Kel679 PDF Eng

REVISED NOVEMBER 16, 2015
PAOLA SAPIENZA, VINEET BHAGWAT, AND APAAR KASLIWAL KEL679
Surya Tutoring:
Evaluating a Growth Equity Deal in India
R. K. Sharma, the founder and CEO of Surya Tutoring, sipped his masala chai at the dawn of
what promised to be a beautiful day in Kota, India, on March 24, 2010. Surya was a fast-growing
tutoring academy for high school students aspiring to gain admission to the prestigious Indian
Institute of Technology (IIT), and Sharma wanted to expand its reach. In the past two decades,
Kota, a city of 1 million in the northern state of Rajasthan, had become the center of the IIT
testing-prep industry and home to tens of thousands of students studying for the rigorous IIT
entrance exam. However, Sharma knew there was vast untapped potential in the teeming Indian
metropolises of Mumbai, Chennai, Delhi, and Bangalore, as well as in foreign markets such as
Dubai and Australia.
Sharma picked up the term sheets he had received from two private equity firms willing to
finance Surya’s expansion. By the end of the month he needed to decide which to accept—the
offer from Blackgem, a big bulge bracket fund, or the one from ZenCap, a small Indian firm
based in Mumbai with whom he had become familiar during the past year.
Indian Institute of Technology

With an annual enrollment of just under 14 million students in roughly 20,000 colleges or
professional schools, India had one of the largest higher education systems in the world. This was
driven in part by the large population of the country, but the intense desire of all parents to see
their children succeed also played a large factor. With a national literacy rate hovering around 74
percent (well under the world average of 84 percent), the returns to education could be very high
in India. Thus, parents enrolled their children from a very young age in private tutoring and went
the extra mile to ensure that they received an extraordinary education.
Many students aspired to enter IIT, which comprised a group of fifteen top-quality
autonomous engineering and technology-oriented universities that were created to train scientists
and engineers to support the economic and social development of India. All IIT schools had a
common admissions process for undergraduates, using the highly selective Indian Institute of
Technology joint entrance examination (IIT-JEE). The acceptance rates for the IIT-JEE are
shown in Table 1. The number of students taking the IIT-JEE was expected to grow by 20
percent every year.
©2012 by the Kellogg School of Management at Northwestern University. This case was developed with support from the June 2009
graduates of the Executive MBA Program (EMP-73). This case was prepared by Professor Paola Sapienza, Vineet Bhagwat, PhD ’12,
and Apaar Kasliwal ’12. Cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements,
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This document is authorized for use only in Professor Bharat Parashar's WSGSB - Elective 2019-Private Equity (PE) at Asian Institute of Management from Sep 2019 to Feb 2020.
SURYA TUTORING KEL679
Table 1: Acceptance Rates for IIT-JEE

450,000 8,295 9,000
400,000 8,000
6,992
350,000 7,000
5,444 5,537
300,000 6,000
Students Admitted
Students Testing
4,935
250,000 5,000
200,000 4,000
150,000 3,000
100,000 2,000
50,000 1,000
198,000 299,266 243,029 311,258 384,977
‐ ‐
2005 2006 2007 2008 2009
Source: IIT Madras website (http://www.iitm.ac.in), JEE website (http://jee.iitm.ac.in), and Wikipedia (http://en.wikipedia.org/wiki/Indian_
Institute_of_Technology_Joint_Entrance_Examination) (accessed July 6, 2012).
IIT Testing-Prep Industry

The low acceptance rates for the IIT-JEE, combined with its rigor, made for a captive market
for tutoring services geared toward the examination. Tutoring services had evolved into boarding
schools that, along with preparation for the IIT-JEE, provided regular education for eleventh- and
twelfth-grade students. Courses such as the Princeton Review or Kaplan in the United States
offered preparation for standardized tests such as the SAT, GRE, or GMAT, but the intensity of
preparation for entrance exams was much higher in India. In fact, the desire for an IIT admission
was so strong that some students entered boarding schools geared for the IIT-JEE in eighth grade.
One of the first such academies, Bansal Classes, was established in 1983 by V. K. Bansal in
Kota. The success of Bansal Classes spawned many offshoot academies, many of which were
established by former Bansal Classes instructors and headquartered in Kota. Thus, although Kota
remained a small city by Indian standards, with a population of just over 1 million (45th largest
city in India), it was a hotbed of tutoring and academies geared to meet the demands of students
wishing to secure admission into the top-quality higher education institutions in India. The
industry was fragmented and included companies such as Resonance, Career Point, and Mahesh
Tutorials.
2 KELLOGG SCHOOL OF MANAGEMENT

