Private Equity in India

Since the enactment of economic reforms in the early 1990s, India has experienced a period of rapid economic growth.[1] On average, GDP has grown over 7% per year since 1997,[2] making India one of the world’s fastest growing economies. In 2004, investors began seeing opportunities for private equity investment,[3] and the market grew from $6.6 billion in 2005 to $55.8 billion in 2007.[4] Despite taking a major hit in response to the economic crisis, investment grew back steadily through early 2011,[5] at which point India had the fastest growing private equity market in Asia.[6] However, towards the end of 2011, investment began trending downward and has languished ever since.[7] Unfortunately, this is due at least in part to the Indian government’s inconsistent policies, which have created regulatory uncertainty among foreign investors.

In January of 2012, the Supreme Court of India held that the Indian government may not tax capital gains from indirect transfers of capital assets located in India, an issue over which there had been much confusion.[8] The suit began after Vodafone, a Netherlands company, had purchased CGP Investments Ltd. (CGP), a company based in the Cayman Islands.[9] CGP’s main asset was an interest in Hutchison Essar Limited (HEL), based in India.[10] Under Section 9 of India’s Income Tax Act, a non-resident must pay tax on income arising through “transfer of a capital asset situate[d] in India.”[11] India’s tax authorities contended that this section applied to Vodafone, claiming that Vodafone’s acquisition of CGP was equivalent to a transfer of shares of HEL to Vodafone. Therefore, the government insisted that Vodafone owed taxes on capital gains derived from the acquisition of HEL.[12] The Supreme Court disagreed, holding that Section 9 did not cover indirect transfers of capital assets situated in India.[13] The case set an important precedent for a number of foreign investors whose deals were structured similarly to Vodafone’s, and provided clarity for others who were hesitant to invest due to the legal uncertainty of the pending case.[14] Unfortunately, the issue was once again opened in March of 2012, thanks to the Indian Financial Minister’s proposal of new tax rules. The proposal would enact General Anti-Avoidance Rules (GAAR),[15] making transactions between international companies with Indian subsidiaries liable for a domestic capital gains tax.[16] GAAR would “effectively overturn[]” the Supreme Court’s decision in the Vodafone case.[17]

The Financial Ministry’s proposal sparked massive uncertainty. GAAR would be retroactive through April 1st, 1962, creating the potential for many cases, including Vodafone’s, to be re-examined.[18] In addition, the outcome of several pending cases regarding M&A deals between international companies that hold Indian subsidiaries is once again uncertain.[19] Moreover, GAAR created further uncertainty among those who might have been planning to invest in Indian companies through deals structured similarly to Vodafone’s.[20] To assuage investor concerns, India’s Prime Minister issued a statement in June of 2012 saying GAAR would not be finalized without his approval.[21] The Prime Minister is expected to soften GAAR’s impact on investors, but exactly how he will do so is still unclear.[22]

The recent actions of the Government of India are problematic for two reasons. First, they re-open the issue of whether the Indian government may tax capital gains from indirect transfers of capital assets situated in India. Hopefully, the Indian government will soon clarify what GAAR’s practical effects will be, and resolve the matter once and for all. Second, even if the Indian Government resolves the GAAR issue in favor of investors, they have now set an example to the world that the law of India is volatile. Private equity deals are carefully structured to gain benefits from whatever legal systems they are subject to, so the fact that India’s laws seem to be constantly in flux is highly discouraging to anyone looking to acquire Indian companies. If the country wants any sort of private equity market, it must find a way to rebuild investors’ confidence in the stability of India’s laws. At any rate, it will not be easy to do so before Indian private equity investment falls even further.


[1] Central Intelligence Agency, Economy: INDIA, The World Factbook, (last visited Oct. 27, 2012). See also T.C.A. Anant & N.L. Mitra, The Role of Law and Legal Institutions in Asian Economic Development: The Case of India 4, 57 (Harvard Institute for International Development 1998).

[2] Central Intelligence Agency, supra note 1.

[3] Malini Goyal, PE: The story of greed, boom and the fall of private equity in India, The Econ. Times (May 17, 2012),

[4] Deloitte, Private Equity: Fueling India’s Growth 6 (2012), available at

[5] Id.

[6] Id. at 4.

[7] Id. at 6.

[8] Vodafone International Holdings B.V. v. Union of India & Anr., (2012) __ S.C.R. __ (India), available at

[9] Id. at ¶ 2 (India), available at

[10] Id.

[11] Id. at ¶70.

[12] Id. at ¶ 71.

[13] Id.

[14] Amol Sharma and R. Jai Krishna, Vodafone Overturns Tax Bill in India, Wall St. J. (Jan. 21, 2012),

[15] 5 Facts About the General Anti-Avoidance Rule (GAAR), NDTV Profit, (last updated May 14, 2012, 19:27 (IST)).

[16] James Crabtree, India to Change Tax Law After Vodafone Case, Fin. Times, (last. updated Mar. 16, 2012 8:32 PM). Language in the amendments seems to be specifically targeted at the Vodafone decision. One of the explanatory notes reads, “[A]n asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India.” Crabtree, supra.

[17] Crabtree, supra note 15.

[18] Crabtree, supra note 15.

[19] Crabtree, supra note 15.

[20] After Vodafone, GAAR; PM Takes Charge of Finance Ministry, The Times of India (June 30, 2012, 2:16 AM IST),

[21] Id.

[22] FE Bureau, PM Moves to Soften GAAR, Vodafone Blow, Fin. Express (June 29, 2012, 32:00 IST), See .also FinMin May Amend GAAR Rules to Boost Investor Confidence, Firstpost (Oct. 2, 2012),