wcer working paper no. 2013-2 collaborating with states on

TVS CAPITAL FUNDS LTD

TVS Shriram Growth Fund Scheme 1B

Frequently Asked Questions (FAQ)

Private & Confidential

Prepared by TVS Capital Funds Ltd

Contents

Chapter 1: Key Terms ............................................................................................................................... 3

Chapter 2: Introduction to TVS Capital Funds ....................................................................................... 6

Chapter 3: VC/PE as an Asset Class .................................................................................................... 11

Chapter 4: Investment Strategy ............................................................................................................. 14

Chapter 5: Portfolio Companies ............................................................................................................. 18

Chapter 6: Taxation ................................................................................................................................. 22

Chapter 7: Form Filling ............................................................................................................................ 25

Chapter 8: SEBI’s New Regulation........................................................................................................ 27



Chapter 1: Key Terms

1. What is parallel scheme?

Parallel scheme is one which co-invests with the existing schemes. Scheme 1B is a

parallel scheme which will co-invest along with existing scheme 1A, till the funds of 1A

are fully invested. However, we believe that by the time Scheme 1B is raised, Scheme

1A will be more or less fully invested.

2. Why TSGF has started a parallel scheme and not a subsequent fund?

We originally wanted to start a fund in the range of Rs 1000-1200 cr, but thought of

doing it in 2 tranches. 1A was the first of them and 1B is the second tranche. Also the

investment philosophy of both the schemes are same.

3. What is the maximum corpus the fund intends to raise?

TSGF Scheme has a target corpus of Rs.400 crores, and a greenshoe option of Rs.100

crores.

4. Who are the sponsors/promoters, and what is their capital commitment? Why

have you committed only Rs 50 Cr?

The sponsors of the fund are TVS Group, and Shriram Group.The sponsors together

have made a commitment of Rs 50 Crores.

The larger plan has been to raise a ~1000 – 1100 Cr fund in TVS Shriram Growth Fund

from Scheme 1A and Scheme 1B. The sponsors have contributed Rs 150 Cr in Scheme

1A and Rs 50 Cr in Scheme 1B making it Rs 200 Cr for the ~1100 Cr fund which is in

line with the industry standard.

5. What is the timing for close?

The first close of the fund is expected by December 2011

6. How do you allocate to investors?

The fund intends to allocate units on a first-come-first-serve basis.

7. Will Fund 1B investors have access to returns of 1A scheme, as it is a parallel

scheme?

Accounts of the both the schemes will be maintained separately and the investors will

have access only to returns generated from investment made from his scheme.

8. Why no management fee is charged on A2 units?



This is to incentivize the investment manager’s team to invest in the fund for more

alignment of interest. Anyways the total commitment for A2 Class units is capped at Rs 5

cr.

9. What will happen if the fund able to raise a very low amount (say 200 cr), will

sponsor commitment will be reduced?

The sponsors have already committed Rs 50 cr. It will remain the same irrespective of

amount raised.

10. Why different rate of Drawdown from different investors? Will the returns for the

people paying earlier will have lower returns?

It is for the convenience of the small investor. The more the number of calls, the more

the logistics harassment for the investors. The IRRs are time weighted, so the IRR for all

the investors would be same. One who has given money earlier will have more COC.

11. When the money is to be paid by the investor?

At the time of signing the Contribution Agreement and when the subsequent capital calls

are made.

12. When Management fee to be paid to the TVS Capital? Do we have to pay this in

addition to capital commitment?

2% management fee is charged on the capital commitment and will be deducted from

the fund on a quarterly basis. The Management fee is payable to the investment

manager from the date of the first closing.

13. When investor will get the money back?

We expect to close the fund in 7 years. But the investor will start getting back the money

as soon any investment is realized. Also, if any of the investee company declares

dividend or pays interest it will be paid back to the investors.

14. In case I am unable to pay my contribution for subsequent calls, what will be the

consequences?

If such unforeseen circumstances like this happen, the fund manager has the following

options:

a. Reduce the commitment and recover fees for the original full commitment

b. Secondary sale of the units by the investor himself

c. Forfeiture of the capital commitment

15. Do we get quarterly NAV?

The audited NAV is available annually as the independent valuation of portfolio

companies is done in the year end. We provide provisional NAVs for quarter ends.



16. What is the first close date?

We are targeting to do the first close in Dec 11

17. What is the premium an investor has to pay if he/she comes after first closing?

The Investment Manager may charge a premium of SBI PLR + 2% on the Capital

Commitment for investors committing after first closing.

18. Can a person co-invest in deals with Scheme 1B without investing in the Scheme

1B?

We would prefer the investor to commit reasonable money (not less than Rs 5 crore) to

the Scheme 1B and the Investment Manager can offer the co-investment opportunities

for those investors on case by case basis.