KEL679 SURYA TUTORING
Surya Tutoring
R. K. Sharma was born and raised in a small village on the outskirts of Kota. Motivated to
gain entrance into a top-quality college, he used to ride his bicycle almost two hours each way to
Kota to study in high school and prepare for the IIT-JEE. Despite not having any formal
education in English until high school, he managed to secure admission to the Madras (now
Chennai) campus of IIT.
Graduating from IIT-Madras with a bachelor’s degree in physics, Sharma landed a job in
Germany at a prestigious high-tech company. In his spare time after work, he would tutor many
of his co-workers’ children in their elementary and secondary school mathematics and science.
Though he had found success in his job and tutoring services, his attention was constantly on his
nine siblings back home in the small village near Kota. Eventually he decided to return to India
and concentrate on supporting his mother and siblings.
He worked as an instructor at the prestigious Bansal Classes for six years before his
entrepreneurial itch caught up to him. He decided to form his own academy, Surya, in 2001.
India’s bureaucracy was notoriously slow and obstructionist, which meant Sharma had to be
tenacious in order to survive and thrive. Corruption was also a major problem with bureaucrats,
which challenged him to develop the ability to navigate the system without becoming tainted by
it.
Despite intense competition, Surya had done very well: it had become one of India’s leading
test-prep schools, with more than 22,000 students studying annually to prepare for the IIT-JEE.
Out of the nearly 10,000 open seats at IIT, Surya’s students ended up securing 1,600 to 1,700
each year. Sharma had been able to attract a great team of professors, 280 in total, 70 of whom
were graduates of IIT themselves. The team was young and eager to grow the business, even
though Sharma had not shared any equity with them.
Private Equity in India

Private equity in India was clustered into three geographic centers—Mumbai, New Delhi, and
Bangalore—and was divided into three main groups of firms. The first set consisted of the big
bulge bracket firms, including Apax Partners, Blackstone, KPMB, and Blackgem, and were
mainly based in the United States or Europe. These firms generally hired Indians who had grown
up in the United States or Europe and wanted to work in India. The second set of private equity
players consisted of large Indian corporate conglomerates such as Reliance and Tata. These
corporate wings were not like the corporate venture capital firms from the United States; whereas
U.S. corporate venture capital firms mainly invested in the same line of business as the parent
company, corporate private equity players in India invested across the board in various industries
and technologies. In addition, there was an inherent conflict of interest in that the managers of the
venture capital funds did not get a substantial fraction of the returns, which mainly went to the
parent company. The third and last set of private equity firms consisted of independent Indian
firms such as Tano, Avigo, and ZenCap. The differentiating feature of this set of firms was that
they were smaller in both fund size and partners and generally invested in much smaller
transactions than the big bulge bracket firms.
KELLOGG SCHOOL OF MANAGEMENT 3

