End of another exit option for private equity investors?

Over the past couple of years, India has witnessed the maturing of various private equity investments of the 2006-07 vintage, which has necessitated finding a suitable exit for such investors. At a time when global private equity investors have started to doubt their reasons for making investments in India, another disappointing move by the Indian regulators (even if well-intentioned) has potentially compromised the availability of “reverse merger” as an exit option for private equity investors.

With the existing question marks over the enforceability of options and the restrictions posed by the buyback regulations and their tax implications, the flexibility and options available to private equity investors to effect a suitable and convenient exit are being tested. Listing of target companies (often with such investors constituting the single largest shareholder class pre-listing) is also not in vogue as a conducive market sentiment has been missing.

Recent example

One of the exit choices available to investors is by way of a “reverse merger” of a listed company with an unlisted company, thereby achieving listing of the merged company without having to undergo the exhaustive initial public offering process. While this exit mechanism has not been tested extensively, a recent example is TPG Capital’s sale of a 10% stake in Shriram Transport Finance (STF). To facilitate TPG’s partial exit, the STF board in December 2011 approved a plan to merge with its unlisted parent, Shriram Holdings. After the merger, TPG owned a 20% stake in the merged entity which got listed and allowed for the 10% stake sale by TPG.

Aakash Choubey is a partner and Ashish Razdan is a principal associate at Khaitan & Co. The views of the authors are personal, and should not be considered as those of the firm.