19. What is the advantage of committing and paying early vs waiting till Dec and

paying then?

The returns of the fund are calculated on time weighted basis and the investors will earn

IRR for actual number days his/her money was invested with the Fund. So the Fund will

return more cash to an investor paying early as compared to other investor.

20. What do you mean by the term – “Scheme 1B is a top up fund”?

The Scheme 1B is a top up scheme to our existing scheme 1A. Scheme 1B is

structured as a parallel scheme, and would be investing in new companies, as well as

co-investing with 1A. We have reserved Rs 70 Crs in 1A for additional investments in

existing portfolio companies. We do not expect 1B to invest in any of the existing 1A

portfolio, as this is not a recommended practice in the industry.

In case of new investments after the Scheme 1B is raised, both the Schemes will co-

invest and it would be after notification to the Investor Advisory Committee (LP

Committee) to ensure transparency and fairness to 1A and 1B investors

21. What are the benefits of Anchor Investor?

A Contributor, other than the Sponsors, making a minimum Capital Commitment of Rs

25Cr, may be designated by the Investment Manager in its sole discretion as an “Anchor

Investor”. The Anchor Investor will be entitled to nominate a representative in the

Investor Advisory Committee subject to the sole discretion of the Investment Manager.

Also, if TSG Fund Scheme 1B decides to provide third parties with a right to co-invest

with it in an Investee Company as per “Co-investment with other parties” clause below,

the Anchor Investor will be provided the right of first refusal to make such co-investment.

Subject to the provisions contained in the section ‘Defaulting Contributors’, the Anchor

Investors shall be entitled to the following benefits:



(a) No Placement Fee on Capital Contributions;

(b) Management Fee payable will be reduced to 1.5% per annum of the Capital Commitment during the Commitment Period and 1.5% per annum of the Capital Contribution after the Commitment Period, as further detailed in the section “Management Fee” below;

(c) Nomination on the Advisory Board of the Fund;

(d) Carried interest payable to the Anchor Investors will be increased to 85% and payable to Investment Manager will be reduced to 15%

22. What are the benefits of Lead Investor?

A Contributor, other than the Sponsors, making a minimum Capital Commitment of Rs15

Cr and a maximum Capital Commitment of less than Rs25 Cr, may be designated by the

Investment Manager in its sole discretion as a “Lead Investor”.

Also, if TSG Fund Scheme 1B decides to provide third parties with a right to co-invest

with it in an Investee Company as per “Co-investment with other parties” clause below,

the Lead Investor will be provided the right of first refusal to make such co-investment.

Subject to the provisions contained in the section ‘Defaulting Contributors’, the Lead

Investors shall be entitled to the following benefits:

(a) No Placement Fee on Capital Contributions;

(b) Management Fee payable will be reduced to 1.75% per annum of the Capital Commitment during the Commitment Period and 1.75% per annum of the Capital Contribution after the Commitment Period, as further detailed in the section “Management Fee” below;

(c) Carried interest payable to the Lead Investors will be increased to 82.5% and payable to Investment Manager will be reduced to 17.5%

Chapter 2: Introduction to TVS Capital Funds

1. What is the size of Scheme 1A? Who are the investors?

Scheme 1A has a corpus of Rs 591 Cr.

The fund has been raised from Sponsors (Rs 150 Cr), Financial Institutions (Rs 200 Cr)

and HNIs (~Rs 240 Cr)

2. How much capital is deployed in Scheme 1A? What is the NAV? Why you have not

exited from your investments?

83% commitment of Scheme1A is as follows:

324cr – 9 investments

55cr – actual fees & expenses till date

70cr – reserved for top up (9.9 – 5 Cr, Dusters – 25 Cr, Medfort – 15 Cr, Jawad – 25Cr)



40cr – reserved for fees and expenses

____

489cr (83%)

The current NAV of Scheme 1A is 963 (Face value – 1000) post the valuations of 4

companies (TVS Logistics, 9.9, Dusters and Landmark). The investments in the other 5

companies are less than 1 year.

Typically, we invest in companies with an investment horizon of 4 – 5 years. Our first

investment in only about 3 years old and we are looking to exit from various companies

starting from mid 2012

3. Why are you raising 1B now?

Under normal circumstances, we would have waited. We have committed 80% of the

corpus and have a great portfolio which is performing very well and we also have an

active pipeline compelling opportunities. The market environment is also helping us as

funds raised during difficult market conditions have outperformed the market. So this is

an opportunity where we believe we can get attractive returns, hence we are raising this

now

4. Is this industry practice – to raise 1B before 1A is fully deployed?

Typically the subsequent funds are raised when 70% of the capital of the existing funds

is deployed. However, we have been cautious and are raising the top up only after 80%

is committed.