There were many differences between private equity deals in the United States and in India.
First, the traditional distinction between venture capital and private equity used in the United
States was somewhat blurred in India (as in most other economies). Most funds in India were
growth capital funds, specialized by stage of financing. An early-stage fund was similar to a
venture capital fund in the United States. A late-stage fund was somewhat different from a buyout
or private equity fund, as it almost never took a majority stake in the portfolio company but
instead maintained an ownership structure very similar to a venture deal in the United States.
Most deals had very little leverage due to the extremely high cost of debt. In the typical late-
stage deal, the fund provided capital and managerial expertise (much like the U.S. venture capital
industry), took a minority position and some board seats, and actively participated in the next
phase of the company’s development. In contrast to the United States, where private equity
money was concentrated in a few sectors, Indian funds were sector-agnostic. Sourcing was also
very different from the United States, where the industry was concentrated in few markets. In
India, a huge country with limited infrastructure, new ventures were located in many different
places, which imposed search costs. Often, charter accountants and lawyers helped with sourcing.
Finally, because it took a long time to enforce contracts through courts, the personal and legal
agreements between the fund and the entrepreneur were often different from those seen in the
West.
ZenCap
One cold winter morning in 2003, Sharma had been about to close his office door and go
home when the phone rang. On the other end was Nishit Verma, principal of ZenCap, a relatively
small Mumbai-based private equity firm. Verma leveraged the fact that he was originally from
Jaipur, a larger city a few hours from Kota, to schedule a meeting with Sharma in Kota.
A few weeks later when Verma visited his family in Jaipur, he made the four-hour car
journey to Kota to meet with Sharma. Because they came from the same sub-caste, grew up in
neighboring cities, and shared a common ethnic language, Sharma felt an instant connection with
Verma. Despite its success, Kota was a relatively isolated town and Sharma had not expected to
garner any attention from investment firms as far away as Mumbai. Naturally, Sharma was
curious to know how Verma had come to hear about Surya in the first place.
Verma told him that recently he had been riding in a taxi to the Mumbai train station when
the cab driver pulled over to answer a phone call. The call was from one of the head instructors at
Surya Tutoring, informing the cab driver that his son would be expelled from the program if he
did not purchase the required textbooks. The cab driver immediately called his son demanding an
explanation. His son explained that he had in fact bought the textbook, but had lost it. He knew
that his father was putting every penny of his hard-earned savings to send him to the boarding
classes in Kota, and he had been scared to ask him for more money. The cab driver immediately
drove to the nearest bank and wired some money to his son.
Verma told Sharma that by observing this incident from the back seat of the taxi, he came to
appreciate the extreme lengths parents in India would go to ensure that their children received an
outstanding education: the monthly cost of sending his son to Kota for Surya’s classes would
have been roughly 80 percent of the cab driver’s income.

Both Sharma and Verma agreed that Indian cultural norms would ensure that education
would be in high demand for years to come. After a few meetings, however, Sharma revealed to
Verma that he was not keen on diluting any equity at this point in time. The business was fairly
cash-rich and had a steady flow of revenues with stable admissions on a yearly basis.
Despite the fact that Surya did not need any capital, Verma kept in regular touch with
Sharma. Using his family in Jaipur as a convenient excuse, he traveled to Kota fairly regularly
and visited Surya. Because Kota was a small town, most of the small business owners knew each
other well, and even maintained an informal club. Through his many social and service activities
in Kota Sharma regularly encountered other small business owners who had some connection
with Verma.
He stayed in touch with Verma, and over the course of several months Verma provided him
with varied but much-needed advice. For example, when Sharma had problems retaining his top-
quality instructors, Verma filled him in on some crucial lessons that ZenCap had learned during a
similar investment in the past. As the rapport between Verma and Sharma grew, Sharma realized
there was a slow but sure shift occurring in the education tutoring sector. Kota was home to all
the top tutoring academies, but they could not keep up with the immense demand for their
services all across India. Most tutoring services only offered in-house services; students had to
leave their home towns and live in the boarding hostels in Kota, staying there for at least a few
months. Slowly, however, tutoring services were starting to offer remote instruction, opening
branches in the large metro cities of India such as Mumbai, Delhi, Bangalore, and Chennai.
Sharma turned to Verma for advice regarding this expansion. Verma soon realized that Surya
did not have well-organized records of inflows and outflows: the business was clearly generating
a lot of cash, but it lacked financial sophistication in handling and recording transactions. With
some effort, Verma was able to help Sharma put together some simple financial projections (see
Exhibit 1). Based on these projections, Verma suggested that this was an ideal moment for Surya
to expand with outside investors, and that Sharma should consider opportunities such as
teleconferencing and remote video classes. Given ZenCap’s connections to numerous small and
mid-level businesses within India, Sharma started warming to the idea of an investment from
ZenCap to aid in this expansion. However, he first wanted to be sure he was getting a good price
for his company. He made a few calls the next day and hired an investment bank to scout for
other private equity firms that would be interested in investing in Surya.
Upon learning of potential competition for the investment in Surya, Verma immediately put
Sharma in touch with the founder of ZenCap, Rajesh Oza, who happened to be from Jaipur, spoke
their common regional language, and had a similar upbringing to Sharma. Oza had also grown up
in a small village near Kota, had attended IIT, and had worked in France for several years after
graduation. Like Sharma, he had come back to India to help with family obligations even though
he had been successful abroad.
On March 16 Verma delivered to Sharma a term sheet from ZenCap for a minority
investment in Surya (see Exhibit 2).
Blackgem
The efforts of Sharma’s investment bank resulted in a call from Blackgem, a top-tier private
equity player. The prospect of working with a big firm with an international reputation was very

