Investors have been in a tizzy over the Indian government's recent attempt to retroactively slap a capital gains tax on offshore deals involving Indian assets. In the peculiar twists and turns Indian regulations often take, the proposed new tax code now looks like it's lost steam. Evidently, the authorities underestimated the backlash the move unleashed, say industry practitioners.

The backtracking has only added to investors' bearish sentiment. For some time, even before Pranab Mukherjee's resignation as finance minister in June, freeing him to run for president, India's macroeconomics had been unfavorable. Slower gross domestic product growth, high inflation, enfeebling politics, graft, corruption and interminable red tape have all sapped confidence, observers say.

Shashank Singh, a partner at Apax Partners LLP and co-head of its Mumbai-based India office, decried the role of politics in undermining India's investment climate in a June interview on NDTV India. "Businesses have voted with their feet, and that would be very damaging in the long run," he said.

Nonetheless, as a global buyout shop, Singh points out, Apax invests based on micro factors. His firm, he says, has soldiered on, though it treads carefully. Apax has made only two bets since alighting in India in 2006.

From its recent experiences successfully navigating the country's arcane delisting rules when it pulled off India's first private equity-backed take-private, the firm has every reason to be upbeat. In one of the most complex PE-funded transactions in India in recent years, Silicon Valley software company iGate Corp., with equity from Apax, managed to delist IT outsourcing pioneer Patni Computer Systems Ltd. through a reverse auction.

"We didn't think it was possible because the precedent was so unfavorable," says Singh, who recently recounted the two-step process in detail. "There's a long and painful history of companies going down this path and not succeeding."

A few years ago, both Oracle Corp. and Electronic Data Systems Corp. (before Hewlett-Packard Co. bought it) acquired Indian companies, I-Flex Solutions Ltd. and MphasiS BFL Ltd., respectively, but tried and failed to delist them. A number of small-cap businesses have delisted in the past, but it's rare for a company of Patni's size, one reason private equity in India shies away from take-privates.

Apax invested in iGate's $1.25 billion acquisition of Patni in January 2011, with $380 million in equity. Founded in the early '70s by Massachusetts Institute of Technology graduate Narendra Patni, Patni became synonymous with India's software industry. It started as a project consultant, carving a niche deploying an army of software engineers to work on projects for multinational clients.

General Electric Co., which accounted for half of Patni's $150 million in revenue in 2000, was an early fan. General Atlantic Partners LLC in 2002, along with GE Capital Corp. and others, invested $107 million to buy 20.3%.

But the three Patni brothers who owned it never saw eye to eye. Starting in 2007, they attempted to sell the company several times; its CEOs changed four times. "This created instability such that it became one of the underperformers in the industry," says Singh.

The business generated about $700 million in revenue, but it had stagnated while the country's outsourcing industry was growing at 20% to 25%.

Apax tried to buy Patni twice. On its third attempt it corralled Phaneesh Murthy, iGate's CEO, who had previously transformed Infosys Ltd. from a struggling startup in the early '90s to a $700 million business in 2002. IGate, which had acquired Murthy's startup in 2003, promoted him to CEO in 2008, largely to use his turnaround skills to fix the company's declining revenue and earnings. By the time Apax looked into it in 2010, Singh says, iGate was growing 45%.

Still, iGate, whose shares had been listed on the Nasdaq since the mid-'90s, was a $280 million company with a market capitalization of about $1 billion. "It was the tail wagging the dog," says Singh. "We backed a $300 million company to buy a $700 million company in India."

Apax invested some $350 million via convertible preferred shares, plus $30 million in additional financing, and helped iGate raise a further $770 million of bonds in the U.S. The total, plus some cash, was used to acquire 82% of Patni, a Mumbai-listed company, with American Depositary Receipts in the U.S.

The acquirers bought out the Patni brothers' 45%, and 17% from General Atlantic and other shareholders. IGate then had to acquire another 20% from public shareholders because under India's securities law at the time -- they were modified later -- if an acquirer bought 15% of a publicly traded company, the buyer must make a mandatory tender offer for up to another 20% at a minimum.

This part of the deal went through without a hitch. The plan was to merge the companies and over time transition from the "Patni" family name, which the owners deemed an "indefensible trademark." But completing the delisting became a protracted affair. "Indian laws are very quirky," says Murthy.

For one thing there is no squeeze-out provision. Stock market regulators appear to have a bias to try to keep companies listed to allow shareholders to benefit from company growth, Singh speculates. There's a general encouragement to list perhaps earlier than a company would have done in the West, and to stay listed, he adds.

"So even if you get to a 99% holding, you can't squeeze anyone out; you're still obliged to make annual financial disclosures, pay out dividend checks, etc."

IGate could have kept the remaining 18% in public hands, and have a holding company discount hanging over the remaining stub of Indian shares. There would be cash trapped in India as well, because iGate would not have been able to pull that up to its level without tax considerations. IGate would have bifurcated shares while adhering as well to U.S. rules via the ADRs.

IGate was caught in a prisoner's dilemma. After having met the tender offer minimum of 20%, the rule changed halfway through the process, and iGate was told it needed to sell down to 75% to comply with the new ongoing listing requirement of a 25% minimum shareholding, before iGate could make a formal offer to delist the shares.

"The first vigorous debate we had with regulators was to say, 'You're prejudicing the rules against us,' " Singh says. "We should be allowed to delist straightaway without having to sell down to 75%."

After several months, iGate prevailed, convincing the regulators it shouldn't be forced to follow the new rules since its open offer occurred before the change.

Meanwhile the stock had doubled. Apax bought at 503.5 Indian rupees ($9.09) per share in 2011. The price corrected down to Rs250, but over time, as delisting became more imminent, it jumped to Rs450 to nearly Rs500 per share. It had Elliott Management Corp. to thank for that. The hedge fund had been buying up shares since May 2011, accumulating about 11% by March 2012.

To delist, iGate must buy either 90% of the total shares or 50% of the remaining outstanding shares, whichever is higher. For iGate's owners, who had 82%, buying 50% of the remaining 18% -- or 9% -- was higher. In order to get to the 91% threshold, it had to deal with Elliott.

Unlike most other stock exchanges, India requires a reverse bookbuilding process, not a direct auction, at a price nominated by the sponsor, or the price at which the largest chunk of shares were tendered by public shareholders. So a declaration of an intention to delist would read something like: "Kindly nominate a price at which you'd be willing to sell."

The result was almost laughable. Recalls Singh, offers ranged from Rs100 to Rs1,200 to Rs12,000. After much "nodding and winking," he adds, Elliott agreed to a Rs520 price.

By contrast, integrating both businesses was relatively easy, "exceeding the most optimistic plans," Singh says. The company has grown 18% since, had no client loss and "practically zero" loss of critical employees.

The challenge for iGate, which dropped the Patni name in May, is to "demonstrate that the combined business can grow faster than the individual companies could have done on their own," says Singh.

That remains to be seen. While gaining scale, iGate still ranks eighth behind much larger players. Says Singh: "In the second inning of this nine-inning game, I would hope it turns out well, but the proof is still in the future." n

Vyvyan Tenorio writes about private equity for The Deal magazine.