Chillin' out till it needs to be funded
As we write, FIPB is scheduled to meet and review proposals from UTV and another TV channel among others for FDI approval. The UTV porposal is for uplinking and broadcasting a news channel and UTV is already a listed company. Apart from such non controversial proposals like that of publicly listed companies within sectoral FDI limits and others like fully owned subsidiary for Interpublic ( One of the world’s largest in Advertising) the FIPB also takes up proposals from unlisted ventures like Turmeric Vision Pvt Ltd for a 24 hour food TV channel.
These current examples have been used to illustrate a common issue, that of valuation of unlisted ventures. Earlier versions of FDI guidelines, had allowed these ventures to be valued on the basis of a Comptroller of Capital Issues formula, which effectively welcomed Private Equity by undervaluing their incoming investment or sale and thus leaving open questions of under reporting and subversion of rightful tax revenue.
Earlier we have highlighted and presented a final opinion on cases of downstream investment and potential cases of Jeopardy. Proposals like DLF Hilton that have been deferred earlier may have valuation implications as well as that of Rajasthan Royals’ owner Jaipur IPL. In the latter case valuation issues may arise only when the proposed crossing of sectoral limit is considered favorably at any point in time.
Also, we recommend a through crawling of the Moneycontrol site as they have good expert speak in the subject used by us for referral and updation of native knowledge base in this case rather than my guiding the markets 🙂
The guidelines issued by RBI ( as usual read alongwith FEMA guidelines which are the usual exit point for RBI consultation in the proposal for DIPP/SEA/FIPB approval) note that previous guidelines were not sufficient and going forward only a fair valuation basis will be agreed as employing a discounted cash flow approach and executed by a Category I Merchant Banker or chartered accountant as registered category of investment professionals.
This means that the RBI expects gentlemen that favor the earlier guidelines ( like Luis Miranda head IDFC PE on moneycontrol.com/tv) to officially defend each valuation as leaning towards neither the buyer nor the seller and avoiding employment of multifarious valuation methods without recourse to standard projections. the new guidelines will definitely be able to minimise RBI’s liability in evaluating each such pricing, but in no way do these new guidelines make sure that there is a strict valuation basis. The valuation for a venture that is by definition previously unattempted area of business, esp in India ( like tikona digital networks, they may also be entirely new in technology and/or business model) As a merchant banker, I can offer my services to Mr Miranda and others, and I would also go thru multiple learning curves in trying to value such a venture in terms of an effective discount rate, veritable cash flows for 10 years in the future and project cash and leverage ratios which can fundamentablly change the profitability, let alone the valuation of the venture. The Discounted Cash flows are unfortunately the least important part of the arsenal for a PE deal negotiation, the ones being used almost always in the PEs mental calculations at a variance from stated assumptions and even the cost benefit equation. However, it does seem that apart from variations of DCF from implied value, it is an elegant method that can minimise tax disputes and indication of moral hazard and for that they must be welcomed as a responsible first step.
They are definitely plus to the freshly organised Extant FDI policy guidelines and may actually help in adding zeroes to India’s investment income acount and for PE funds as well once they overcome their aversion to tax regulation and even participate in the coming DTC/treaty overhauls.
Also with current deal flow recovery esp in the mega deals with $900 billion closed in PE in jan-March, it seems like a moot point where promoters that have recommended high exit prices are anyway sitting dry without a prospect.