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Sebi rules make due diligence of a listed company difficult

Sebi rules make due diligence of a listed company difficult
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First Published: Fri, Apr 24 2009. 10 02 PM IST

Investment options: Providence’s Biswajit Subramanian says the firm has been looking at opportunities between $50-100 million in Asia. Ashesh Shah / Mint
Investment options: Providence’s Biswajit Subramanian says the firm has been looking at opportunities between $50-100 million in Asia. Ashesh Shah / Mint
Updated: Fri, Apr 24 2009. 10 02 PM IST
Mumbai: Biswajit Subramanian, managing director of Providence Equity Advisors India Pvt. Ltd, was named for a Bollywood hero whose film Bees Saal Baad (20 Years Later) his mother adored. Today, he is a sort of a star in the private equity (PE) space, where he has invested around $828 million (Rs4,140 crore today) in two Indian firms, Aditya Birla Telecom Ltd and Idea Cellular Ltd.
Providence says it is the world’s largest sector-focused PE fund, with $21 billion in assets. In fact, it sees itself more as a quasi-strategic investor because of the sector expertise, the size of the firms and the stake it has in these, Subramanian said in an interview. Edited excerpts:
Investment options: Providence’s Biswajit Subramanian says the firm has been looking at opportunities between $50-100 million in Asia. Ashesh Shah / Mint
Why was the initial $640 million investment for a 20% stake in Aditya Birla Telecom scaled down to $428 million for a 16.14% stake?
One was the exchange rate in dollar terms (dollar rising against the rupee). The other was that we had always thought of syndicating some of the investments (getting co-investors), but the nature of the (government) approvals made it clear that it would not be possible to do that.
Would you look at some of the newer companies that have been issued telecom licences?
No, we will not. We have a big investment in Idea. So, there will be a conflict.
In the US and Europe, you typically target investments of $250 million-$2.5 billion. Any difference for India?
In Asia, we’ll do smaller deals of $50 million-plus. Our two investments so far have been bigger. But in the last year-and-a-half, we’ve been looking at opportunities between $50-100 million.
In the three sectors you invest in (telecom, media and information services), would you say anything is untouchable here in India?
We never say never. Having said that, let’s say you take a business that is entirely dependent on advertising. There is a lot of uncertainty as to how the revenue will pan out. Some people used to grow at 20% a year. Now, some are saying 10%, others sub-10%. The visibility of advertising revenue is much less stronger than the visibility of revenues coming from subscription or that coming from customers, who have signed long-term contracts. With (revenue) visibility more volatile and less tangible, I am going to be more conservative, which means a lower valuation. But the seller may have a different view and the deal may not happen.
In the US, Providence also takes public companies private. Is that a possibility in India?
In India, it’s almost impossible to take companies private. You (as an investor) cannot take their (shareholders’) shares unless they sell on their own. 100% acquisition is close to impossible. If we have control, it’s manageable, though it’s not the ideal situation.
The more important issue about taking companies private is the way the Sebi (market regulator Securities and Exchange Board of India) rules are set up. It’s very difficult to do diligence of a listed company. In many countries, for a listed company, you get access to all kinds of non-public information, to the books, to future prospects, if you agree to a confidentiality agreement and not to trade their shares in the market for a certain period. In India, that is not possible. If you cannot do diligence, how do you come up with a valuation of a company?
That’s surprising considering the number of private equity funds that have invested in listed companies. What exactly do you mean?
If you believe in financial theory, the value of a company is the sum of discounted cash flow in the future. That’ll depend on forecast revenues and profits. And, we know the historical numbers, but how much does the company expect to grow next year? Why? Where is the growth coming from? What is the additional profitability and revenue? The management typically has a view, at least for the next two-three years. But that is not allowed to be publicly disclosed.
But when you’re engaging with the promoter, don’t they tell you?
They may tell you, but Sebi rules are not clear. They will give you some information, but the real information may be hidden.
But in India, people share so much information informally. Isn’t that adequate?
(laughs) That’s not what we’re looking for when we take it to our investment committee. You need proper information. Sometimes you need your advisers to review it, you need precise information.
So, listed companies as a whole will be off your radar?
That will depend on the sector. If I’ve already done an investment in a sector, and I know the sector dynamics quite well, I may sometimes take a view on the sector without getting information from the company.
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First Published: Fri, Apr 24 2009. 10 02 PM IST