Fund-raising: Turbulence for private equity investors

Private equity (PE) investors are typically long-term investors who work with management to build value in an enterprise, as they are looking for a high valuation at the time of exit. When making an investment the PE investor conducts due diligence to gauge the risks involved and ascertain the fair value of the enterprise, and also seeks a wide range of representations and warranties from the company and its promoters.

The Companies Act, 2013, seems to have made an impact on the way PE deals will be executed as the language used in sections 42 and 62 of the act and the compliance requirements introduced by rule 13 of the Companies (Share Capital and Debentures) Rules, 2014, are incongruous in that the rules make no distinction between public issuance and private equity placements.

For a PE fund, an investment decision usually involves both legal and financial due diligence followed by one-on-one negotiations with the company’s promoters. An understanding between them is generally crystallized in a memorandum of understanding or term sheet, succeeded by a share subscription or share purchase agreement coupled with a shareholders agreement. In practice, the promoter/management of the company typically issues a “disclosure letter” regarding the warranties in the above agreements, and often also agrees to indemnify the fund for acts done prior to its entry.

Suhail Nathani is a partner and Yogesh Chande is an associate partner at Economic Laws Practice. Manendra Singh, associate, assisted with research. This article is intended for informational purposes and does not constitute a legal opinion or advice.