to consider the
following options, considering the facts found in the
course of due diligence:
I. Proceed with the investment
II. Solving of problems uncovered
III. Adjusting the valuation of the investment
IV. Withdrawal of deal

39. STAGES OF DUE DILIGENCE
▪ A due diligence process can be divided into
three stages
(i) Pre Diligence
(ii) Diligence
(iii) Post Diligence

40. STEPS OF DILIGENCE REVIEW
1. Ministry of Corporate Affairs (MCA)Website:
The documents and information gathered in this step include:
i. Company Information
ii. Date of Last Balance Sheet
iii. Director Information
iv. Charges Registered
v. Details of Secured Lenders of the Company & Quantum of Secured
Loans
vi. Certificate of Incorporation.
vii. Memorandum ofAssociation
viii. Articles of Association

41. STEPS OF DILIGENCE REVIEW
(Contd’)
2. Business Aspects
▪ Market Evaluation and Industry
Growth
▪ Competitive Landscape
▪ Monetization Strategy
▪ Capital Requirements
▪ Operational Aspects
▪ Human Resource Aspects

42. STEPS OF DILIGENCE REVIEW (Contd’)
3. Financial Aspects
▪ Book of Accounts and Financial Statements
▪ Projections and Capital Budgets
▪ Analyst Reports
▪ Schedules- inventory, accounts etc;
▪ Tax Structures

43. STEPS OF DILIGENCE REVIEW (Contd’)
4. LegalAspects
▪ Company law – Licenses and Permits
▪ Real Estate
▪ Intellectual Property
▪ Labour law
▪ Contracts and Agreements
▪ Litigation
▪ Insurance
▪ Health and Environment

44. FUND DOCUMENTATION

45. General Introduction
Fund counsels are now required to devise innovative structures and
advise investors on terms for meeting expectations on commercials,
governance and maintaining discipline on the articulated investment
strategy of the fund. All these are to be done in conformity with the
changing legal framework.
Fund documents are an important aspect of the fundraising exercise.
They are also critical to determining whether a pooling vehicle is in
compliance with the applicable law across various jurisdictions.

46. Major Parties Involved
Investor/
Sponsor
Investment
Manager Trustee
Eligible
Investment

47. 1. Private Placement Memorandum
 AIF Regulations require that a concerned fund’s PPM should
contain all material information about the Fund (Regulation 11)
Major Information's like, details of the manager, targeted investors,
fees, investment strategy, risk factors and risk management tools,
conflicts of interest and other related information as deemed fit.
Essential Features.

48. 2. INDENTURE OFTRUST :
 The Indenture ofTrust is an instrument that is executed between a settlor
and a trustee whereby the settlor conveys an initial settlement to the
trustee towards creating the assets of the fund.
 This instrument also provides the various functions and responsibilities to
be discharged by the appointed trustee.
3. INVESTMENT MANAGEMENT AGREEMENT :
 The Investment ManagementAgreement is entered into by and between
the trustee and the investment manager.
 Under this Agreement, the trustee appoints the investment manager and
delegates all its management powers in respect of the fund.

49. 4. CONTRIBUTION AGREEMENT:
The Contribution Agreement is to be entered into by and between each
contributor (i.e. investor), the trustee and the investment manager and, as
the context may require.
The Contribution Agreement records the terms on which an investor
participates in a fund.
This includes aspects relating to computation of beneficial interest,
distribution mechanism, list of expenses to be borne by the fund, powers
of the investment committee, etc

50. 5. Shareholders Agreement
 Transfer Restrictions:
▪ Promoter Lock-in
▪ Right of First Offer (ROFO) / Refusal(ROFR)
▪ Tag-along / Co-sale Right
 Downside Protection: Downside protection essentially means protection when
things go wrong with the investee company.
▪ Bonus Issue
▪ Issuance at Lowest Legally Permissible Price
▪ Adjustable Conversion Prices
 Exit Option:
▪ IPO
▪ ADR / GDR Listing
▪ Strategic Sale
▪ Buyback

51. 5. Miscellaneous Documents:
5.1 INVESTOR SIDE LETTERS :
 Contains specific arrangements with respect to their participation in
the fund.
 Typically, investors seek differential arrangements with respect to
management fee, distribution mechanics, participation in investment
committees, investor giveback, etc.
5.2 AGREEMENTSWITH SERVICE PROVIDER :
 Sometimes, investment managers may enter into agreements with
placement agents, distributor and other service providers with a view
to efficiently market the interests of the fund.

52. At Offshore Level
1. WRAPPER :
A wrapper is a short supplement that is attached to the PPM of a
domestic fund (in case of ‘unified structure’) to help achieve
compliance with the requirements for private placement of the
securities / interests of an offshore fund to investors in jurisdictions
outside India.
2. CONSTITUTION DOCUMENT:
 A constitution is the charter document of an offshore fund in certain
jurisdictions.

53. 3. SUBSCRIPTION AGREEMENT :
 The Subscription Agreement sets forth the terms and conditions of
on which an investor will subscribe to the securities / interests.
 It is the “sales contract” for purchasing the securities (opposite of a
public offering).The subscription agreement sets out the investor’s
capital commitment to the fund and also records the representations
and warranties made by the investor to the fund.
4. ADVISORY AGREEMENT:
 The board of an offshore fund may delegate its investment management /
advisory responsibilities to a separate entity known as the Investment
Advisor or the Investment Manager.
 It contains the general terms under which such investment advisor render
advise in respect of the transactions for the fund’s board.

55. PRESENTATION BY :
GARIMA GOYAL
NEHA BALODHI
LAASYA BHAVISETTI
AKSHAY MADAN
ABHISHEKH GUPTA