The main reason that PIPE finds lost a lot of their valuation in 2008 was that listed investments in companies by Private Equity funds was predominantly due to high entry valuations and continued capital market correction. “The capital market crisis has been extremely severe than many investors initially anticipated at the time of investment,” said Jagannadham Thunuguntla.

1. Private investment bleeds
AFTERNOON DESPATCH & COURIER
TUESDAY, JANUARY 20, 2009 ADC Business 17
BY MANIK K. MALAKAR ments have a lock-in period of one year from
Courtesy: SMC Capitals Limited the date of allotment. PIPE investments
P
IPE (Private Investment in Public Eq- made by the private equity funds in listed
uity) valuations in 2008 are continuing companies through open market purchases,
to be bad news for their investors. The however, do not have a lock-in period.
roller coaster that was 2008 has affected val- The private equity funds may not with-
uations badly and many investors have draw / sell their investments from the com-
taken a hit, in some cases greatly. PIPE in- panies they had invested in at a loss at
vestment is a private investment firm, or in- current market levels, as they generally have
stitutional purchaser or a similar investor an investment period of 4 to 5 years.
buying stock in a company (usually at a dis- In these troubled times, investors would
count) to enable the company to raise cash naturally seek to get terms that are suitable
for various purposes. to them. But are such renegotiations possi-
In the wake of losses of PIPE investments ble? If the investment by private equity
in 2007, the year 2008 also proved to be a funds into listed companies in the form of
bad year for such investors. PIPE invest- hybrid instruments such as convertible pref-
ments in 2008 have lost about 53.29 per cent erence shares, convertible bonds, convert-
of their investments of $ 1.67 billion dollars ible debentures or warrants, then investors
to a current value of $ 0.78 billion. This rep- have the flexibility of not exercising their
resents an absolute loss of 0.89 billion dol- conversion option and hence can ask for re-
lars, a rather large amount. demption of their investment with agreed
This information was compiled by Jagan- coupon / yield,” said Thunuguntla.
nadham Thunuguntla in his recent report. However, in case of straight equity invest-
Thunuguntla is the equity head of SMC Cap- ment, the private equity investors do not
itals Limited, one of India’s leading financial have any legally supported mechanism
services companies. He informs in his re- the range of 15 to 20 per cent in the compa- There are, however, two exceptions to the where they can renegotiate the terms and
ports that there is wealth erosion across all nies. Of course, there are instances where rule. Navis’s investment into Sah Petroleum conditions of the investment.
sectors ranging from aviation to shipping. the investors have also taken the controlling on Dec 1, 2008 and Nalanda Capital’s in- As to a recovery from the current loss in
In the main, PIPE investments come from stakes, he explains. In India, however, es- vestment into Sun TV network on Dec 22, valuations, a little background is required.
foreign private equity funds that generally sentially the instances of investments with 2008 are not in losses. These two invest- Private equity is mainly a commitment and
have registered set-ups in Mauritius. ‘This is controlling stakes are less in comparison to ments were made in December, 2008 by the not capital driven investment vehicle. That
to take advantage of tax planning advantage international trend. The board seat is a must time of which markets have corrected more is, none of the private equity investors sit on
of the double taxation avoidance treaty in almost all cases whether the investment than enough. Also as their period of invest- real capital, they just have commitments
agreement that India has with Mauritius,” is significant minority or controlling stake. ment as of now is less than that of 2 month from their Limited Partners (L.P In these
.s).
said Thunuguntla. “Private equity investors do participate in period, which is too short a period to attrib- tough capital market conditions, none of the
The main reason that PIPE finds lost a lot the management decisions,” Thunuguntla ute any particular reason for such current limited partners and investment commit-
of their valuation in 2008 was that listed in- informed. The sector that has taken the MTM profit, explained Thunuguntla. tees are really in a position where they can
vestments in companies by Private Equity worst hit is the infrastructure sector. It has The depreciation of the rupee too has had take any big investment decisions.
funds was predominantly due to high entry lost 86.67 per cent of investment value. The adverse affect on the loss of the mark-to- Further, most of the limited partners are
valuations and continued capital market main reason for the loss in the sector is long market values. As the rupee has seen a de- struggling for survival with the stressful eco-
correction. “The capital market crisis has gestation periods. In the current tough cap- preciation of about 23.75 per cent from nomic conditions in US and Europe. Amidst
been extremely severe than many investors ital market conditions, the fund rising January 1 2008 till date, all adding to wors- of these conditions, it will be too optimistic
Nearly one-third drop
initially anticipated at the time of invest- whether in equity or debt mode is tough. ening capital market returns. to expect market recovery any time soon.
ment,” said Thunuguntla. “This, understandably, puts the infrastruc- As far as an exit by such funds goes, PIPE “Having said that, five years period from
Generally speaking, private equity in- ture projects under stress of not meeting the investments made by private equity funds in now will be much better than the five month
Poor 3rd quarterly show ends
vestors take significant minority stakes in project completion deadlines,” he said. listed companies through preferential allot- period form now, Thunuguntla concluded.
in small gains for Sensex
in sugar output
COMMODITIES
MUMBAI:range asmoderatelyshowed by six benchmark swingingon
a restricted
The Bombay Stock Exchange
Monday ended
investors
higher points, after
Sensex
in
concerns over slowing third-
quarter earnings by blue-chip firms.
