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Private Equity in India: The Legal Perspective

A number of laws, policies and regulations come into play where private equity in India is concerned. Legasis partner Apurv Sardeshmukh analyses the legal complexities.

The economic, commercial and industrial scenario today is that which is dependent upon investment or what we may also categorize as fund raising. Investment, which is a driver for growth for a number of industries, may flow into an organization in a number of ways such as private equity funding, angel investments, seed money investments, etc. These investments may vary in nature and in amounts and are regulated as per the applicable laws and regulations.

Private Equity:

In relation to Private Equity, a fund may be established which pools in funds raised by individuals or organizations and further invests them in a wide range of businesses. Investment by way of Private Equity differs from venture capital investment wherein money is generally invested for a stake in the business. The difference is generally in relation to the amount which is invested as well as the stage at which the investment is made. A private equity investment also differs from an angel investment which is an investment which is generally done in start ups.

There exist a number of laws, policies and regulations formulated by the Government and the Legislature which come into play wherein a private equity fund chooses to make an investment or during the course of a private equity transaction. The liability of adhering to these laws fall both upon the Company in which the investment is made and the Private Equity Fund which makes the investment. The laws governing both are discussed below.

Regulatory Framework Governing Private Equity Funds and Transactions:

The Company Accountability:

1) Companies Act, 2013:

Where an investor knocks on the doors of the Company, questions related to how and by what way can the investment be made and in what manner rights can be granted to the investor come to surface. Depending on the manner as mutually agreed upon between the Company and the Investor, the Private Equity Investment is made in a company and accordingly statutory compliances that the companies need to be in line with are ascertained. These statutory compliances can further be sub divided into those which relate to a) the transaction related to the investment and b) other conditions precedents to the investment.

a) Section 42 and Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: Private Placement of Securities other than public issue: Where a Company is willing to raise funds through private placement of securities, the provisions of Section 42 need to be complied with. Private Placement means any offer of securities or invitation to subscribe to securities made to a group of persons selected by the company (other than by way of public offer) through issue of a private placement offer letter and which satisfies the conditions specified in section 42. The process of issuing securities by way of private placement is enumerated below.

Certain condition precedents for Private Placement:

  • The offer or invitation cannot be made to more than 2001 persons excluding Qualified Institution Buyer’s and employees offered securities under Employee Stock Option Plan in a financial year.
  • No fresh offer or invitation under this section shall be made unless the allotments with respect to any offer or invitation made earlier have been completed or the invitation/offer has been abandoned by the company.
  • The value of such offer/invitation per person shall be with an investment size of not less than twenty thousand rupees of face value of the securities.
  • Private placement offer/invitation shall only be made to such persons whose names are recorded by the company prior to invitation to subscribe the securities.
  • Money payable towards subscription of securities be paid through cheque/DD or other banking channels and the application money received shall be kept in a separate bank account in a scheduled bank and shall not be utilized for any purpose.
  • Allotment of securities to be made within 60 days from the date of receipt of application money and if the company fails to do the same the application money needs to be repaid within 15 days with an interest of 12% p.a.

Flowchart: Issuing Securities by Way of Private Placement
Flowchart: Issuing Securities by Way of Private Placement

b) Section 62 and Companies (Share Capital and Debentures) Rules, 2014: Further issue of Share Capital: Section 61(1)(a) confers certain pre-emptive rights on the existing shareholders. However, Section 62(1)(b) and (c) allow issuance of further shares to employees and other persons subject to certain conditions prescribed in the Section and the Rules mentioned above. Allotment can be made on preferential basis and any other manner subject to certain conditions such as:

  • Approvals: The issue shall be authorized by a special resolution and in the articles of association of the company. Further, certain disclosures shall be made in explanatory statement to the notice of the meeting.
  • - Valuation: Price of such shares, except for listed companies, shall be determined by the valuation report of a registered valuer. Where convertible securities are offered with the option to convert them into equity shares, the price of the resultant shares has to be determined beforehand on the basis of valuation report. Further, in case of allotment of shares or other securities for consideration other than cash, the valuation of such consideration shall also be done by a registered valuer.
  • Allotment: Securities allotted shall be made fully paid up at the time of their allotment and the allotment shall be complete within 12 months of passing the special resolution. In case the process of allotment is not completed, another special resolution has to be passed.
  • The issue of shares on preferential basis should also comply with the conditions enumerated in Section 42 of the Act i.e. Private Placement.
  • All conditions prescribed in the Companies (Share Capital and Debentures) Rules, 2014 shall be complied with. Further, if the issue is that of a listed company, SEBI regulations such as SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 and SEBI Issue of Capital and Disclosure Requirements) Regulations 2009 shall be complied with.

c) Issue of debentures: For the issue of debentures, the provisions of Section 42 and Section 62 (in case they are issued through preferential allotment) need to be complied with. Further, all other conditions such as creation of a debenture redemption reserve, appointment of a debenture trustee and those which are mentioned in Section 71 of the Companies Act, 2013 need to be complied with.

d) Issue of Preference Shares: Private equity investments may also be made by way of issue of preference shares. Section 55 of the Act governs the rules related to issue preference shares. Earlier, the investors preferred investing in a company by way of acquiring preference shares. However, now given the requirement that issuance of preference shares would need to be authorized by a special resolution and also that for issuance of preference shares a company would be required to have not defaulted in repayment of dividend on or redemption of any preference share, the same is discouraged.

e) Further, companies are restricted from making investments through more than 2 layers of investment subsidiaries and the Articles of Association of a Company need to be amended to ensure that conditions of the transactions and investment made in the company are incorporated in them.

