Promoters may be able to assess investors' intentions from the manner of their treatment of anti-dilution rights that keep the investors' holding at a pre-agreed level. For example, if an investor holds 100 shares issued at Rs.100 per share, and the company makes a fresh round at Rs.50 per share, the investor with full anti-dilution protection would be entitled to a further 100 shares at no additional cost. If investors do not participate at the lower-price rights issue,it may indicate that they do not have a long-term plan with your company. Promoters could negotiate provisions where the investor loses its anti-dilution protection in such circumstances.
Private Equity investors negotiate expensive affirmative rights and minority protection,via board control rights often not fully used when the company's business and finances are positive. Understand completely overly detailed provisions that may, in effect, shift the focus from minority protection to management participation depending on certain triggers such as sustained losses. If the promoter or company proactively involve the investor in the developments of negative triggers,there could be scope for negotiation on how the investor enforces these rights. Much would depend on the commercial justification of company decisions.
Investor exits are often secured by way of an IPO without taking into account hostile market conditions.Promoters could try to negotiate some liquidity realisation through the IPO in order to ensure a guaranteed payback.Company or promoter defaults in providing the promised IPO exit could lead to investors forcing promoters to purchase their shares at a price determined in advance or later. Our regulators frown upon such structures,classifying them as borrowings. The investor may also make the promoters sell their shares for a third-party buyout.Such drag-along clauses must be considered carefully.
Venture Intelligence is the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports.