Comparison of legal developments in private equity

India’s PE market has shown a degree of maturation and resilience, while in China disputes have become more frequent and volatile

CHINA

INDIA

Navigating dispute resolution for PE funds in China

China’s private equity (PE) fund industry has experienced rapid growth in recent years, playing an active role in improving financing structures and encouraging innovation and entrepreneurship. However, due to changes in the market environment — with difficulties in listing and mergers and acquisitions (M&A) along with weakened investor confidence — many PE funds face challenges in exiting projects on schedule.

Against a backdrop of sub-optimal investment returns and increased market volatility, disputes have become increasingly frequent between investors and fund managers, custodians, advisory institutions and sales agencies over issues such as suitability obligations, fiduciary duties and rigid payment guarantees.

Analysis of litigation and arbitration cases involving PE funds reveals a clear upward trend in such disputes, with arbitration cases significantly outnumbering litigation cases.

Disputes are concentrated in the management and exit stages of the “fundraising, investment, management, and exit” cycle. During the management stage, key issues often include whether managers have acted diligently, whether investment decisions comply with regulations, and information disclosure.

In the exit stage, disputes frequently centre on diverse performance-based agreements and listing-related clauses, with conflicts between investors and founders becoming particularly intense. Additionally, a common practical challenge is the low enforcement rate of favourable judgments due to the poor creditworthiness of judgment debtors.

Debt evasion

In cases where portfolio companies underperform, the financing environment deteriorates and performance-based agreements reach their deadlines, some founders face significant moral risks of “debt evasion” under the pressure of such agreements.

For instance, in a case handled on behalf of a PE fund against a founder, the portfolio company failed to meet performance targets and did not complete an IPO within the stipulated timeframe, triggering the founder’s obligations for performance compensation and equity buyback.

The fund sued the founder for payment of performance compensation and equity buyback amounts. During the litigation, the founder presented a shareholder resolution — previously unseen by the fund — claiming their obligations for performance compensation and equity buyback had been waived.

As the resolution bore the fund’s official seal, the first-instance court accepted it and dismissed the fund’s claims. On taking over the case at the appeal stage, evidence was uncovered showing the founder had forged the shareholder resolution using a blank stamped page provided by the fund during a capital increase registration process.

By reconstructing the facts through business registration records, interviews with personnel and communication records — and arguing that authenticity of a seal does not necessarily validate the content of a document — the court was successfully persuaded to overturn the initial judgment and fully support the fund’s claims.

Another common dispute in judicial practice involves the risk of debt evasion arising from “contract signing by proxy”. During the negotiation stage, parties such as investors, portfolio companies, founders and guarantors are often geographically dispersed, and contracts undergo multiple revisions.

Due to the inconvenience of in-person signing, parties frequently sign investment and guarantee contracts through proxies, creating risks of unauthorised signatures. When performance-based clauses are triggered, relationships deteriorate or litigation ensues, founders may argue that the contracts were not personally signed and are therefore not legally binding.

In another case handled for a PE fund against a guarantor, the guarantor argued that the guarantee contract was signed by another person on their behalf, and that they did not agree to assume guarantee responsibilities, requesting handwriting verification.

Verification confirmed that the signature on the guarantee contract was not the guarantor’s, and the first-instance court ruled that the guarantor was not liable. At the appellate stage, new evidence was gathered, including chat records showing: the guarantor’s awareness and approval of the guarantee contract; their active facilitation of the fund’s investment; proof of their long-term involvement in the portfolio company’s management; and recordings of their negotiations with the fund.

The evidence demonstrated the guarantor’s knowledge and consent to the guarantee obligations. Although the signature was not theirs, the fund had reasonable grounds to believe the guarantor authorised the proxy under the principle of apparent authority. The appellate court ultimately ruled that the guarantor was jointly liable, safeguarding the fund’s rights and mitigating potential risks of investor claims against the fund manager for negligence.

Evolving perspectives

Another particularly noteworthy trend is the impact of evolving judicial perspectives on the PE fund sector. For instance, the Supreme People’s Court recently stated that the reasonable period for exercising equity buyback rights should be six months. If investors exercise buyback rights beyond this period, courts will not support their claims.

This perspective has rapidly spread within the judicial community, sparking heated debate and potentially triggering a wave of equity buyback disputes.

From the perspective of fund managers, they could previously make commercial decisions based on market conditions, the company’s status, future prospects and communication with founders. However, the new risk of forfeiture due to delayed action means that fund managers must exercise buyback rights within six months, once conditions are triggered.

This could immediately place founders under buyback obligations, leaving no room for negotiation and potentially destabilising portfolio companies. Banks may cut off loans due to perceived risks, external financing channels may be blocked, and companies may face cash flow crises. Founders burdened with heavy debt may struggle to manage their companies, leading to internal instability and operational chaos, or even bankruptcy.

On the other hand, if fund managers choose not to exercise buyback rights within six months, they risk being held accountable by investors. In a buyback case being currently handled, the fund manager faces this dilemma: whether to promptly pursue legal action against the founder for equity buyback, or delay action in an attempt to rescue the struggling portfolio company.

This decision affects not only the interests of fund managers, investors and founders, but also the future of the portfolio company and the investment industry.

New challenges

Such dynamic changes in judicial policies and perspectives present new challenges for PE funds. In addition to focusing on investment performance, PE funds must pay close attention and adapt to evolving regulatory requirements and government policies, with the impact of geopolitical factors becoming increasingly significant.

On the legal and regulatory front, the introduction and revision of the Regulations on the Supervision and Administration of Private Investment Funds, the Minutes of the Ninth Civil Trial Conference and the newly revised Company Law have improved the legal framework for PE funds and had a profound impact on dispute resolution within the industry.

On the government influence front, institutional limited partners (LPs) such as government platforms and industrial platforms are playing an increasingly important role in China’s PE sector. State-owned capital is rapidly expanding and the state-owned nature of fund managers is becoming more prominent.

In January 2025, the General Office of the State Council issued its “No. 1 Document”, namely the Guiding Opinions on Promoting the High-Quality Development of Government Investment Funds. This proposes 25 measures across seven areas to promote the scientific, efficient and high-quality development of government investment funds, which have become a significant force in the capital market.

Due to the policy-driven needs of local governments, government investment funds often aim to leverage state-owned capital to attract more private capital and channel funds into local industries. As a result, the market-oriented operations of PE funds are inevitably influenced by policy objectives such as local employment, tax revenue and industrial support.

In some cases, PE funds may even be compelled to provide “guaranteed returns” to government investment funds. When investors exit, they may face challenges such as subordinated returns compared to government investment funds, local protectionism or policy restrictions.

The above-mentioned guiding opinions also encourage the development of secondary market funds (S funds) and M&A funds, which may lead to new hotspots in dispute resolution such as disputes over share transfers, the validity of partnership resolutions and withdrawal issues.

Key takeaway

PE funds in China face diverse, complex, professional and high-risk disputes in the field of dispute resolution. With improved laws and stricter regulations, the PE fund industry must strengthen compliance operations, risk management, information disclosure and investor education, while effectively addressing disputes, seeking professional support and safeguarding their rights through legal means.

TIANTAI LAW FIRM
F6/A, North Star Huibin Plaza
No.8 Beichen East Road,
Chaoyang District,Beijing 100101 China
Email: tiantai@tiantailaw.com
www.tiantailaw.com

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India’s distinctive private equity pathway

India’s private equity landscape has transformed remarkably in recent years, characterised by increasing sophistication, a maturing ecosystem and evolving deal structures.

While global headwinds have impacted private equity (PE) activity worldwide, India’s market has shown a degree of resilience. The first half of 2024 witnessed several significant transactions, including multiple USD500 million-plus deals, underscoring a strategic shift towards scale.

Much of this is attributable to strong domestic fundamentals, namely increasingly diverse opportunities in a deep market with one of the highest macro growth rates globally, backed by a bold and ambitious national agenda supporting capital deployment.

A buoyant IPO market with increasing retail participation provides the proverbial icing on the cake, with headline exits for an earlier generation of PE investments.

Top global PE funds continue to be the largest contributors of deal activity, exceeding their own aggregate 2023 investments in H1 of 2024 alone, according to a report by Bain & Co.

Alongside these global “big boys”, homegrown PE funds are becoming increasingly dynamic, and 2024 saw many of them close their largest funds
in recent years.

PE trends

The rise of buyouts — India’s unique path. Minority deals account for a lion’s share of deal volumes, but recent years have seen an uptick in control transactions. Unlike predominantly efficiency-optimisation leveraged buyout models prevalent in the US, the Indian buyout landscape varies as we see buyouts of family-managed businesses leading them to institutionalisation.

Control deals offer investors a chance to capitalise on insights from other portfolio investments, as they pursue a growth-oriented business expansion resulting in higher value creation and a better eventual exit.

This approach has also brought a subtle shift in deal dynamics, with PE investor concerns shifting away from more traditional subjects to strategically negotiating employment terms for founding-family members, underwriting effective transition linked to an exit glide path.

IPO renaissance — the holy grail of exits. India is currently amid a generational shift from parking household savings in debt products to seeking higher return-yielding equity instruments.

A thriving domestic market for IPOs has created a virtuous cycle. Successful listings by PE-backed companies, with multi-fold returns for earlier investments, are making current investors more comfortable with skin in the game.

Regulatory changes — such as reduced post-IPO lock-in periods, streamlining of the listing prospectus’ review process by the Securities and Exchange Board of India and rationalisation of the “promoter” classification — have all encouraged PE investors.

As a direct result of more control deals and the rationalisation of regulations, PE investors are more comfortable being designated as “promoters” in the IPO process. For instance, a Carlyle Group entity was the promoter for a filing in September 2024. This is a long-term trend.

Price discovery. There is increased competition for high-quality assets across industries and most large secondary deals are now being run as a process to help with price discovery.

