Madhavan Srivatsan, is a founder of ‘Law Office of Madhavan Srivatsan’ and is currently focusing on corporate law advisory to start-up entities. He completed his LLB from Campus Law Centre, Delhi University in 2001. His main area of expertise is M&A, Private Equity and corporate and commercial advisory and transaction related work. He was a partner with Desai & Diwanji, (Delhi Office) prior to venturing out to open his boutique law office in August 2017. In his last 19 years of experience, he has been a key member of teams which advised companies like Moser Baer, IDFC Project, Sesa Goa, Caparo Power Limited, Greenply Industries, Quippo Oil & Gas, Minda Industries Limited, Xerox India Limited, Solar Arise group, IB Vogt group, Amtek Auto Limited, Oppo Mobiles, various start-up entities, private equity investors, merchant bankers, investment bankers etc. He is also a speaker on various forums and is particularly focused on start-up entities. He was recently featured in Times of India on a couple of occasions in their articles on Start-up Entities.
Q. Could you talk about certain challenges faced by the start-up clients and how do you deal with them?
Response: One of the major challenges faced by the start-up clients from a legal perspective is the kind of rights to be provided to the Investors. Since, the equity percentage is relatively smaller but the investment amount is not only substantial but also relevant for the growth story, it becomes difficult to do a balancing act. The standard and usual rights which are otherwise provided to a seasoned private equity player in VC funding is not the correct measure and thus, we need to have a different approach. The investors in a start-up (more particularly in case of initial funding) need to understand that, usually there are multiple investors and it is not possible to differentiate between the investors (unless there is a huge gap in the investment amount) and if these rights are given to all the investors, then, the founders have virtually no incentive to grow the company. Thus, the investors need to really understand what kind of rights are super critical for them which are directly related to their risk and returns and not worry too much about governance and exit rights. Even though exit rights are critical for investors, but if all the investors try to push mandatory exit rights upon the founders and company, the company might be choked in which case everyone loses their investment value.
The other challenge is, what is the right valuation? With the introduction of “Convertible Notes”, it has opened one more avenue but at the same time, it has provided room for more intense negotiation between Investors and Founders. Usually, most of the start-ups are valued upon an idea and future prospects, and thus, the convertible instruments such as convertible preference shares, convertible debentures and convertible notes provides an option to both the Founders and Investors to decide the valuation at a future time based upon future results. It is highly sensitive and most relevant decision for the Investor and the Founders to agree on the mechanism for future valuation and once agreed, often pricing guidelines under the FEMA Laws (in case the Investor is a foreign party) and valuation rules under the Companies Act acts as a roadblock to the final agreed position. In such cases, the only option is to structure the mechanism as per pricing guidelines and companies act and it depends upon case to case which includes some kind of re-structure of the entire deal. It is more of commercial and financial than legal in many cases.
Q. Do you think the recent amendments in the Insolvency and Bankruptcy Code (IBC) are sufficient to spur acquisition of distressed assets?
Response: Yes. Although it is not possible to go into details of each such recent amendments in this platform, however, the recent amendments whether, it be increasing the limit for initiation of insolvency process from Rs. 1 Lakh to Rs. 1 Crore, or, increasing the minimum thresholds for certain class of creditors to 100 or 10% of such creditors of such class, or, taking away the right to suspend the existing licenses/approvals of the corporate debtor if the dues are paid, or, statutory immunity to successful resolution applicants and the corporate debtor against offences committed prior to the resolution process, or, increasing the scope of essential services to be provided to the corporate debtor in order to sustain its operations, extension of timelines for appointment of interim resolution professional and such other remedies will clearly provide some light of hope to a distressed entity and all these steps are towards finding an effective resolution plan for such distressed entity rather than take it to insolvency. This will surely attract interest in the distressed assets, because, now some kind of extra breathing space has been provided to the distressed entity to come out of the distressed situation.
There is another angle to it. These amendments will also bring down litigation under IBC which was quite necessary because lately, IBC was being used as an arm-twisting tactic by small time creditors. When the IBC was introduced in the year 2016, many of the decently performing entities in terms of its business and income were also subjected to litigation under IBC by small and minor creditors. Any data will reveal that, there has been too much of litigation under IBC. The whole premise of IBC was to provide a revival plan for the entity which is on the brinks of insolvency and if resolution is not possible, then, provide an effective means to dissolve such entity and pay of the creditors as much possible. However, it was seen, that, many small-time recoveries against a going concern (i.e. some-what healthy entity) were initiated under IBC as an arm-twisting tactic. This had to stop and we cannot afford to have so much litigation under IBC as it may, like other insolvency laws in the past will prove to be an in-effective remedy.
Q. You have gained significant experience in the field of M&A. What other changes in the laws would you recommend to make the M&A process in India more efficient?
Response: We already have too many laws regulating M&A process in India. When I use the word “M&A”, I do not refer to the court driven merger process but privately negotiated acquisition transaction by way of equity purchase or business purchase transactions. These transactions are already subject to Competition Law, Companies Act, SEBI Laws (in case of listed companies), RBI Guidelines (in case of foreign investors). Maybe Government can provide some exemptions to certain classes of M&A transactions from the valuation and pricing rules under the Companies Act. In order to encourage M&A transactions in a start-up space and also to encourage M&A Transactions of lesser investment amount, the govt may consider providing certain exemptions from pricing and valuation norms, certain compliance and filing process. This may encourage small time transactions and even otherwise, in case of privately negotiated transactions (with all checks and balances that, it is a genuine transaction and not a route of hawala or parking illegal money), some basic rules should be left to the parties to decide.
