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January 14, 2009

"Liberalising preferential allotments will encourage PE investments"

In an interview to Business Standard, Rajeev Gupta, Managing Director of Carlyle India, explains the bottlenecks in doing preferential allotments in the current environment.
What is stopping the firms from getting investment?
Basically, there are two ways in which capital can be raised. One is from investors who can participate through what Sebi has labelled as QIPs (qualified institutional placement). Second is through preferential allotment to PE firms and some of the largest players are present in India. Regulations are quite benign for QIP issues to portfolio investors. The six-month price floor rule does not apply to QIP allotments. However, this rule does apply to preferential allotment to PE firms.

Why can’t PE firms participate through QIPs?
In QIPs, no one investor can have more than a 50 per cent of the shares offered by a company. And, there should be at least five investors. We put a lot of energy to understand the company and its business. We want a significant ownership in the company. Therefore, in the last three months the PE flow has been very small. And, during the current three months, it will remain small.

So, what is the possible way out?
What we are suggesting is for the rule of two weeks’ average price being applicable, as opposed to six months’, there should be two categories. One category should be promoters and those acting in concert with the promoters. If a promoter wants to take an allotment to a company, or a person acting in concert with the promoter wants to take an allotment in concert with the company, then this six months’ rule should be applied. All those who are non promoter entities are financial buyers. I am not a strategic buyer. I buy it for a certain horizon, after that I quit the stock. When an allotment is made to PE funds then this six months’ rule should not be applicable.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at