5. How can we commit capital to 1B, when we have not seen exit or return on capital

in 1A yet?

In PE, it takes 3 to 4 years to complete the investment and each investment is made for

about 3 - 4 years. Our deals were made primarily towards end of 2009, end of 2010 and

early 2011. (Though TVSL and 9.9 were made during 2008, they are very small

investments)

Time Period Nov – Dec 2009 Nov - Dec 2010 Jan – Mar 2011 Deals done Dusters

Landmark Medfort Om Pizza

Medplus ICL Ratnakar Bank

Likely exit time FY 12 to FY 13 FY 13 – FY 14 FY 14 – FY 15

In line with the above table, we are expecting exits starting from end of FY 12.

6. Why is your NAV below par?

The NAV of a PE fund follows a J curve where in the initial years, the portfolio

companies are in growth phase, there are no exits and there is a fee outflow. However,



as the portfolio matures and the fund starts producing exits, the NAV increases.

Currently, we are nearing the end of the investment phase for our Scheme 1A and our

exits are likely to happen from FY 12 end and NAV would increase

7. Please explain how will resource allocation be managed between 1A and 1B?

MDs/EDs will lead individual deals and there is a clear responsibility allocation for every

deal, this is in line with the industry practice.

8. What is different about 1B vs. 1A?

Fund 1B will follow the same thesis and theme leveraging the momentum of 1A with the

same team. We look to focus more on sectors such as Education and Agri business

which we have not done in 1A. Also, we expect to look at PIPE opportunities more

actively. We might also look at unique opportunities in Manufacturing / Infra services

9. What is unique about TVS Capital Funds? There appears to be many VC/PE funds

in the market right now? Who are your competitors?

We invest in businesses that don’t go out of fashion and will ride on the projected

consumer boom in India. These businesses when managed well produce attractive

returns for investors. We undertake the transformation of the companies that we work

with and do this with our own operating experience. We call this approach as “Capability

Capital”

There are several mid market funds operating in India, however, we would not think any

fund is our direct competitors since this is a collaborative industry and we have tried to

co invest with several funds with similar mandate. Some of the comparable funds with

mid market focus would be India Value Fund, SAIF, Gaja Capital, Kotak, Sequoia,

Helion and so on

10. What are your comments on “too much dry powder” / “too many funds, few good

deals”?

It is a fact that capital availability is no longer a constraint. However, we have the ability

to find the right company who see value in us because of consumer focus and our

capability capital to transform companies. 5 out of 9 investments we have made are

proprietary. In these we have worked with the promoter to create the opportunity for

investment.

Also, local teams and networks are very important for PE business

11. Why are you coming back to domestic LPs? Why are you not raising funds from

outside India?



Part of original plan of raising up to Rs 1200cr rupee money (Scheme 1A and 1B)

We will raise a larger fund of $500Mn from foreign money as Fund2

12. Can you tell us about your team? We understand that Mr. Suresh Raju has moved

on. Could we know about that?

Our senior team composition comprises of:

• Gopal Srinivasan, 25+ years of entrepreneurial and operational experience

• D Sundaram, 35+ years of consumer, corporate finance experience and leadership

• Manish Makharia, 15+ years of investment banking experience

• Venkat Kailasam, 18+ years in banking, IFRS, risk and compliance

Suresh Raju was closely involved in setting up the fund and was looking at a term of 3 –

5 years. When he relocated to India, he had the idea of moving to Hyderabad

subsequently. He was here for 4 years in a successful stint and decided to relocate to

Hyderabad for personal reasons and has left as at end of June 2011.

13. Who are your auditors?

• Ernst & Young are statutory auditor for Scheme 1A

• PwC are our statutory auditors for AMC

• PKF Sridhar & Santhanam are internal auditors for both AMC & Scheme 1A

•

14. Will you investing in your group companies?

We like to evaluate all opportunities in front of us and if we find an attractive investment

in group company, we could invest, however, we do have restrictions in place in the

interest of our investors. We have generally stayed away from group company

opportunities in the past.

If there are some extraordinarily attractive propositions in our group companies, we take

it to the Investor Advisory Committee; we set Gold standards of Governance in such

issues.

According to our PPM, we cannot invest more than 20% of the fund corpus in group

companies and we cannot hold more than 10% in any one group company.

15. Would you invest in the same portfolio companies from Scheme 1B?

We have already reserved funds for top up in existing portfolio companies for Scheme

1A and we believe that it’s only fair that these top up investment opportunities are given

to our existing investors. Currently, we are planning to use funds only from Scheme 1A

for top up investments. If there is further need in these companies and if we believe it will

provide attractive returns for Scheme 1B investors, we will do it in consultation with

Investor Advisory Committee (IAC) to ensure there is no conflict of interest.

