WITH Indian stock market indices having shed nearly 30 per cent since the beginning of the year, many listed companies appear attractive for buyers seeking to expand their stake in these firms.

Among the major buyers these days are private equity (PE) funds, many of who have been on the look-out for attractive acquisitions. Quite a few international PE funds had acquired a stake in listed companies when their valuations were sky-high. But now with prices having come down to realistic levels, these firms are acquiring stocks from the market, reducing their total cost of acquisition.

PE firms are increasingly dabbling in PIPE (private investment in public equity) transactions, quietly enhancing their stake in companies. Most PE funds are flush with cash and can afford to buy scrips when the markets are down.

According to investment bankers in Mumbai, a number of PE firms were hesitant to make large acquisitions when the markets were high and were content on sitting on piles of cash. But now with the indices having tumbled by nearly a third, they have started making selective purchases.

PE funding has emerged as one of the most vibrant segments in the Indian financial services sector. And dozens of international PE investors now operate in India, injecting billions of dollars into the economy.

In an era of high interest rates, many corporates are hesitant to borrow funds from banks and other lenders. The Reserve Bank of India (RBI), the country’s central bank, has also imposed restrictions on external commercial borrowings and raising of funds through foreign currency convertible bonds.

The Initial Public Offer (IPO) market has also virtually dried up, with investor sentiment having turned bearish, in view of the sharp decline in stock prices. So, many companies are being starved of funds and are looking at alternative sources of funding.

This has resulted in PE investors being welcomed by Indian companies, eager for a hefty infusion of funds to meet their expansion plans.

Last year, India emerged as the biggest recipient of PE funds in Asia, attracting $10 billion in private funding, even overtaking China, which saw inflows of $8.3 billion. According to Asian Venture Capital Journal (AVCJ), Hong Kong, India got an additional $6.8 billion of PE funding during the first six months of 2008, as against $5.8 billion by China.

China had dominated the PE funds business, attracting $13 billion in 2006, when India received just $7 billion. Overall, PE funding into the Asia-Pacific region fell by nearly 23 per cent during the first half of 2008, to $32.4 billion. AVCJ estimates that PE capital under management in the region has now topped $200 billion.

India is expected to continue being the biggest recipient of PE funding over the coming years, and could attract $50 billion by 2010. Already, the number of big ticket deals is climbing. In 2006, there were less than six deals of over $100 million. Last year, there were over 50 of $100 million-plus PE deals.

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FAST growing sectors of the economy, including real estate, infrastructure and telecommunications, account for a bulk of the PE funds that enter India. Last year, for instance, over 70 per cent of PE funds ended up with companies in these three sectors, according to IndusView, a cross-border advisory firm.

Caroline Williams, private equity partner, Walkers group, a Cayman Islands-based firm, says that the global credit crunch has tightened the availability of banking finance, forcing investors in India and abroad to reach out to private equity funds as an alternative source of funding for their capital investment and expansion programmes.

“Despite India’s recent weakened economic outlook and inflation at a 13-year high, the infrastructure sector continues to attract global equity funds,” she points out. “Additionally, India is realising increased interest from offshore money, which will be invested into the national infrastructure programme over the next five to seven years.”

Special economic zones (SEZs), IT parks, residential townships and commercial complexes, highways, ports and other transport-related infrastructure are attracting huge inflow of PE funds. International funds have recently invested hundreds of millions of dollars in many SEZs in the country. According to government figures, notified SEZs in India attracted over $10 billion in investments last year. By the end of next year, the government expects a huge infusion of funds, amounting to over $60 billion, into SEZs.

Private equity investors are consequently bullish about the sector and are unveiling ambitious plans for investing in SEZs. Keshav Misra, a senior executive of Baring Equity India, notes that the firm will be investing $1 billion in the country, of which a significant amount will be in SEZs.

Other PE firms that are keen on investing in SEZs include Goldman Sachs, Deutsche Bank, Blackstone Group and Lehman Brothers. DE Shaw has invested $400 million in an SEZ being promoted by the DLF group, while Trikona from the UK has invested $420 million in an IT park at Greater Noida.

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VIRTUALLY all the leading international PE firms have set up shop in India and are scouting for opportunities.. Kohlberg Kravis Roberts (KKR), for instance, is eyeing acquisition of a 31 per cent stake in Tech Mahindra, a leading information technology company; British Telecom, which promoted the company with the Mahindra & Mahindra group, is seeking an exit from the firm.

According to industry sources, KKR and other private equity investors — including Caryle, Texas Pacific group, Apax Partners and Singapore’s Temasek Holdings — were last week looking at the possibility of paying $800 million for the British Telecom stake in the company.

KKR had earlier invested $250 million in Bharti Enterprises, which controls one of India’s leading telecommunication service providers, Bharti Airtel. W.L. Ross & Co, another leading private equity investor, and Goldman Sachs, are investing $100 million to acquire a stake in low-cost carrier, SpiceJet.

Providence Equity Partners had invested $650 million in Aditya Birla Telecom, while the Blackstone Group paid $165 million for Gokaldas Exports. Other active international PE firms operating in India include Warburg Pincus, Actis Capital, 3i Group Plc and Morgan Stanley.

Deutsche Bank, through its PE arm, plans to invest $1 billion in India over the next three years. Other major investment plans include those by Tishman Speyer Properties LP — which also aims to invest about a billion dollars over the next few months — Walton Street Capital (also $1 billion), Red Fort Capital ($775 million), Sequoia Capital ($725 million) and Jacob Ballas Capital ($500 million).

The Anil Dhirubhai Ambani Group (ADAG), through its Reliance Capital, is also planning to splurge a billion dollars in a private equity division. ADAG will invest about $200 million and the remaining amount will be raised overseas.

Looking at all the action on the private equity front, Indian banks are also unveiling plans to enter the buoyant sector. State Bank of India (SBI), the country’s largest commercial bank, is looking at a $100 million PE fund, in which it plans to have a 20 per cent stake.

According to Om Prakash Bhatt, chairman, SBI, it has sought approval from the Securities and Exchange Board of India (SEBI), the capital market regulator, for the PE fund, which will target small and medium enterprises (SMEs).

ICICI Bank, the second largest bank — and the largest private sector bank — is also looking at the SME segment and plans to float a $200 million PE fund. YES Bank is also focusing on the SME segment and plans a smaller PE fund. Another private institution, Axis Bank, has raised $150 million for its private equity venture, and hopes to add another $350 million over the next few months. According to Alok Gupta, managing director and CEO, Axis PE, it has already invested $50 million in two companies.

Private equity funding has emerged as the flavour of the season and all the leading financial sector players are rushing in with their plans. At a time when companies are starved of funds, it makes eminent sense to offer funding through the PE route.