India was touted as the promised land for private equity investors. Now it’s time to deliver the dream. By Nishant Parikh and Aniruddha Sen

“We’ve spent $350 million and we come up with a turd with a tip? … We put enough technology in this project to send a cigarette to the moon and we come up with one that tastes like it took a dump?” – RJR Nabisco CEO, F Ross Johnson, in the film version of The Barbarians at the Gate (1993).

It’s ironic that perhaps the finest movie on private equity (PE) buyouts contains a quote that aptly captures the frustration that several fund managers with capital in India currently feel. Consider the following cases, none of which are intended to resemble specific situations:

Case 1: A leading international PE fund invested approximately US$100 million in an Indian company. The investment terms contained several agreed exit mechanisms including a put option on the promoter of the company carrying an internal rate of return of 15% a year. On exercise of the option, the promoter refuses to perform. The promoter produces a letter from the Reserve Bank of India (RBI) contending that the put option is “debt-like” in character and violates foreign direct investment (FDI) policy in India. The promoter also contends that the enterprise value of the investee company calculated in accordance with the discounted free cash flow method is insufficient to support the put option price.

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Nishant Parikh ([email protected]) is a partner and Aniruddha Sen ([email protected]) is a senior associate at Trilegal in Mumbai.