16. Has the team stuck together over the past 4 years? Any notable team attrition



In this industry, there is significant attrition at entry levels, however, it is critical for the

senior team to stuck together. The core of the team, including the MDs has successful

stuck with the team for the last 3years. We see some attrition levels as per industry

standard in other levels.

17. What is difference between IC, IAC, Governance Committee, Venture Advisors,

FAB ?

- Investment Committee – To approve and endorse investment decision of the

fund

- Investor Advisory Committee – Created to ensure the interest of investors are

protected and a nominated person will also be part of IC

- Governance Committee – To ensure governance at TVS Capital equivalent to

audit committee

- Fund Advisory Board – To bring new ideas for the investment team and give

selective sector expertise

- Venture Advisors – To work on daily basis with the investment team in deal

evaluation, execution and business management

18. How much role Shriram Group plays in Investment decision?

Shriram Group is sponsor of the fund. Apart from that, Mr. R Thyagarajan, the founder of

the Shriram group is one of our Board of Director. The group also has a representative

on the Investment Committee. The day to day affairs of the fund will be managed by

TVS Capital, which is part of TVS Group.



Chapter 3: VC/PE as an Asset Class

1. Why Invest in Private Equity now?

• Private Equity funds raised during difficult market conditions have done well

historically

o Funds able to make investments at lower valuations

o PE becomes only source of capital for attractive mid-market companies

o Entrepreneurs prefer the Capability Capital that comes with PE at such times

o We experienced this in TSGF 1A

� Attractive entries into Dusters, Om Pizza, Landmark

• Markets continue to be volatile but mid-market portfolio companies growth on track

o Private Equity delivers value to investors through transformation of

companies

o Not affected by volatility factors as in public market/ interest rates in the short

term

o 5 – 10% higher returns over a long period of time (5 – 7 years) on a sustained

basis

• Private Equity is an important asset class for your portfolio – 56% growth in FY 11

compared to FY 10

o A portfolio is a basket of asset classes

� Deposits, gold, real estate, NCDs, Public & private equities

o Public market returns have settled at a range bound equilibrium of 13 – 15%

o In growth economies, PE allocation forms a significant share of one’s portfolio

2. What is the benefit of investing in a Private Equity fund?

Private equity is an alternative asset class that can potentially offer attractive returns over a

period of time.(22 – 25% IRR over 5 – 7 years)

PE provides an opportunity for diversification and is the only channel to access investments

in attractive unlisted private companies in emerging sectors

Private equity funds have several features that make them the ideal vehicles to invest:

• make small number of investments with significant rigorous screening and hands-on due

diligence to select opportunities with the best capabilities to succeed

• value-add through extended teams of industry experts with deep domain knowledge, to

provide strategic and operational inputs to help company execute on targets

3. What are the different types of PE?



Venture Capital:

Investments made in less mature companies, for example companies that are launching a

product first time, very typical in technology companies. These type of companies might not

be profitable for a few years after the investment is made as they look to establish the proof

on concept. These type of investments fall in the category of very high risk deals but when

they succeed can provide very high return to investors

Growth Capital:

These are often minority investments in relatively mature companies that are looking for

capital to expand operations or business, enter new markets or finance an acquisition.

These are companies that have a proof of concept and could be profitable, but might not

have sufficient cash from operations or the ability to take debt to grow the company rapidly

in which cases, Private Equity is a source for financing.

Distressed and special situations

Special Situations" or "Turnaround" strategies where an investor will provide debt and equity

investments, often "rescue financing" to companies undergoing operational or financial

challenges

Buyout:

Buyout refers to a strategy of making equity investments as part of a transaction in which a

company, business unit or business assets is acquired from the current shareholders

typically with the use of financial leverage.

Infrastructure:

Infrastructure projects typically have large outlays and investments are made in project

structures, however, such projects are financed at lower rates and given their lower risk

profile

Real Estate:

Typically investments in real estate are made on specific projects for shorter horizons (3 – 4

years). They belong to lower risk return profile

4. What are the typical returns from other asset classes? (long term)

a) Risk free – 8%

b) Market Indices – 13 – 15% (Incidentally, RoE (based on company earnings) has

declined from 21% in FY 06 to – 16.5% in FY 11. Additionally, the Cost of Equity has



increased from 11.5% in FY 06 to 14% in FY 11. RoE - CoE spread has declined from 9

pps to 3 pps and has reached a utility level as in developed economies)

c) Private Equity – 22 – 25%

5. What are the different exit options available to a PE fund?

a. IPO – the investee company makes a public offer where the PE fund sells its

stake in the company

b. Trade sale – the stake of the PE firm is sold to another financial investor for

instance other PE funds.

