Growth of Private Markets in India


India is currently seeing an acceleration in private capital (private equity, private debts, real estate and infrastructure) which can be explained by the search for more opportunities and higher returns by both institutional and high net worth investors.

According to an EY report1, 2011-2020 was a pivotal decade for the Indian Private Equity / Venture Capital (PE/VC) industry as it grew from a nascent alternative asset class to a mature ecosystem aggregating to a total of USD 232.4 billion. The decade ended on a record high of USD 47.6 billion in PE/VC investments in 2020 despite the sharp downturn in investment sentiment due to the COVID -19 pandemic.  

The possibilities available for foreign PE investors to invest in India are:

  • Foreign Portfolio Investment (FPI) – Portfolio Investments are allowed in listed securities on the Indian Stock Exchanges, Fixed Income and unlisted debt;
  • Foreign Direct Investment (FDI) – Strategic investments allowed under the automatic route or the government approval route, depending on the sector of the investee company;
  • Foreign Venture Capital Investment (FVCI) – Investments allowed in Venture Capital undertakings in specific sectors.

Investors typically route their investments in an Indian portfolio company through a Foreign Direct Investment (FDI) vehicle if the strategy is to play an active part in the business of the company. FDI has played an important role in developing countries including India. Since 1992, India's steps toward economic liberalization have had a positive impact on FDI flows as recent Federal Government figures seem to show: total FDI inflow into India grew at a compound annual growth rate (CAGR) of 6% between FY 2015-16 and FY 2019-202. Investors have responded to the changes in the investment environment including government policies and the broader economic policy framework. FDI policies were liberalized in railways, insurance, defence, pharmaceutics and aviation.  FDI limits in the defence and insurance sector were recently raised from 49% to 74% by the Indian Ministry of Finance.

The inflows from state owned investors in India have risen steadily and has become even three times bigger than in China last year.

Private investments by SOI into China and India (USD billions) – Source: Global SWF’s World Investment Report 2020) 

Investments made in the scope of FDI are governed by the entry routes (automatic or government approval), sector specific foreign ownership limits and guidelines for entry and exit mechanism incl. pricing, as specified under the Foreign Exchange Management Regulations.

FDI investments can be made in equity shares (listed and unlisted) and fully convertible bonds or preference shares. For undertaking FDI transactions, the entity is allowed to open a securities and depository account with a custodian for the safekeeping of the securities. India Rupee (INR) / Foreign currency cash account is not permitted to be opened with any Authorized Dealer Bank. All flow of funds must be routed through normal banking channels only.      

At the time of sale, the Authorized Dealer Bank will allow remittance of the sale proceeds (net of applicable taxes) to the seller of shares provided:

  • The security was held on a repatriation basis,

  • the sale was made in accordance with the prescribed guidelines and

  • no objection / tax clearance certificate has been produced.

We expect India’s FDI friendly policies will continue to attract investments in the private market space. India is well positioned to benefit from the abundance of young population & talent, a trusted regulatory environment with strong governance & market infrastructure, attractive returns and a vibrant investor community.