Mumbai: Many investors could fall back on excuse provisions to opt out of their commitments to Indian assets, likely hurting both private equity inflows and exits after New Delhi made its prior approval mandatory for any direct or indirect Chinese investments, experts and industry officials said.Limited partners, or LPs that are investors in a PE fund, could use these emergency provisions that enable them to opt out from participating in a deal due to the regulations, commercial considerations, or even religious reasons.
These include exemptions from investments in industries such as alcohol, pork processing or firearms.Chinese tech investors have put in an estimated $4 billion into Indian startups over the past two years.
In addition, global buyout firms such as TPG, KKR, Carlyle and Blackstone have 20% to 35% allocation coming from the LPs based out of China or Hong Kong.Chinese investors were leading investments even for exits and the successive rounds.
For Asia funds of global buyout funds, one third of the total commitments have come from China and Hong Kong.
The government notification will make a complete halt for even bulge bracket investment into India, said the India chief executive of a US buyout fund.Last week, Peoples Bank of China (PBoC) had raised its stake to over 1% in Indias largest non-banking mortgage provider HDFC.Most global PE funds have their pooling entities outside China and are managed by third-party regulated managers.
While there is, of course, some apprehension that the regulations could be interpreted broadly, and require funds with China LP contributions to obtain prior approval for their FDI transactions in India, in the worst case, the government may bring funds with majority Chinese LP contributions into the ambit of this approval, said Kartick Maheshwari, partner, Khaitan - Co.However, another concern for Indian private-equity funds is whether the new regulations will affect local investments by global PEs through their Asia-focused funds, where Chinese firms remain major investors.The Chinese LPs can apply the Excuse Provisions and opt out from participating in a proposed investment in India, said a Mumbaibased private equity fund manager.IVCA, Indias apex association representing private equity and venture capital industry, is yet to respond to the changed regulations.
Renuka Ramnath, chairperson of IVCA, declined to comment when reached by ET.The single biggest Chinese investment in India is the $1.1 billion acquisition of Gland Pharma from KKR India by Fosun in 2018.
This accounts for 17.7% of all Chinese FDI into India.
But that too got embroiled in controversy and had to be revised in 2017, much before the current notification.