c. Strategic sale – the portfolio company is sold to a another company which

acquires this to either expand its business or a acquire a new line of business

d. Promoter buy back – the stake held by the PE firm is brought back by the

promoter

e. Merge with a listed parent – one of the options where this happens in

subsidiaries which have a listed parent company

6. What do Companies expect from PE funds? (source: KPMG)

a. Help in governance and compliance in the company

b. Capital for Market expansion and scaling up

c. Operational improvement and implementation of best practices

d. Customer access – domestic and international



Chapter 4: Investment Strategy

1. Please explain your investment philosophy of 1A?

� Invests in consumer driven opportunities after deep understanding where the

business is sustainable over 2 cycles (10-12 years)

� Mid-market companies

� Scalable, sustainable businesses with strong promoters

� Under-served and undeveloped consumer driven opportunities

� Significant stakes, including jointly in control

� Asset Light investments

2. Please explain scale & size of investments in 1A?

� Rs 40-60cr investment size

� Typical company revenues between Rs 50-250cr

3. Please explain sector thesis in 1A?

• Consumer consumption and light-asset B2B

o Healthcare, education, food services, specialty retail

o Also, FMCG, media & entertainment

o B2B such as infra services, FMS

• Emerging high-growth sectors

• Middle class family spending money on a day to day, week to week basis

• We look at sectors with a minimum 20% CAGR. Funded companies in such high-growth

sectors with strong promoter teams have a good chance of achieving 30%+ growth YoY

4. What is the basis of your valuations of portfolio companies

While investing in companies, we do rigorous Analysis using valuation methods such as

Discounted Cash Flows & Relative Valuation such as EV / Revenue, EV / EBITDA and

P/E. Entry Valuation is based on the full potential of the business and the risk of

execution effort to transform the business

5. What do you mean by Core, Classic and Special Situations?

Core: High-engagement (2MDs/EDs, 1VP, + ACE) (Dusters, Om Pizza, Medfort)

Classic: (1MD/ED, 1VP, + ACE) (Medplus, Landmark, 9.9)

Special: (1MD/ED + on per need basis) (TVS-L, Indian Cookery, Ratnakar Bank)

6. Kindly explain how your fund1A is differentiated? What does Capability Capital

mean?



� Collaborative partnership with promoters

� Providing Capability Capital to achieve thesis objectives

� Investee Company provides 4-6years “Base Growth” case to TSGF

� TSGF Capability Capital aims to boost the company’s resources to help the

promoter realize their aspirations

– Bridge the delta between Full Potential growth case and Base growth

case through management, mentorship, M&A and access to experts and

advisors

� TSGF and Investee Company co-develop a Growth and Execution Plan to

achieve the Full Potential growth case

7. Why have you done a high number of co-investments?

We do co investments strategically where we think we bring unique value to enhance

return in the transaction. Also, if the size of the transaction is higher, PE funds invest

together; larger transactions also give us wider exit options

Our extensive ecosystem + rupee money does bring in many attractive co-investment

proposals on the table

8. Explain your investment action during the 2008-09 financial downturn?

We look at investments with a 5-7year investment horizon. However, given the gravity of

the crisis, we were overall cautious. Having said that, we did invest in 2 very interesting

companies – Landmark and Dusters; We were able to close both of these deals at fairly

attractive valuations and other terms; given the tightness in lending and equity markets

9. It appears that you are targeting strategic sale (and not IPO) as likely route for

most, if not all of your exits? Isn’t that the more difficult route to exit?

Following exit options are possible:

1. Strategic sale to a domain player

2. Trade sale to a PE fund

3. IPO listing

4. Buyback by promoter

It is generally advisable to have a wide range of exit options available for a company,

like we do since that gives the ability to create better value for our investors.

We substantially evaluate the feasibility, ease and options of exit for each of our investee

companies. We often engage in conversations with potential strategic buyers

before/early into our engagement with the Company. Given the scale of our companies,

most of our exits are likely to be strategic sale to a domain player, trade sale to PE fund



or buyback by promoter. Having said, Medplus, Ratnakar Bank and TVS logistics may

see an IPO exit.

10. Overall, how much return do you think this fund will return?

Our Scheme1A is on track to deliver target returns (25% IRR to investors pre tax)

11. Appears that a lot of your investments are into low margin/loss-making entities

today? (Is there a danger of underestimating the difficulty of business

turnaround?)

Growth capital in mid-market companies. Companies are investing into a strong platform

today to build the engine for future growth. Hence, it is normal for these companies to

incur operational losses in the first few years of operations.

However, towards the latter half of the investment horizon, we start exiting portfolio

companies when they have grown and this helps us in making good returns to our

investors. We call this phenomenon as J Curve effect.

