Deal or no deal – 2017: transaction trends and regulatory reforms

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The year 2017 was an interesting, action-packed one. The country witnessed the impact of significant macroeconomic reforms such as demonetisation and implementation of the Goods and Service Tax.

Steady inflow of foreign investments into the country continued, and there were a number of big-ticket transactions (eg Alibaba’s investment in Paytm, Warburg Pincus’ investment in PVR Ltd, SoftBank’s investments into Oyo, Paytm and Flipkart, and Carlyle’s investment in Delivery, to name a few).

The country witnessed the impact of significant macroeconomic reforms such as demonetisation and implementation of the GST.

Statistically speaking, at the close of the third quarter of 2017, FDI inflow was $25 million, with a growth of approximately 17 percent over the corresponding period last financial year. Mauritius, Singapore and Japan topped the list of countries investing in India as of September, 2017.

From a VC-PE activity perspective, 2017 also recorded a six-year high in deal values, with deals worth approximately $48 billion, up 34 percent over 2016. According to data published by Venture Intelligence, ‘private equity firms invested about $17.6 billion in Indian companies in the first nine months of 2017, sailing past the previous high of $17.3 billion in 2015.’

Despite the remarkable rise in deal values (owing to the large deals), the volume of deals witnessed a decline this year, with approximately 49 deals, compared with approximately 80 deals last year.

The sectors that remained bullish in 2017 were fintech, digital innovation, IT e-commerce, logistics, infrastructure and life sciences. Within e-commerce, fintech, mobile gaming, and health apps contributed a significant pie in the growth trajectory.

Due to simplification of regulations, relaxation of tax regime and faster exit norms implemented under the Startup India action plan, startups have spearheaded deal volumes with over 330 investments worth $2 billion as of the third quarter of 2017.

While private equity and venture capital funds continued to adopt a prudent approach towards angel to early-stage funding, the market remained buoyant mostly for mid to late stage investments. Fund managers continued to aggressively seek quality assets and utilise dry capital to fund portfolios to grow and scale up.

The calendar year also witnessed steady growth in outbound cross-border transactions. There were a number of exits too, demonstrating good performance of investee companies, and re-affirming investor confidence.

From a regulatory standpoint, the calendar year witnessed significant reforms in every sector of relevance for startups and fundraise generally (such as tax, corporate laws, foreign exchange laws and employment laws).

Notable ones are as follows:

  • Goods and Service Tax: The much-deliberated Goods and Service Tax was implemented in July, 2017. The impact of GST has been different in each industry owing to the sector-specific reforms/taxation regimes that were introduced.
The 'hit' by GST.

The primary objective of GST is to eliminate the cascading effect of multiple layers of taxation and subsequently reduce indirect tax rates in connection with supply of goods or services.

  • Corporate Compliance: In an effort to ease compliance for private companies, but yet bring in a sense of professionalism in the management of corporate affairs, the Ministry of Corporate Affairs introduced a slew of reforms. In particular, the exemptions and secretarial standards made applicable to private companies have further streamlined corporate housekeeping practices, yet giving ample room for operational flexibilities.
  • Foreign exchange laws: Foreign exchange laws have generally been rationalised and a consolidated regulation relating to FDI transactions (FEMA (Transfer or Issue of Securities to Persons Resident Outside India), Regulations, 2017) have been issued by the RBI. The laws now enable various transaction structures for early stage investments (such as issuance of convertible notes).

Also, the Foreign Investment Facilitation Portal (FIFP) (substituting the erstwhile Foreign Investment Promotion Board) was launched to fast track the process of obtaining approvals for foreign investments under the extant FDI Policy. The FIFP is the new online single point interface of the Government of India for investors, to facilitate clearance of applications which are under the government approval route.

  • Labour Reforms: India is at the helm of multiple labour reforms. The Government undertook various legislative, administrative and e-governance initiatives in 2017 to generate employment, ensure inclusiveness among workforce and facilitate ease of doing business.

Notable reforms are:

  • Anti-sexual harassment laws / SHe Box Platform - In support of the world-wide #MeToo campaign on prevention of sexual harassment against women, the Ministry of Woman and Child Development launched an online compliant management platform known as the sexual harassment electronic box (SHe Box). SHe Box provides a single window access to every woman to facilitate registration of a complaint related to sexual harassment at workplace (in addition to the existing mechanism to channelise complaints to the internal complaints committee of every organisation). Complaints filed on SHe Box portal may be monitored by the Ministry of Women and Child Development, for more effective redressal.
metoo
In support of the world-wide #MeToo campaign
  • Maternity Benefit Laws – With a view to have a more women-friendly workplace, paid maternity leave has been enhanced from 12 weeks to 26 weeks. Establishments employing more than 50 employees are required to provide crèche facilities for their employees.
  • Ease of compliance – In order to save costs and ease compliance, the Ministry of Labour and Employment notified the Ease of Compliance Rules in 2017, as regards the notification process under various labour laws (such as filing of various forms and maintaining registers).

To put it simply, going forward, instead of filing or maintaining 56 registers/forms, you will only need to file five common forms/registers under nine various central labour laws. The most important one in this bucket is, of course, the ones relating to contract labour – which invariably every growing business depends upon. This is a great step forward, although the dichotomy of central and state level compliance mechanism is yet to be done away with!

  • Regulations relating to P2P Lending Platforms: Putting to rest the humdrum regarding regulating peer-to-peer lending platforms, the RBI notified master directions on ‘Non-Banking Financial Company – Peer-to-Peer Lending Platforms’ in October, 2017.

Accordingly, all P2P platforms providing loan facilitation services will be classified as non-banking financial companies, and must comply with various stringent requirements such as registration with the RBI, net owned fund obligations, caps and floors on lending / borrowing transactions that can be facilitated on the platform, and maintenance of escrow accounts, to name a few.

Given the harshly conservative approach taken by the RBI, this regulation has managed to raise some noise among P2P lenders, and has been viewed as fairly draconian.

India continues to be one of the fastest growing economies and has emerged as an attractive business market, and we believe that 2018 will continue to be equally fascinating from a start-up / PE-VC activity perspective.

(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)

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Authors
Ashwini Vittalachar
Ashwini has more than a decade’s experience in advising on private equity and venture capital transactions; as well as acquisitions and joint ventures.  She is a partner at Samvād Partners and has been instrumental in the establishment of the New Delhi office of the Firm.   Recently, she has advised on several transactions in the e-commerce sector, clients being both VC funds as well as target companies/promoters.  Her expertise extends not just to deal negotiations, but also to general corporate/commercial, employment and advisory matters. Ashwini Vittalachar has played a key supporting role in many of the firm's recent M&A deals.  This has included acting on cross-border M&A deals in the life sciences and automotive sectors.   ‘Ashwini is singled out by clients for her "communication skills, quick understanding of key business issues, and negotiating ability." You can connect with Ashwini on LinkedIn.

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