ED’s raids on Sequoia Capital spook India’s star venture capitalists

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.

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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 per cent 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 November 18 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 foreign direct investment 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. Ban on surge pricing by states such as Delhi and Karnataka has also been another issue.

Some downplay the impact of ED raids, arguing India will remain the most attractive investment destination in the world. "This is a random fate incident," said Gopal Srinivasan, chairman of industry body IVCA. "Sequoia has done an outstanding job in working with this investigation. Investing in companies in an emerging market...one or two incidents are a part of life despite your very best efforts," said Srinivasan, who is also the chairman of TVS Capital.