12. What will be your first exit? When?

Landmark, TVS-L expected in FY12 / FY 13 and Dusters in FY13 / FY 14

13. How has being a domestic rupee money fund helped you?

It gives us access into deals at favorable terms. Examples include 9.9, Landmark,

Medplus

14. What have been your top3 learning’s in this business?

1. Partnership with promoters

2. Importance of Collaborative Capital

3. Proactive sourcing (theme-based/idea based)

15. What makes you believe that you can beat public market returns?

Over the years, the gap between Return on Equity (ROE) and Cost of Equity (COE) has

been narrowing for the Indian stocks and hence the valuation premium for India

compared to other emerging markets is under pressure. Given the above factors, public

market returns will be under severe factors and hence Private Equity is a good

alternative asset class to invest in unlisted companies where we can tap the unrealized

potential and generate alpha.

Drivers of Alpha



- Timing and Pricing of Entry/Exit

- Privileged Access

- Deal Structuring

- Knowledge pool within Fund & advisors

16. Have you lost any deals to your competitors?

Yes, there were opportunities where we were interested in the business model but

valuations were attractive enough in our assessment. So when some of our competitors

bid more than us in the valuation, we stayed away from bidding as we believe this kind

of strategy will not create value for our investors.

Examples: Mobile VAS companies

17. Why are you planning to invest in PIPE deals?

� Scheme 1B will also target to invest in untapped and often illiquid value-creation

opportunities within public markets.

� With public markets being volatile and shallower than many perceive them to be, the

stock prices of several mid-cap companies do not often reflect true value because

trading volumes are thin due to limited and sporadic investor interest.

� 76% of active BSE listed companies have market cap of less than Rs 500crores and

provide a significant pool of attractive PIPE opportunities.

18. Why are you looking at Infra/Agri-business?

Agri-business

� Growing population, urbanisation, increase in the disposable income, increasing

inflation, organized retail growth, increasing health consciousness

� Expected increase in level of Food processing from current 6% to 20% by 2015.

� High fragmentation - opportunity to consolidate

� Government support in financing & technology

Attractive opportunities with high projected growth and high ROE, in micro irrigation,

commercials seeds, rice milling, ready to eat foods, horticulture



Chapter 5: Portfolio Companies

Dusters

1. Dusters – Low margin, high attrition, highly people intensive, cut throat price

competition: Please explain your investment thesis

� FMS investment into Rs 100cr company; bringing together 2 entrepreneur brothers

� Highly unorganized sector moving towards branded play; growing at 25%

� 3x revenue growth, valued today at 1.8x to entry

� People intensity is a characteristic of the industry and has to be managed through HR

skills

� Margins increase will potentially happen with ERP implementation, outcome based

billing, different mix of business, direct billing, etc

Example of Dusters:

TSGF brought 2 entrepreneur brothers together to build a Rs 100cr+ FMS organization

Base growth case of Rs 250-300cr in 4 years

TSGF engaged with following partners

i) Bain consulting

ii) Pradipta K Mohapatra

iii) K Ramesh

iv) Gopal + Sundaram

-Built a Rs 350cr+ full potential growth model in 4 years

-Organic and M&A growth in FMS and whitespaces (Hotel + hospitality acquisition, M&E

acquisition; security guard services)

-Enhanching the team: New CFO in place, new COO

-Governance: Robust ERP system getting implemented (1-2% margin improvement

expected); domain experts validating compliance processes; internal auditor appointed

Om Pizza

2. Can PJ stand up to Domino’s or Pizza Hut? Can GCC player understand India?

Aren’t restaurants typically high-risk investments?

Opening for a #2 player in the delivery market (higher ROIC, pizza optimal food for

delivery)

India’s large and growing GDP & per capita consumption provides space for some more

players as penetration of Pizza and delivery market is increasing

PJ is a globally established brand and the scale will bring higher profitability

TSGF-Jawad:

� Joint Control investment



� High-involvement from Hemu, Jai, Gopal, Sundaram

� Building strong leadership team: TSGF brought HR agencies, candidates on the table

� New locations: Getting attractively priced good locations

� A&P: Co-developed local area activation plan

� Existing stores: Visit and conversations at each store, turn-to-profitability plan; closure

of non-performing stores

� High-engagement with PJ international

� strong focus on delivery only/heavy stores

Medfort

3. Medfort – early stage company?

Serial entrepreneur Dr Velu’s roll-up venture in eye-care and diabetes

Attractive M&A in-progress. New capital raise expected

Medplus

4. Why do a small-stake investment?

• Organized retail and branded pharma chain in an attractive sector

• 70 Cr is a large investment and investment along with 2 other funds

• Potential for expansion and improving profitability is very good

• Co-investment with MK & IVA

• Rampant pharmacy growth. Bain working with promoters

Landmark

5. Landmark – Ebooks/Internet book buying; how is all of that impacting the

Landmark business?