tempting for Sharma. Although Greg Smith, a partner at Blackgem based in London, had never
visited him in Kota, Sharma had traveled to Mumbai three times to meet him. Sharma was
impressed by the set of portfolio companies Smith had invested in and by his international
network of connections. In one of the meetings, Smith had mentioned that several of his
investments had been in for-profit higher-education companies, and that he had strong contacts
with industry leaders in companies such as the Apollo Group, Education Management, and
DeVry. However, Sharma could not take his mind off the fact that their meetings focused only on
numbers; further, he was unsure whether Smith and Blackgem had the requisite local knowledge
to add more than financial value to Surya.
In most of its past deals, Blackgem had acquired a majority stake, but Sharma clarified from
the first meeting that he was not interested in giving up control of his company. Surya was his
cherished venture and he could not imagine parting from it.
When Sharma received Blackgem’s term sheet (see Exhibit 3), he noted that the valuation
was higher than that offered by ZenCap and that the contractual features were very different.
Sharma wondered how many of these differences reflected the different experience he had had
with the two funds and their representatives.
Decision Time
Sharma was grateful for the free advice and connections he had gained from ZenCap and
Verma, but the prestige and better financial terms of Blackgem were tempting. Having started his
own business in Germany, he knew very well the type of benefits that internationally-known
firms could offer to companies with global aspirations such as Surya.
To help him in his decision he had asked his investment bank to provide information about
comparable deals and interest rates (see Exhibit 4 and Exhibit 5). As he began to review the
documents, Sharma knew this would not be an easy decision.

Exhibit 1: Surya Tutoring Financial Projections (in Rs. crores)

2010 2011 2012 2013 2014
Revenue
Course fees 133.67 180.45 243.60 304.51 380.63
Sale of learning material 6.60 9.90 14.85 22.28 33.41
Entrance exams 3.38 4.56 6.15 8.30 11.21
Total revenue 143.64 194.90 264.61 335.08 425.25
Operating expenses
Salary expenses 59.23 74.04 92.55 115.68 144.60
a
Short-term lease rentals 2.35 2.94 3.67 4.59 5.74
b
Long-term lease rentals 7.53 9.41 11.77 14.71 18.38
Marketing/sales 14.40 17.28 20.74 24.88 29.86
Other operating expenses 1.40 1.68 2.02 2.42 2.90
Administration 7.57 9.08 10.90 13.08 15.70
Total operating expenses 92.48 114.43 141.64 175.36 217.19
Income before interest and taxes 51.16 80.47 122.97 159.72 208.07
Interest expense 0.00 0.00 0.00 0.00 0.00

Interest revenue 5.23 5.75 7.23 8.42 9.57
Income before taxes 56.39 86.22 130.20 168.14 217.64
Tax expected @ 35% 19.74 30.18 45.57 58.85 76.17

Net income 36.65 56.04 84.63 109.29 141.47
Note: In the numbering system used in South Asia, which is based on the Vedic numerical system, one hundred thousand Rupees (Rs.
100,000) is referred to as 1 lakh and denoted as 1,00,000. One hundred lakhs (i.e., Rs. 10 million) is referred to as 1 crore and denoted as
1,00,00,000.
a
Short-term lease agreements range from two- to four-year contracts with building owners.
b
Surya Tutoring had also entered into a long-term lease and purchase agreement. The agreement included the option of purchasing the
buildings back from the existing owner at the end of a ten-year lease period at a discount of 15 percent from the market value of the asset.