The Fund Accountability:

1) Foreign Direct Investment Policy:

Foreign Direct Investment (“FDI”) Policy is issued by the Department of Industrial Policy and Promotion every year. The Policy regulates the inflow of FDI in India and further imposes general conditions and sector specific conditions on these investments. The

FDI Policy also puts caps on investments and enlists the sectors in which the same can be made. The two types of routes for FDI as enumerated in the Policy are the Automatic Route and the Government Approval Route. In case the investment falls under the automatic route, no permissions and approvals need to be taken by the investor, however, if the same falls under the government/approval route due permissions need to be in place.

Earlier, these permissions were to be taken by the Foreign Investment Promotion Board. However, the same was abolished in May, 2017. The FDI Policy 2017 lays down the authorities who are empowered to provide permission for investments which fall under the government route.

2) Reserve Bank of India Regulations on Transfer or Issue of Security by a Person Resident outside India and Regulations under the Foreign Exchange Management Act, 1999:

Reserve Bank of India (“RBI”) in November, 2017 issued Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2017. These regulations regulate investments made in Indian companies and the issue of equity shares, debentures, preference shares and share warrants which are classified as “Capital Instruments” under the Regulations. The Regulations also impose restriction on receiving and making investments. Provisions in relation to permission to be given for making investment by a person resident outside India and the entry routes, sectoral caps and the investment limits are also enumerated in the Regulation and the same are in line with the FDI Policy. Further, the Regulation also enumerates the provisions related to the transfer of capital instruments of an Indian company by or to a person resident outside India, pricing guidelines, taxes, remittance of sale proceeds and mandate certain reporting requirements.

3) SEBI (Alternative Investment Funds) Regulations, 2012:

The investment in various organizations is now routed from the “Alternate Investment Funds” which are established for the purpose of making investments. These funds need to be complaint with the SEBI (Alternative Investment Funds) Regulations, 2012. The Regulations provide a legal framework for the pool investment funds in India such as real estate, private equity, hedge funds etc. The regulations mandate registration of all Alternative Investment Funds and restrict any person or entity from acting as an AIF unless registration from SEBI has been procured. The Regulation bifurcates the registration in Category I/II/II and enumerates the eligibility criteria for the same. Category II includes private equity funds within their ambit. Private Equity Fund means an AIF which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund. It also imposes certain restrictions in terms of number of investors and amount of investments. The regulation restricts any scheme from having more than 1000 investors and further accepting a deposit of less than 1 Crore. The investment transactions shall be in line with the restrictions and conditions imposed by the regulations.

4) SEBI (Foreign Venture Capital Investor) Regulations, 2000:

dc:The SEBI (Foreign Venture Capital Investor) Regulations, 2000 regulates investments by the Foreign Venture Capital Investors (“FVCI”) which are investors incorporated or established outside India and propose to make investments in venture capital funds or venture capital undertakings in India. Even though the registration under the Regulations are not mandatory, SEBI and the RBI have extended certain benefits to SEBI registered FVCIs. The regulations also mandate the appointment of a domestic custodian for the purpose of the custody of the securities. SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (“ICDR Regulations”) prescribes one-year post Initial Public Offering (IPO) lock-in period for the promoters. The same proved to be a hindrance for the investors. The FCVI regulation however, provides an exemption from the same.

5) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011:

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 provide an exit option to public shareholders in case any person acquires shares or voting rights which entitles him to 25% or more voting rights. These regulations come into force wherein the investment is of such a nature that the same delist the company or one may call as a complete buy-out of a company. Certain conditions and restrictions on those who already own shares in a company from making further investments are also imposed. Where such an investment as that which delists the company is made, the SEBI (Delisting of Equity Shares) Regulations, 2009 also come in play.

6) Income Tax Act, 1961:

The Income from the sale of shares is classified as Capital Gains. Hence, the investment transactions are regulated by the provisions of the Income Tax Act, 1961. The Income Tax Act, 1961 provides for certain exemptions for investments made in companies. Further, in order to get tax benefits it may be possible that the investors route their investments from more favorable jurisdictions. In such scenarios, Double Taxation Avoidance Agreement, Place of Effective Management and General Anti-Avoidance Rules are to be considered.


With the increased need of dependence on investments, there exists a need for a robust legal environment which encourages foreign investors to step foot in India. A liberalized economy wherein domestic and international investors are protected by a well guarded legal framework is the need of the hour.


1 Rule 14 of the Companies (Prospectus and Allotment of Securities) Rules, 2014


Apurv Sardeshmukh


Tel: +91 20 3029 4228


Apurv Sardeshmukh is a partner with Legasis Partners, a law firm having its offices in Mumbai, Pune, Delhi and Hyderabad. With over 10 years in the profession, Apurv has advised variety of private equity firms, venture capital firms, investors, foreign companies and domestic companies on various aspects of corporate laws, investment laws, foreign exchange regulations, commercial laws, IT laws and labour laws. He has advised various companies and firms in relation to investment transactions and due diligences. Apurv also acted as the issuer’s counsel for the Pune Municipal Corporation in relation to their 200 Crore Municipal Bond Offering in 2017. Apurv has also advised companies on various aspects of competition laws, cyber laws and data protection laws.

Legasis Partners

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Pune 411016

Maharashtra, India

With offices in Mumbai - BKC, Mumbai - Nariman Point, New Delhi and Hyderabad


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