Sebi to issue discussion paper on PIPE funding

The Securities and Exchange Board of India (Sebi) will soon issue a discussion paper to formalise and address issues pertaining to the Private Investment in Public Equity (PIPE) funding.

"Work is going on to make lives easier for private equity players that invest in listed companies. The discussion paper will address issues the industry is facing, and after public consultation, formal guidelines would be issued," said a source.

A PIPE funding is purchase of shares in a company at a discount to the current market value for the purpose of raising capital by private investment firms or qualified investors.

The PIPE funding industry is relatively nascent in India with only two major players - Nalanda Capital and Avendus Capital -- that actively take part in PIPE deals.

This financing technique is popular in more developed economies due to the relative efficiency in time and cost of PIPEs, compared to more traditional forms of financing such as secondary offerings.

Industry players say this initiative would encourage more private equity players to look at the space seriously.

PIPEs give small-to-medium-sized public companies (SMEs) easy access to finances when SMEs have a hard time accessing more traditional forms of equity financing.

"There is an inherent issue PE players face while investing in public companies: It is the mandatory open offer. As per the takeover norms any investment in excess of 24 per cent requires an open offer. On the other hand, while investing in private firms the PEs can take a majority stake without making an open offer this sometimes deters PEs to delve in listed space," said Raja Lahiri, partner, Grant Thornton India LLP.

People close to the development indicate the market regulator would address issues such as corporate governance responsibilities of such large investors, their status with respect to being an insider, pricing issues and rights that they get on listed companies.

Mails sent to officials at the Indian Private Equity and Venture Capital Association did not elicit any response.

"PE investors require clarity and consistency on the issue of the rights they can get on listed companies. Further, under current regulations a minority shareholder holding veto rights could be regarded as person acting in concert with the promoters. Therefore, there is a need that Sebi introduces some provisions which allow PIPE investors to take veto rights as an exception to this requirement of the takeover regulations," said Aakash Choubey, partner, Khaitan & Co.

Sebi is also understood to be working on launching a non-exchange trading venue that would allow private equity players, venture capitalists trade in privately held securities.

The industry has communicated to the markets regulator that it is facing issues in terms of pricing, while they take a stake in listed companies.

Sebi and Foreign Exchange Management Act (FEMA) currently place restrictions on pricing to preserve the interests of the public shareholders.

Legal experts say the restrictions ensure that the investments by PIPE investors are at market prices and in turn prevent promoters from striking a deal at a lesser valuation.

Market participants say that there is lack of clarity on due diligence done by PE firms with respect to insider regulations. PE players are wary of disclosing their due diligence that constitutes as price-sensitive information that it could be accessed by competition.