The twist in the tale is that many investors have generated single-digit net returns from the India portfolio. The 2004, 2005 and 2006 vintages that should have delivered outstanding returns have, in fact, had patchy returns at best. While funds have gone on to raise their second and even third funds, investors and returns are languishing.
The root of this problem lies in the fact that the understanding between PE and the businesses was set incorrectly in 2004. PE was regarded by businesses as just another source of financing, alongside the public markets and bank debt. The PE industry did not correct this understanding. With capital rushing into PE in India and immature teams being set up to capitalise on the capital flow, a number of mistakes have been made by an immature start-up industry. These included compromising on the quality of opportunities, price-value balance, governance attitude of potential partners and evaluation of exit options.
...Against this backdrop, the General Anti-Avoidance Rule or GAAR (now deferred by a year) and the uncertainty of retrospective taxation can prove to be seriously harmful to the industry. Investors cannot and should not face regulatory uncertainty. Given the high dependence on this asset class for the supply of risk capital in the country, a slowdown would severely affect private capital formation and development of entrepreneurship.
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