This has redefined the buy/sell tension and dynamics. Most processes are split into two clear phases, one for price discovery and the other for the negotiation of deal terms — with exclusivity in the second phase. As a result, besides sharing a valuation for assets, bidders also use terms and conditions provided in transaction documents as a leverage tool and part of the bid process.

Valuation and growth equity. The euphoria of post-pandemic years has made way for a dose of rationality in growth equity valuations, with investors securing greater emphasis on unit economics and sustainable growth metrics.

More deals are relying on earnout structures and downside protection mechanisms, with average revenue multiples for late-stage PE deals moderating from 2021 highs to reflect a more nuanced assessment of profitability prospects.

Continuation funds, redomiciliation and domestic M&A for growth. Given these macros, interest is developing among early and mid-stage investors in transferring portfolio companies with significant growth fuel into continuation funds.

Another accelerating trend is Indian businesses with offshore holding structures redomiciling to India (especially in the technology space), and investors relying on a maturing representation and warranty insurance market to better manage their liability and return capital to limited partners.

As their portfolio companies pursue consolidation and inorganic growth, PE investors are benefitting from and being supportive of increased domestic M&A for scale and access to new markets.

Regulatory framework

Foreign exchange. Most direct equity investments by PE investors into Indian companies fall under the “automatic” route of foreign direct investment regulations, requiring no specific approvals. PE investors typically invest via equity shares or instruments that are fully and compulsorily convertible into equity shares in accordance with principles that are agreed upfront.

For niche investments into sensitive sectors or special situations requiring a more creative and tailored approach to the investment instrument, additional approvals may be required — including from specific sectoral regulators such as the Insurance and Regulatory Development Authority, Ministry of Electronics and Information Technology, and the Telecom Regulatory Authority.

Competition and merger control. While most early-stage PE deals benefit from specific exemptions, late-stage deals typically require antitrust approvals granted by the Competition Commission of India. Recently, changes were notified to antitrust laws to give effect to deal value threshold-based approval requirements.

With these changes, if the value of a transaction exceeds INR20 billion (USD 240 million) and the target or the entity involved in the merger or amalgamation has “substantial business operations in India”, such transactions would be considered a “combination” requiring competition assessments/approvals.

Exemptions to PE investors from notification requirements because the asset and turnover thresholds were not breached, or on meeting the “small target” exemption, may now be subject to the notification requirement if the size of the transaction exceeds the deal value threshold.

The recently introduced Competition (Criteria for Exemption of Combinations) Rules, 2024, have also impacted PE investment. Under these rules, “control” is now defined with reference to a “material influence” standard. In the regulator’s view, investor rights such as board appointment and information rights can also impart an element of “control”.

While these amendments and rules are still nascent, Indian antitrust regulators are staying directionally in-step with regulators globally on enforcement approaches.

Press Note 3. Global PE investors should also take note of Press Note 3 (2020), which requires specific approval for investments from neighbouring countries sharing a land border with India. While some approvals have been granted in specific sectors, the need for approvals has slowed down investment activity from these countries (including China). An investor’s ultimate chain of beneficial ownership is typically subjected to a higher level of scrutiny to ensure compliance with these rules.

Market intelligence suggests these regulations may be relaxed soon. In the initial phase, these relaxations are likely to come with some guardrails, and limited to sectors where India needs expertise and/or capital, or a joint-venture scenario with a local Indian company.

Taxation. Following a round of tax treaty revisions, capital gains exemptions are generally not available for the sale of Indian investments by global funds (barring some grandfathered exemptions, and a very specific surviving tax treaty exemption for Dutch companies).

This is balanced out by a headline tax rate of 12.5% applicable to long-term capital gains for unlisted companies (holding periods in excess of 24 months).

Looking ahead

PE investors continue to be enthused by the fundamental attractiveness of the Indian market, supported by strong demographic trends, policy reforms and a digital revolution. As the economy and market grows, regulations are expected to evolve in tandem.

In the medium term, anticipate growth in PE investments to be driven by sectoral consolidation (and platform plays across fragmented industries), tech-enabled growth and consolidation of traditional businesses, and a transition of family-owned businesses to professional management.

Cross-border deal making could also increase, underscored by: India’s advent as an alternative to China for global manufacturers; the growth of global capability centres and research & development hubs powered by India’s demographic advantages; and strategic acquisitions by Indian companies in developed markets for access to global best practices, talent and capabilities.

As control deals by PE increase, a pathway to delisting — currently viewed as an inefficient and expensive process to consider — may even be provided soon.

Given the level of dry powder across the industry, larger deal sizes with more buyouts and control transactions, and increasingly sophisticated approaches to value creation and monetisation, are anticipated.

Success will require PE funds to leverage global best practices alongside a deep local understanding, while remaining agile and responsive to the evolution of a distinctively Indian path.

CYRIL AMARCHAND MANGALDAS
Peninsula Chambers, Peninsula Corporate Park,
Ganpatrao Kadam Marg, Lower Parel,
Mumbai – 400013, India
Tel: +91 22 6660 4455
Email: cam.mumbai@cyrilshroff.com
www.cyrilshroff.com

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