PE Investments: Exit Strategies
Ritwik Sahay
Partner
Jus Remedium
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SESSION OVERVIEW
Exit Strategies
General Observations
Exit by Outright Sale
Exit by Buy-Back / Capital Reduction
Exit by IPO
Exit by Liquidation
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EXIT STRATEGIES
Exit by Outright Sale
Exit by Buy - Back / Capital
Reduction
Exit by IPO
Exit by Liquidation
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GENERAL OBSERVATIONS
Types of Securities
Equity
•
•
Equity Shares
Quasi Equity:
CCD/ CCPS
Typical SHA Provisions
Debt
•
•
Shareholder
loans;
OCPS/ OCD/ RPS
Non-Convertible
Debentures
•
•
•
•
Affirmative rights and other shareholder rights and
covenants.
In case of IPO, valuation thresholds, consent rights
and re-instatement provisions if IPO fails.
Waterfall for liquidation events like sale, asset
sale, IPO, winding-up.
PE investor not treated as ‘promoter’.
Lock-in Restrictions
•
Optionality Clauses:
SEBI – 1 year lock-in (for public listed & unlisted companies).
•
Pre-IPO Holding Period: Shares offered for sale in IPO to have been held for 1 year prior to filing of DRHP.
•
Post-IPO: 1 year lock-in for shares not being offered for sale. Not applicable on shares held by VCF/AIF/FVCI
for 1 year prior to filing of DRHP.
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GENERAL OBSERVATIONS (Contd’)
Valuation
•
Equity & Quasi-equity: Fair value
calculated in accordance with any
internationally accepted pricing method.
Companies Act 2013 – Key Provisions
•
•
•
•
•
Differential Voting Rights – Private companies
(previously exempted) now covered under restriction
on issue of equity with DVR; requirement of track
record of distributable profit for last 3 years; equity
with DVR not to exceed 26%.
Restriction on transfer of securities - any contract or
arrangement in respect of restriction on transfer of
securities of public company is enforceable as a
contract.
Insider Trading - Restriction on insider trading
extended to private companies; prohibition on key
managerial persons, directors or any other officer of the
company
having
non-public
price
sensitive
information, from dealing in company’s securities.
Entrenchment - Articles of companies may contain
provisions of entrenchment permitting alteration of
specified provisions of articles only if more restrictive
conditions than those applicable on special resolution
are complied with.
Bonus shares – May be issued out of (i) free reserves;
(ii) securities premium account; or (iii) capital
redemption reserve account. Cannot be issued (i) out of
reserves created from revaluation of assets; and (ii) in
lieu of dividends.
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OUTRIGHT SALE
Put Option
•
Structured in equity shares, CCPS and
CCDs through shareholders agreement.
•
Regulated exit price (as per internationally
accepted valuation method), subject to
lock-in restriction.
•
No assured return at exit
Third Party Sale
•
•
R&W typically limited to title of shares.
Exit price as per RBI pricing guidelines.
•
•
Subject to lock-in restriction.
Could be subject to pre-emptive rights - ROFR, ROFO,
Drag and Tag as structured in SHA.
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Direct and indirect transfer - discussed subsequently.
Tax Implications
Redemption
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CRPS/NCDs may be redeemed on the
terms of issuance.
•
Returns on CRPS/NCDs as redemption
premium.
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For redemption – Company should have
profits available for distribution or
proceeds of fresh issue of shares.
•
Creation of DRR for redemption of NCDs.
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Gain on transfer of securities attracts capital gains tax.
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Taxability as short term and long term capital gains; depends
upon holding period of securities; LTCG on sale of listed
securities on stock exchange are exempt and is subject only
to securities transaction tax.
•
GAAR provisions - empowers the Revenue with
considerable discretion in taxing 'impermissible avoidance
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arrangements', denying tax treaty benefits.
ASSET SALE
• Generally no VAT/sales tax.
• Integral liabilities (statutory and
employees related cannot be excluded).
