Equity Fundraising for Technology Companies

Protection of Digital Assets

Technology companies raise funds by selling shares of company to external investors through acquisition transactions. Digital assets form an important part of technology companies that add immense value to their business valuation. Innovators protect digital assets by way of patent protection to ensure that inventive products provide strategic business advantage. As an example in India, Jio Platforms have raised significant investment through various investors including the likes of Google and Facebook. Jio Platforms are made up of digital assets of Reliance Group above its basic connectivity assets. Besides mobile, broadband, and enterprise solutions, Jio Platforms have properties with video content, music, natural language processing, regional language technology, and e-governance. The digital experience of Reliance Groups is owned by Jio Platforms and it certifies the monetization of the customer base for multiple revenue streams. Thus, the Jio Platforms business model is non-linear.  

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Reliance Group Digital Assets

Reliance Industries undertook three major deals to economize its share in Jio Platforms, the digital property of Reliance Group. Jio Platforms has over 50% of the valuation of the Reliance group and while Facebook is a business synergy with Jio, Silver Lake, and Vista Equity are PE funds. The Facebook agreement authorized Jio Platforms to leverage the Indian Facebook and WhatsApp community to empower smart trade. With “Jio Meet”, the platform aims to build super apps as its Asian subparts like Alibaba and Tencent have successfully done. This is the greatest investment deal for a minority stake through a technology enterprise in the world and is the greatest FDI funding in the technological area in India. The deal will make Facebook the greatest minority shareholder of Jio after the deal receives the regulatory approvals and will make Jio Platforms amongst the best 5 listed businesses in India by way of market capitalization.  

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Minority Stake Investment

Private Equity (PE) investors generally retain a 10% to 25% investment in the share capital of a business and the major investment is mainly held by the promoters. There has existed a surge in promoters amassing a minority interest in the group, with the capital framework of the enterprise being distributed to several investors. Where the PE investors need to attain a controlling share, promoters maintain between 10% to 25%. It is also familiar for PE investors to maintain a significant minority investment in the business.

American social media and technology colossus, Facebook aims at investing ₹43,574cr for a 9.99% investment in Jio Platforms, an associate of Reliance Industries Ltd (RIL). The contract furnishes a pre-enterprise price of ₹4.62trn, with a conversion rate of ₹70 to the mobile communications business. Accordingly, formal safety like council seats, the ability to veto, quorum liberties, information rights, and exit rights have a crucial role in certifying the investor’s rights are safeguarded. Considering the Facebook deal, it is a tremendous undertaking for a minor stake by a technology corporation in the world and is the largest FDI funding in the Indian tech sector. Facebook serves as a major minority shareholder of Jio after the contract is authorized and will rank Jio Platforms in the prime 5 listed Indian companies by market capitalization.  

   

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Investment Laws in India

For equity transactions pertaining to minority stake investments in India, there exist various regulatory conditions that are required for private equity firms to invest in companies situated in India:

  1. Companies Act, 2013 – This act lays down the procedure for mergers and acquisitions including the regulation of process of issuance and transfer of securities. It also sets out corporate governance framework for the Indian companies. It also prohibits the foreign company to leverage their assets to raise investments. It also bars the Indian companies to provide financial assistance to any person for the purchase of their shares. 
  2. Foreign Exchange Management Act, 1999 – As the increase of liberalisation in the Indian economy, foreign investments in equity instruments are dealt by the Foreign Exchange Management Act and the rules and regulations thereunder. All the regulations that are framed by the government from time to time are also covered under the purview of this act. There are two routes through which a foreign investor may invest, i.e. either directly or as a foreign portfolio investor registered with the SEBI. All the investments that are less than 10% in the shares of a listed company by a SEBI registered investor is treated as a foreign portfolio investment while a foreign investment in an unlisted company or in 10% or more of shares of a listed company is known as FDI. 
  3. RBI – Investments in certain sectors such as the financial, telecom and insurance sectors are subject to the incremental restrictions and the conditions imposed by the relevant sectoral sectors. The RBI monitors the management and ownership of banks and NBFCs in India and prior approval of RBI is required for change in shareholding or management linked to specific thresholds. 
  4. Taxation Regulations – Transfer of securities of an Indian company to a foreign company through FPI or FDI generally attracts the capital gains tax in India in the hands of the seller. On the part of the purchaser, there is an obligation to withhold taxes from the consideration payable to non-resident sellers. 
  5. Antitrust Issues – Any M&A transaction will require the notification to and approval of the CCI. If the assets or turnover of the parties to the transaction exceed a certain specified threshold. There are certain combinations of companies such as Jio Chat and WhatsApp for instance that are likely to cause an Appreciable Adverse Effect on the Competition (AAEC) in India are prohibited by the CCI. 

Companies and institutional investors interested in acquiring minority stakes in Indian companies need to ensure compliance with above-mentioned regulations, as applicable to specific transactions

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