ED’s Se­quoia Raid Has In­dia’s Star VCs Spooked

En­trepreneurs, in­vestors ques­tion need for raids when firms co­op­er­ate

The Economic Times - - Front Page -

Mad­hav Chan­chani & Ari­jit Bar­man

Ben­galuru | Mum­bai: Some­what spooked and wor­ried — that’s how the ven­ture cap­i­tal com­mu­nity feels af­ter the en­force­ment di­rec­torate (ED) raids on Se­quoia Cap­i­tal last week. ET spoke to a num­ber of ven­ture cap­i­tal­ists and the wider in­vestor and en­tre­pre­neur­ial com­mu­nity for this story. Some peo­ple spoke on the con­di­tion they not be iden­ti­fied. ED’s raids were in con­nec­tion with its in­ves­ti­ga­tions into the eyecare chain, Vasan Health­care.

Se­quoia, which had in­vested in Vasan in 2009, has made one of the largest bets on In­dia. In De­cem­ber last year, it raised $900 mil­lion for its In­dia-fo­cused fund. ED had raided the Ben­galuru office of WestBridge Cap­i­tal as well. The pri­vate eq­uity firm is also an in­vestor in Vasan.

The shock and surprise for the VC and pri­vate eq­uity com­mu­nity have been both per­sonal and sys­temic.

A Se­quoia ven­ture cap­i­tal­ist vis­ited by ED of­fi­cials with a search war­rant at his res­i­dence — the posse of in­ves­ti­ga­tors work­ing in full view of fam­ily and neigh­bours — is a typ­i­cal ex­am­ple of un­set­tling per­sonal en­coun­ters many ex­ec­u­tives had last week.

ED fol­lowed its stan­dard oper­at­ing pro­ce­dure: ex­ec­u­tives were grilled while com­mu­ni­ca­tions with the out­side world were restricted, and office doc­u­ments, lap­tops and hard drives were looked into.

Be­tween them, Se­quoia and WestBridge man­age nearly $4 bil­lion across many funds, in­clud­ing cap­i­tal from en­dow­ments of Har­vard and Stan­ford Uni­ver­si­ties.

Pri­vate eq­uity and ven­ture cap­i­tal in­vest­ments ac­counted for 53% of the for­eign di­rect in­vest­ment (FDI) in­flow into In­dia in 2014, ac­cord­ing to Bain & Co data.

The sys­temic surprise and shock came from the fact that Se­quoia had been co­op­er­at­ing with ED in the Vasan in­ves­ti­ga­tion. The in­vest­ment firm — one of the cham­pi­ons of the In­dia startup story — has been co-oper­at­ing with in­ves­ti­ga­tors since Septem­ber last year. When ET asked for ED’s views, a spokesper­son main­tained the raid was proper. “The raid was con­ducted af­ter ob­serv­ing due pro­ce­dures. It was in con­nec­tion with al­leged FEMA vi­o­la­tions in­volv­ing Vasan Health­care,” he said. Se­quoia Man­ag­ing Direc­tor VT Bharad­waj, who was a Vasan board mem­ber till Novem­ber last year, had vis­ited ED nearly a dozen times and the firm had com­plied with all the re­quests on shar­ing data. A Se­quoia spokesper­son de­clined to com­ment for this ar­ti­cle. Bharad­waj had re­signed from Vasan’s board on Novem­ber18 and two months be­fore that he had “de­manded that man­age­ment of Vasan Health­care con­duct a thor­ough in­ves­ti­ga­tion into the al­le­ga­tions”, the ven­ture cap­i­tal firm had said in a state­ment on Tues­day, April 19.

“Dur­ing the course of this in­ves­ti­ga­tion, the Se­quoia Cap­i­tal In­dia team has met the ED of­fi­cials mul­ti­ple times and has an­swered ev­ery query placed be­fore us. We adopted the same ap­proach yes­ter­day dur­ing the ED visit to our of­fices,” the state­ment said.

Se­nior mem­bers of en­tre­pre­neur­ial and in­vest­ing com­mu­ni­ties feel when a firm ex­tends co­op­er­a­tion, a raid is just a scare tac­tic. “It (raid) is cre­at­ing a scare in the in­ter­na­tional fi­nan­cial com­mu­nity. Why can’t the gov­ern­ment ask for in­for­ma­tion with­out raid­ing?” said TV Mo­han­das Pai, for­mer In­fosys CFO.

Some in­vestors and ex­ec­u­tives worry whether firms will get caught in big­ger po­lit­i­cal tus­sles. ED is in­ves­ti­gat­ing al­leged money laun­der­ing and tax eva­sion in­volv­ing Vasan, which the au­thor­i­ties be­lieve has con­nec­tions to Karti Chi­dambaram, the son of for­mer Congress fi­nance min­is­ter P Chi­dambaram. A VC firm that has backed Google and What­sApp among other tech cham­pi­ons may now be in the “mid­dle of a po­lit­i­cal bat­tle”, an ex­ec­u­tive ob­served. “This goes on to show that this gov­ern­ment is as vin­dic­tive as the one be­fore. And wasn’t this sup­posed to be the one with min­i­mum gov­ern­ment and max­i­mum gov­er­nance?” asked a se­nior VC ex­ec­u­tive, who has backed many early-stage con­sumer tech com­pa­nies in Mum­bai.

“In­vestors take enough risk in their in­vest­ments and en­vi­ron­men­tal is­sues like these only add to the In­dia risk per­cep­tion. Law of the land must be fol­lowed but in­ves­ti­ga­tions should be thought­ful and with full ev­i­dence; not knee-jerk and head­line-grab­bing. Just re­cently there was also the in­ci­dent of ar­rest of an of­fi­cial for ser­vice tax is­sues at a com­pany…courts came down heav­ily on the in­ves­ti­gat­ing agency. This ob­vi­ously makes the in­vest­ment sen­ti­ment poorer,” said Avnish Ba­jaj, MD at Ma­trix Part­ners In­dia, an early in­vestor in star­tups like Ola, Quikr and co-in­vestor with Se­quoia in sev­eral early stage ven­tures.

A Delhi-based banker-turned-fam­ily office ex­ec­u­tive said: “In In­dia, most en­trepreneurs or busi­ness houses are po­lit­i­cally ex­posed in vary­ing de­grees. But that doesn’t mean the low­est hang­ing fruit will be your easy tar­get…Does ease of do­ing busi­ness go hand in hand with raid raj?”

Ques­tions are also be­ing raised if Se­quoia and WestBridge were soft tar­gets. While Se­quoia and WestBridge in­vested $50 mil­lion in Vasan Health­care till 2012, they were joined by Sin­ga­pore’s sov­er­eign wealth fund GIC in 2012. “Will ED also go af­ter GIC of Sin­ga­pore?” won­dered a se­nior in­vest­ment banker. “They too had put a large sum into Vasan Health­care. But imag­ine the diplo­matic reper­cus­sions of go­ing af­ter the in­vest­ment arm of your big­gest FDI con­trib­u­tor.”

So while in­vestors re­main bullish on In­dian star­tups and will con­tinue to in­vest cap­i­tal — seven VC firms have raised nearly $2.6 bil­lion in new funds since 2015 — some moves have put a ques­tion mark on gov­ern­ment sup­port for the In­dian startup story, feel en­trepreneurs and in­vestors.

For in­stance, in March, Delhi High Court hauled up the ex­cise depart­ment for ar­rest­ing a MakeMyTrip of­fi­cial in an al­leged ser­vice tax eva­sion case.

Ques­tions are also be­ing raised if Se­quoia and WestBridge were soft tar­gets



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