Q. What are the challenges involved in running a boutique law office?
Response: One of the biggest challenges which a boutique law office faces is the “perception of band-with”. Though it is true that, a boutique law office may not have the band-with to undertake mega transactions, but sometimes, clients judge a boutique law office even on a relatively smaller transaction. Secondly, cost is another hurdle, i.e. the “fees”. Clients are bit reluctant in paying higher fees to a boutique law office because they compare the cost with a bigger law firm and the clients feels that, with higher fees, it might as well engage a bigger law firm. However, that perception is now changing as many clients have realized that boutique law office is able to provide better quality and adhere to the timelines in a better manner because it works on selected mandates. Thus, these challenges are be easily over-come by providing quality and adhering to the deadlines. The only thing, is that the team has to put in extra man-hours and burn the mid-night oil at times.
Q. Do you think the introduction of legal technology, including that based on Artificial Intelligence and Machine Learning, has the potential to transform the legal system in India?
Response: Yes. I personally feel that this is absolutely true and also need of the hour, more particularly with the recent COVID-19 experience. The only and only purpose of any “legal system” is to provide justice within reasonable time and not delayed justice. With the right of kind of technology, this is possible and maybe with the huge number of litigations we have in India, advanced technology is the only solution. But this not only requires infrastructure but also right kind of training to judicial officers, judicial staff and lawyers as well.
Q. You have been advising various start-up entrepreneurs in legal aspects of initial fund raising. Could you briefly describe some of the key legal aspects, highlighting the positives and the negatives?
Response: Some of the positive key legal aspects are as follows:
- Start-Up India Initiative: Government is taking interest and showing seriousness in this sector by providing certain benefits to a start-up which is registered with the Start-Up India platform.
- Introduction of “Convertible Notes” as means of funding: This has provided an alternative route of bridge funding to the Companies which were earlier struck on valuation issues and at the same time not able to raise debt.
- Less Complicated: Unlike a typical VC funding or a traditional private equity funding, the start-up funding is less complicated with less rights and obligations. Also, the documentation is less complicated and thus, all of these saves time.
- No requirement of detailed Diligence: A start-up entity is mostly valued on its “idea” and “future prospects” and does not have too many assets and liabilities. This makes diligence process quite less cumbersome and, in many cases, diligence is not even required.
Some of the Negative key legal aspects are as follows:
- Angel Tax: Though government has been providing some relief to the start-up entities from “angel tax”, but it still remains an area of concern particularly for those who genuinely valued their business on “idea” and are not registered under the “start-up” India platform.
- Valuations: At times, the desire and over-ambition of start-up founder in valuing the business kills the deal and even if the deal happens on the higher valuation based upon over-ambition of founders, these founders get stuck in next round of funding when they are not able to match up the same valuation.
- Multiple Investors with multiple rights: At times, in their eagerness to raise funds, some of the founders commit multiple rights to multiple investors which makes it quite messy and it leads to chaos as each investor tends to re-negotiate their deal for better rights.
Q. You have been practicing for more nearly 19 years now. How would you describe your professional journey so far?
Response: The journey has been quite fascinating and encouraging. I will be completing 19 years this July/August. I feel that my biggest achievement is that, I have been part of something creative and constructive in practice of corporate laws and having met so many people, handling their issues, sharing their emotions and stories, seeing their success and failures etc. and being part of all them has taught me some great life lessons. I guess this happens with every lawyer. My biggest take-away from this profession (corporate law) is that, I have been able to contribute and make a difference in some-one s life which has helped me grow my values as human being.
Also, even though I am first generation lawyer and have faced the difficulties and challenges which are faced by any first-generation lawyer, I consider myself blessed and more fortunate than other first-generation lawyers, as I always had good, intelligent, sincere and hard-working seniors and colleagues to work with and also some of the clients have been quite encouraging. I started my journey in 2001 with Mr. V. Shekhar, Senior Designated Advocate, who has always been a very encouraging senior and it is very difficult to find a mentor like him. He has always encouraged his juniors to do well and used to emphasize often that “the only way to success is hard work and nothing else”. He taught me to love this profession and was always encouraging in my work.
Thereafter, when I shifted to corporate law in the year 2004, I joined one of the prominent corporate law firms of India, Desai & Diwanji (“D&D”). Once again, I feel blessed to have worked with very good colleagues and senior partners in D&D. D&D provided me with great working atmosphere which was challenging and competitive yet professional. The credit has to go to the ex-partner of D&D, Mr. Amit Khansaheb who was the founding member of Delhi office and apart from his professional commitment to the work, which was a great trait to learn, he always ensured financial well-being of his team members and tried to maximize financial returns for his entire team before himself which provides a financially secure environment for any junior lawyer. Later on, when I became Partner in D&D in Delhi office in the year 2013, my time spent with other partners was filled with learning and our discussions in partner`s meetings to discuss important issues on running an office is helping me today and I shall always be thankful to them.
Lastly, one of my ex-colleagues from D&D, Mr. Puneet Singh Bindra, Advocate on Record assisted me in setting up my current office. He has his own independent litigation practice and provides off-counsel support to our corporate clients which is quite helpful as we are able to provide all the services to the client under one umbrella. Also, my colleague Mr. Khizer A. Qureshi who comes with corporate finance experience is providing full time support to the growth of our office and he is quite dynamic and energetic in his approach which is helping us grow our practice.
As I mentioned above, I have been fortunate enough to have the company of remarkable lawyers as my seniors and colleagues which is very important for any first-generation lawyer.