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Virendra Verma
Dinesh Narayanan

"f leveraged buy-outs become popular it would help increase the valuations of several seemingly unattractive projects. In such deals the buyer leverages the target company's assets to raise funds for the acquisition."

MUMBAI, Dec. 20

IF the Securities and Exchange Board of India (SEBI) allows merchant bankers to engage in fund-based activities, it would open the doors to highly structured mergers and takeovers such as leveraged buy-outs and would offer a greater role for private equity, according to Mr Udayan Bose, Chairman, Lazard India and Managing Director of Lazard London.

The freedom would also help new concepts of financing public offers through the book-building route, Mr Bose said. Allowing merchant bankers to undertake fund-based activities was one of the recommendations made by a SEBI panel that studied the merchant banking rules and regulations in the country.

Speaking to Business Line, Mr Bose said India was highly scarce in capital and merchant bankers can help first generation entrepreneurial ventures to be funded by private equity. If leveraged buy-outs become popular it would help increase the valuations of several seemingly unattractive projects. In such deals the buyer leverages the target company's assets to raise funds for the acquisition. Since the risk in this type of financing is very high, private equity funds, which have good risk-appetite, are the ideal investors.

The concept of private equity has not caught up in India and new projects are usually funded by debt even now.

Mr Bose, a member of the SEBI Takeover Committee, said the private equity financing would take off once the principle of investment shifts from asset-based, as practised by banks in India today, to cash flow-based as is the norm elsewhere in the world.

Financing through private equity requires a high level of risk assessment and judgement skills. Merchant bankers would be able to get finance for highly risky projects on cash flow projections. "All the cash flows coming from the projects can be kept in an escrow account and repaid to the lender," he said.

On funding of IPOs, Mr Bose said currently merchant bankers acted only as book-runners to issues and did not themselves subscribe to IPOs. If they were given the freedom to undertake fund-based activities, they could help deepen the market by subscribing to issues themselves and then downselling them, he said.

However, Mr Bose ruled out the possibility that the merchant bankers would enter consumer durables and automobile-financing business. "Many a merchant banker has burnt his fingers in the leasing and hire purchase business. With most banks active in the area, it would be difficult for merchant bankers to make a dent."

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