PE looks for angle on India retail opening

Firms are looking for ways to take advantage of loosened regulations in India’s retail sector, but sources say the regulations are unclear.

Emerging markets firm Actis has reportedly delayed the sale of its 40 percent stake in South Asian retail business Nilgiris to include foreign retailers 7-Eleven and Tesco in the bidding process. The firm is hoping to boost valuations by taking advantage of loosened regulations in India's retail sector.

Actis did not respond to requests for comment, but it appears to be one of many private equity firms that are looking for ways to benefit from a recent relaxation of regulations in the retail sector.

Last month, Indian regulators finally allowed foreign entities to own 100 percent of multi-brand retail businesses and 51 percent of single-brand retail businesses in India. 

The regulations are widely believed to offer new opportunities for private equity to invest and exit in India. “This will open up new opportunities for [private equity] retail investors to participate in India,” Siddharth Shah, partner at local law firm Nishith Desai said. “There is huge potential people see in the retail space in India and that is likely to grow significantly over the years.”

However, GP sources told PE Asia that the new laws will have little immediate impact on private equity. One foreign GP invested in India explained that the increased limit in multi- and single-brand retailing in India is relatively insignificant to private equity, which typically invests in minority stakes in the country. 

Dhanpal Jhaveri, partner and chief executive of Everstone Capital Partners, agreed, telling PE Asia that the regulation is restrictive and unclear. “It increases the competitive environment and produces more [opportunities], but the devil is in the detail. The way the regulation is drafted, a lot of existing retailers would disqualify from investment.”

“For any company inviting foreign investment in retail, the minimum investment threshold has to be at least $100 million in multi-brand retail,” he explained. “That size of investment makes it quite restrictive to most private equity firms operating in this country. Typically in India you would see most growth capital investments happening in the $20 – $80 million range.”

Moreover, the new retail laws do not apply in all states in India, including some leading economic, high growth states such as Gujarat and Tamilnadu. Jhaveri says this would restrict private equity firms’ ability to expand retail businesses through bolt-on acquisitions or organic growth. 

Despite problems, sources are optimistic about the government’s move to liberalise the sector.

“This is the first step in a regulation that will evolve over the next several months or years to provide more clarity for substantial investment coming into the country,” Jhaveri said. “As the regulations become more market friendly, private equity will play a greater role in the development of the retail industry.”