• Sale of separate undertakings to
different buyers possible.
• Movable transferred by delivery;
Immovable by conveyance deed.
• Generally purchaser beneficial.
• Liabilities to watch out for.
Slump
Sale
• Incidence of sales tax/VAT.
• Cherry picking of assets without
liabilities possible.
• Apportionment of values important
– exemption available for capital
gains.
• Ability to exclude liabilities.
• Preferred by sellers if business is
less than 3 years old.
• No liabilities.
Itemized
Sale
• Court driven [RIL demerged
Reliance Infrastructure in 2008].
• Transfer of licenses, contracts –
easy.
• Tax neutral as share swap not taxed.
• Creditor/ shareholder/ employee
objections to be watched out for.
• Administrative burden but ease of
transfer of licenses/contracts.
Demerger
Common Issues
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•
Stamp duty exemption:
If seller and purchaser more than 90% common.
Non – compete:
Limited enforceability.
Only within reasonable time and geographical limits in case of transfer of goodwill.
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PRIMARY MARKET EXIT
• Relevant in PIPE deals, or when as part of staggered exit investors sell
shares post IPO.
• Acquisition of more than 25% of equity shares/ voting rights in listed
target company could trigger mandatory tender offer for the acquirer.
Both direct and indirect acquisitions trigger mandatory tender offer.
• Minimum tender offer size - 26% of the total shares of the target
company.
• Tender offer price regulated – highest of negotiated triggering
transaction price, or market determined average price.
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BUY-BACK
Funds
Key
Considerations
Pros
• Out of free reserves, securities premium account, or proceeds of earlier issue
of difference kind of securities.
• Capped at 25% of the total paid-up equity share capital and free
reserves (including amounts in share premium account).
• Post buy-back, ratio of secured and unsecured debt should not be
more than 2 times the aggregate of the paid up capital and free
reserves.
• successive buy-back offer cannot be made by the Company within
a year of the first offer – limits return realization.
• Selective buy-back offer not possible, though other shareholders
can forego their entitlement.
• Relaxed procedural requirements.
• No court involvement.
• Preferred over capital reduction.
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CAPITAL REDUCTION
Requires shareholder’s approval and court
sanction.
Companies can undertake selective capital
reduction.
Key Considerations:
Court approval process prolongs exit timelines and
could bring uncertainty.
Courts look into target company’s ability to
discharge debt and creditors’ concerns.
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IPO: OFFER FOR SALE
Assesses
value of the
investee
company in
the market
IPO – PE
Investor
Why
IPO?
Brings
credibility:
Encourages
further
investment
in PE fund
Markets
perking up
anticipating
economic
reforms
To be compliant with Companies Act,
2013 and SEBI (Issue of Capital and
Disclosure Requirements) Regulations
2009
Long
term
capital
gains
exemption and concession on
short term capital gains for
shares sold on IPO
Listing on domestic exchanges or
international exchanges
Exit through: offer for sale; Condition:
lock-in of non-promoter holding and
other general conditions
Timelines: 6-8 months
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LIQUIDATION
Requires shareholder’s approval and court sanction. Court
sanction means prolonged exit timelines.
Priority in payment of proceeds depends upon nature of
security held. Priority payment to tax authorities, employees
and creditors.
Given the procedural requirements, and that post
completion the target company will cease to exist, not as
preferred as other exit routes – though good to have as part
of overall mechanism.
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THANK YOU
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OFFICE:
16/10, Kalkaji,
New Delhi-110019, India.
+ 91 11 49059341
[email protected]
www.jusremedium.in
KEY CONTACTS:
Ritwik Sahay, Partner
e-mail: [email protected]
Mob: 91 9999759469
Sandeep Bisht, Partner
e-mail: [email protected]
Mob: 91 9891982555
Hemant Solanki, Partner
e-mail: [email protected]
Mob: 91 9810770374
Doyel Sengupta Mattoo, Partner
e-mail: [email protected]
Mob: 91 9871877244
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