• Landmark is under Noel N Tata’s leadership

• Books/ music online a threat and company is launching the online model

• Rs 200cr revenue retailer of books, music, animation and toys

• Structured investment with attractive exit likely in FY12

9.9

6. I heard that the investment in 9.9 is not doing so good?

Co-investment with Helion into Pramath Sinha’s media & events company



2.5x revenue growth, attractive M&A pursued

Top line growth is good with new attract

Profitability will come with scale in each vertical

There is a good and committed team

M & A execution will help

TVS-L

1. What is your investment thesis for TVS-L?

Co-investment with Goldman Sachs into 3PL logistics company

Strong operating performance. Expected IPO in FY12


Our first investment.

Co-investment with marquee investor – Goldman Sachs

Attractive growth since investment, expected to IPO in FY12

Ratnakar Bank


Co-investment into upcoming financial services company with a marquee team and

credible strategy

TSGF and co-investors working with talented team

ICL

1. ICL – early stage company?

� Sanjeev Kapoor building sound chef-independent scalable platform; Talwalkars team brings

location/rental disciple and FOFO/FOCO model expertise

� Marquee co-investors

� Indian cuisine across price segments (Khazana, The Yellow Chili, Indii)


� ROFO on next round of investment (may take total quantum of investment to Rs 25cr)

� Opportunity to participate in other ventures of the team members

� Opportunity for preferential investment in scale up

3. What is the logic behind such a high valuation?

� EV/R of 4x on brand revenue



� High growth prospects

� Unique FOFO/FOCO model for growth (low equity infusion required later on) (Proven model

with Talwalkars gyms)



Chapter 6: Taxation

1. Please explain Taxation Impact to investors

The fund is structured as a pass through entity and the tax can be either by the investor

directly or by the fund on behalf of the investors.

Until now, for our existing fund, investors have been paying taxes directly, however, based

on evolving market practices the fund might pay taxes on behalf of investors.

We have given below the tax rates that would apply for our investments.

TSG Fund Scheme 1B would earn income mainly by way of dividend, interest and exit gains on

sale of securities of the VCU. The tax implications on the same are discussed below:

A. Dividend

Dividend declared by Indian companies is exempt from tax in the hands of the recipient.

However, the Portfolio Company distributing the dividends would have to pay dividend

distribution tax (‘DDT’) of 16.22 per cent (under the Act) or 15 per cent (under the DTC).

B. Interest

Interest income would be taxable in accordance with the tax mechanism applicable to Investors

[generally at 32.45 per cent (under the Act) or at 30 per cent (under the DTC)].

C. Exit gains on sale / buy back of securities

The capital gains would be taxable in accordance with the tax mechanism applicable to

Investors. Generally, the tax implications would be as under:

Particulars Amount in Rs.

Sale consideration XXX

Less: Cost of acquisition (Note

1)

XXX

Less: Expenses on such

transfer

XXX

Capital gains XXX



Note 1: In case of computation of long term capital gains, the option of indexation of cost is

available to resident on all securities (other than bonds and debentures).

Under the Act

(STT @ 0.125 percent of transaction value)

Under the DTC

Sale of equity shares chargeable to STT

Period of

holding

Characterisation Tax rates (Inclusive of surcharge at 5 per cent and

education cess at 3 per cent)

12 months

or less

Short Term

Capital Gains

• 16.22 per cent, in the case of shares listed on a

recognised stock exchange in India and the sale

is subject to Securities Transaction Tax (‘STT’).

• 32.45 per cent, in case of shares listed on a

recognised stock exchange in India but the sale is

not subject to STT or in the case of shares not

listed on any recognised stock exchange in India.

More than

12 months

Long term Capital

Gains

• Zero per cent, in the case of shares listed on a

recognised stock exchange in India and the sale

is subject to Indian STT.

• 21.63 per cent (after considering indexation) /

10.82 per cent (without indexation) (whichever is

lower) in case of shares listed on recognised stock

exchange in India but not subject to STT

• 21.63 per cent (after considering indexation) in

case of shares not listed on any recognised stock

exchange in India

Period of holding Capital gains tax



Any other assets

Held for 1 year or less 15 per cent

Held for more than 1 year Zero per cent

Period of holding Capital gains tax

Held for 1 year or less from the end of the

financial year in which the asset is acquired

30 per cent

Held for more than 1 year from the end of the

financial year in which the asset is acquired

30 per cent (subject to

indexation benefits)



Chapter 7: Form Filling

1. Who can invest?

TSGF Scheme 1B is a domestic fund. It is open to Partnerships, Trusts, Societies and

institutional investors who are residents of India. For individuals, they have to citizens of

India and he should be a resident of India under FEMA Act and Income Tax Act. The fund

is a rupee fund and will make distributions in rupees.