The Sensex, after moving between 9,409.51 and 9,273.47, closed
with a small gain of 5.98 points at 9,329.57 as realty, metal and refin-
N ew Delhi: Sugar production
in the country may fall below
180 lakh tonnes in 2008-09 sea-
duction and not the reduction in the
area under coverage”.
Asked about the reason for lower
ery stocks were up. son from 264 lakh tonnes in the yield, Murkumbi said, “It is due to
Similarly, the 50-share National Stock Exchange index Nifty rose previous year due to lower yield of sugarcane, a top of- less rain in July-August”.
17.75 points at 2,846.20. It moved between 2,868.20 and 2,819.90
points during the day. ficial of leading sugar firm said o n Moday.. “Sugar Sugar recovery in North India will be one per cent
Every rise in stocks was encashed by major market players, which production may not touch 180 lakh tonnes,” Sri less compared with last year, while in Maharashtra it
kept the barometer in a tight range. Stocks of banks, IT firms and auto Renuka Sugar Managing Director Narendra will be 0.2 per cent less, Murkumbi said, adding that
companies plunged. Murkumbi said. Sugar season runs from October to sugarcane yield is 25-30 per cent per acre lower in the
Software exporters, led by Tata Consultancy Services Ltd, ended September. The industry expected sugar production western Indian state this year, reports PTI.
lower after the rupee strengthened against the US dollar, reducing the to be 22.5 million tonnes, which was based on the The government is likely to allow mills to import
value of their exports. lower acreage. However, the estimates have been re- raw sugar and sell the sweetener in the domestic mar-
Marketmen said major players are still not convinced about growth vised, subsequently, from time to time and the indus- ket after refining. It would help the mills to increase
as there are fears of a fall in quarterly earnings by blue-chip firms. try is now apprehensive that the production may not their capacity utilisation. Officials of sugar companies
They said metal stocks were up on rising steel prices in overseas touch 18 million tonnes, he said. The output will fall are of the view that India may import 1-1.5 million
Maize prices up Rs. 20 per qtl.
markets while realty stocks firmed up on reports of Unitech planning due to weather factor and not less acreage, Murkumbi tonnes of raw sugar this year to run the mills as many
to raise fresh funds and Jaiprakash Associates gained on better quar- said. “The lower yield is the main factor for lower pro- of them are facing lower capacity.
terly profits.
The rupee strengthened 0.5 per cent to Rs 48.55 per dollar, they
added.
Kotak Life Insurance launches 2 schemes New the wholesaleprices rose by Rsin20the national
on
Delhi: Maize
grains market
per quintal Following were today’s quotations per quintal in Rs:
Wheat MP (deshi) 1,625-1,865, wheat dara (for mills)
capital today on lower arrivals from producing belts 1,200-1,270, chakki atta (delivery) 1,205-1,210, atta Ra-
M UMBAI :Kotak Life Insurance on Monday launched two schemes -
Kotak Group Assure and Kotak Group Shield. The former scheme is
a reducing cover insurance plan that enable institutions to protect their
amidst pick up in demand from consuming units.
Elsewhere, other grains including wheat ruled flat
jdhani (10 kg) 145, Shakti bhog (10 kg) 150, Roller flour
mill 670-680 (50 kg), Maida 705-715 (50 kilos) and
customers’ assets and liabilities in the unfortunate event of death, dis- in scattered buying or selling, reports PTI. Sooji 710-720 (50 kg).
Marketmen said restricted arrivals from producing Basmati rice (lal quila) 9,200, Shri Lal Mahal 8,800,
ability or illness Kotak Group Shield is a level cover insurance plan that
regions and pick up in demand from poultries mainly Super basmati rice 8,900, Basmati common 5,100-
provides insurance to individual members of a group and protect them pushed up wholesale maize prices. 5,500, rice Pusa-1121 - 3,800-4,500, Permal raw 1,400-
in the case of death,, disability and illness. Maize moved up by Rs 20 to Rs 880-920 per quintal. 1,450, Permal wand 1,520-1580,