Exhibit 2: ZenCap Term Sheet
TERM SHEET FOR INVESTMENT IN EQUITY OF

SURYA TUTORING PVT. LTD.
MARCH 16, 2010
This Term Sheet summarizes the principal terms of subscription to Shares of Surya Tutoring
Pvt. Ltd. (“Company”) by ZenCap Private Equity Fund and ZenCap Army Trust (together called
“Investors”) and the terms of sale of Shares of the Company by Mr. R. K. Sharma (“Promoter”)
to the Investors. This term sheet is prepared relying on the representations made and information
provided by the Company and its Promoters to the Investors.
1. Investor Securities and Investment Amount

For the purpose of this document the term—
“Investor Securities” shall mean and include the following (collectively):
1. Ten Common Equity Shares of the Company each to be issued by the Company at
face value at the time of release of funds for the CCPS as mentioned in following
sub-clause 2;
2. Compulsorily Convertible Preference Shares (“CCPS”) each to be issued by the
company to the Investors at face value (total subscription amount being Rs. 22
Crores). These CCPS are required to be compulsorily converted (along with CCPS
obtained post conversion as mentioned in sub-clause 4 below), at the option of the
Investors, in as many number of Common Equity Shares of the Company as
determined by keeping in mind the valuation in accordance with Clause 2 below;
3. Such number of Common Equity Shares of the Company as purchased by the
Investors from the Promoters for an aggregate consideration of Rs. 11 Crores at a
price per share which is 20 percent lower than the price per share determined for
conversion of CCPS into Common Equity Shares in accordance with Clause 2 below;
4. The “Warrant(s)” to be issued by the Company to the Investors free of cost, at the
time of issue of CCPS (as mentioned in preceding sub-clause 2) entitling the
Investors to subscribe to Compulsorily Convertible Preference Shares at face value
for the total consideration of Rs. 11 Crores. Such option to subscribe to CCPS will
have to be exercised from July 1, 2011 to December 31, 2011.
“Investment Amount” shall mean the aggregate amount paid by the Investors for acquisition
of the Investor Securities.
2. Pre-Money Valuation and Post-Money Valuation and ESOP

The actual post-money equity valuation will be a 12 times multiple of the audited
consolidated FY2010 Profit After Tax, adjusted for any extraordinary items, etc. This is subject to
a maximum post-money valuation of Rs. 440 Crores and a minimum valuation of Rs. 340 Crores.
Accordingly the minimum pre-money valuation will be Rs. 296 Crores and maximum pre money
valuation will be Rs. 396 Crores.

Exhibit 2 (continued)
At maximum post-money valuation, Investor Securities (assuming the CCPS on an as-

converted basis) will represent 8 percent of the post issued and paid up capital of the Company
immediately after the closure of the round and post exercise of the warrants they will represent 12
percent of post issued and paid up Capital assuming all the Warrants have been converted.
The current equity (prior to current funding round) is 100 percent held by Promoters. On or
before June 30, 2010, the Promoter will transfer, at a price decided by the Promoter, such number
of equity shares to Employees/close associates/friends/relatives such that post investment of Rs.
22 Crores by Investors, and after the above mentioned transfer, the percentage stake held by
Employees/close associates/friends/relatives is a maximum of 10 percent and by the Investors is 8
percent (all assuming conversion happens at Rs. 440 Crores post-money).
3. Warrant Conversion Schedule

The Investors would have a right to convert the Warrants into CCPS at face value of Rs. 10
each upon the payment of face value and this right will be valid for conversion from July 1, 2011
through December 31, 2011.
4. Board of Directors
The Investors will have the right to nominate a Director (“Investor Director”) on the Board of
the Company. The Investors will have a right to appoint an Investor Director to each sub-
committee of the Board. The Company undertakes to give at least a 10 days advance notice in
writing or fax or by e-mail (for which a read receipt has been received) regarding the proposed
Board, Committee and/or General Body meetings to the Investor Director and the appointed
Investor Director is entitled to participate in all these meetings. In spite of this notice and as long
as the Company gets an acknowledgment of the invite, by the Investors, if the Investor Director
fails to participate in any of the above mentioned meetings, the other Directors shall proceed with
the meetings. Regardless of the above, no matters relating to the Affirmative Rights of the
Investors shall be taken up and approved without the written consent of the Investors. The Board
and the committees will meet at least quarterly. The Board will comprise of maximum of 7
directors.
5. D&O Insurance
The Company will bind D&O insurance with a carrier and in an amount satisfactory to the
Board of Directors.
6. Usage of Funds
The usage of Investment Amount will be according to the Business Plan (including creating
infrastructure in Kota and/or Jaipur on the land purchased/taken on a long-term lease by the
company, repayment of the loan outstanding for acquisition of land, development of new centres,
starting of new courses and acquisition/takeover of education businesses and working capital
requirements) and it will be detailed and agreed with the Investors. The Company will have the
flexibility to effect changes to the items specified in the Business Plan to an extent of 15 percent
from the amount specified, with intimation to the Investors about the same.