2. Can NRIs /PIO invest?

We have options to raise funds from above categories and we will explore this option if

required.

3. In case if a contributor dies, what would be the status of his contribution. What

would happen to the amount he has contributed, assume it goes to a nominee.

In case of death of a contributor, the legal heirs/nominee of such deceased contributor are

obligated under the contribution agreement to fulfill the remaining capital commitment of

such deceased contributor. If the original contributor or his heir / nominee fail to fulfill their

capital commitments, they would be deemed to be 'defaulting contributor' for the purposes

of their contribution agreement and the consequences provided under the agreement in the

eventuality of such default would be triggered.

4. Can the contributor sell /transfer units to other investors?

Contributors may not be permitted to assign/transfer the Units, unless with the prior written

consent of the fund and upon execution of a deed of adherence by the assignee. The

burden is with the contributor to fund another investor to take his rights/beneficial interest.

The fund will provide annual audited NAV. The investor can use this information as a basis

to arrive at fair market value.

5. Where does investor need to sign on the form? Does he need to sign contribution

agreement?

The investor has to sign in four areas indicated on the form. The investor also has to initial

all the pages of the contribution agreement.

6. What is the reason for having the form: ‘Application for payment of Income without

retention of Tax’?

The form is needed as we intend to distribute returns prior to taxes being withheld and

expect the contributors to pay taxes.

7. What details are to be filled in the space provided for Assessing Officer in the

Application for payment of Income without retention of Tax?

Name of the circle or ward number of the assessing officer which will be mentioned in

Income Tax Return Form.



8. Is the Cancelled Cheque leaf required even if the payment is to be made to the same

account from which the payment is made?

Yes a cancelled cheque of the account in to which the distributions are to be made, is to be

submitted along with the form and other documents.

9. Do we need to fill delivery instructions for securities? Why do we ask for that?

Delivery instructions for securities are not mandatory. In general, the fund expects to

distribute cash back to investors. The instructions are required, if at all, only for the rare

circumstances when the fund distributes securities of the Investee companies.

10. What is the process for submitting the application?

The signed Investment form along with the initial payment is to be submitted to the local

CAMS offices. CAMS will issue an acknowledgement for the receipt of the form.

11. What is the document proof required for address?

Any of the following can serve as proof of address:

• Passport (photo and address copy)

• Driving License

• Voter’s ID card

• Copy of Bank statement

• Latest Electricity / Telephone bill

• IT return acknowledgement receipt



Chapter 8: SEBI’s New Regulation

1. How the new AIF regulations impact TSGF?

The new regulations are only in a draft form under discussion and the final form could be

substantially different from the draft, hence it might be premature to comment on that.

However, TSGF is registered as Venture Capital Fund under SEBI (VCF) Regulations

1996 and the new proposed AIF regulations provides that such funds will continue to be

governed by VCF regulations till the fund/scheme is wound up.

2. What are the different categories of fund envisaged in the new regulations?

The following nine categories of fund have been defined in the new regulations with

investment restrictions applicable for each of them. However, we being governed by the

old VCF regulations will not be required to be guided by new restrictions.

i. Venture Capital Fund – to invest mostly in new ventures using new technology or

with innovative business ideas at early stage or start up stage

ii. PIPE Fund – to invest in shares of small sized listed companies which are not part of

any market indices

iii. Private Equity Fund – to invest in unlisted instruments of companies which require

funding to develop and grow

iv. Infrastructure Equity Fund – to invest mostly in equity of infrastructure companies or

SPVs in infrastructure

v. Debt Fund – to invest primarily in debt of unlisted companies

vi. Real Estate Fund – to invest in real estate projects

vii. SME Fund - to invest mostly in equity of SMEs in manufacturing and services sector

viii. Social Venture Fund – invest in social ventures with muted returns 10-12%

ix. Strategy Fund – invest in any class of financial instrument with a particular strategy

An AIF which has been granted registration under a particular category cannot change

its category subsequent to registration.

3. What it the restriction put by SEBI AIF on the exit by the sponsors?

The Sponsor has to invest at least 5% of the corpus and there cannot be waiver of the

management fees. Also, the sponsor commitment will be locked in till the redemption of the last

investor in the fund.

4. What are the proposed changes in the minimum ticket size?

The ticket size is proposed to be increased to Rs 1 cr from current Rs 5 lakhs. We expect lot of

resistance from the industry members as Rs 1 crore minimum ticket with ultra specific

investment strategy could be a deterrent to the industry growth.

wcer working paper no. 2013-2 collaborating with states on

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