7. Affirmative Conditions
The Company (and its subsidiaries) would require the written concurrence from the Investors
for the following:
a. amending any provision of the Memorandum of Association and the Articles of

Association of the Company, except as required by law to give effect to the
transaction contemplated in part (b) sub-part (i) below
b. changing any rights of the Investors or authorizing changes in the capital structure of
the Company by the following means, inter alia—
i. raise any share capital or common stock or preferred equity (“New Equity”)
except where the New Equity is (collectively)
1. issued to a financial investor
2. issued at a price that provides at least a 15 percent IRR on the Investors’ per
share purchase price (on an as if converted basis) as calculated on the
Investment Amount from the date of investment, and
3. less than 15 percent of the then total Equity Share Capital (on an as if
converted basis) of the Company
It is clarified that, any issuance of New Equity, with or without the Investor
Director affirmative vote, is subject to Clause 9.
ii. create or authorize the creation of or issue any other security convertible into or
exercisable for any equity security, having rights, preferences, or privileges
senior to or on parity with the Investor Securities
iii. finalize the terms and conditions of an Initial Public Offer (IPO)
iv. Creating new or modifying existing ESOP plan
c. purchasing or redeeming or paying any dividend on any capital stock which is in

excess of 25 percent of the Face Value of the common Equity Shares of the Company
d. creation of any additional debt security/guarantee that would increase the Company’s
consolidated aggregate indebtedness by over Rs. 10 Crores by way of a single loan or
a series of loans or guarantees
e. subject to clause 8, entering into related party transactions which are individually in
excess of Rs. 15 lakh or if cumulatively such transactions exceed Rs. 1 Crore in a
financial year
f. make any further/new loan or advance to, or own any stock or other securities of, any
subsidiary or other corporation, partnership, or other entity (such cumulative loans
not exceeding Rs. 1 Crore in a financial year)
g. make any further/new loan or advance in excess of Rs. 20 lakhs to any person,
including, any employee or director, except advances and similar expenditures in the
ordinary course of business or under the terms of an employee stock or option plan
approved by the Board (such cumulative loans not exceeding Rs. 2 Crores in a
financial year)

h. sell, encumber, pledge, or create a lien on the Promoters shares, or do any other act
which has the effect of undermining the underlying beneficiary/fiduciary rights and
responsibilities of the Promoters. It is clarified that the transfer to Employees/close
associates/friends/relatives, as mentioned in clause 2, will be exempt from approval
by the Investors.
i. hiring or terminating or changing the compensation of the senior management—
Managing Director, CEO, COO, heads of new businesses and any other employees as
mutually decided by the Company and the Investors (names to be finalised). It is
clarified that the Company is free to make the above mentioned employment
decisions regarding faculty/head of departments/academic staff and junior
administrative staff without requiring any approval from the Investors.
j. effecting any changes to the Business Plan which is approved by the Investors,
provided that such changes are in excess of 15 percent of the amounts specified in the
Business Plan. Changes to the Business Plan that are below the 15 percent threshold
would require an intimation to the Investors.
k. subject to clause 9, change the principal business of the Company, enter new lines of
business, or exit the current line of business by the following means, inter alia:
i. enter into an M&A transaction or reorganisation
ii. acquire a new business
iii. sell any assets
iv. split up existing business
l. sell, transfer, license, pledge or encumber technology or intellectual property

m. Changes in Statutory and Internal Auditor of the Company with one of the following
six firms being appointed as the Statutory Auditor (“Big Six”): KPMG, PwC, E&Y,
Deloitte Haskins & Sells, Grant Thornton, and BDO Haribhakti. The total audit
expenses not to exceed Rs. 15 lakh per annum.
n. listing of the Company on any stock exchange (however, the decision of choosing the
exchange will lie with the Board)
o. such other matters as may be agreed upon at the time of finalisation of the definitive
agreements
8. Brand Holding/Promoter Remuneration

The brand of “Surya” is presently held by the Promoter personally, and will be transferred to
the Company for a consideration of Rs. 1 at the time of closing. The Promoter’s remuneration as
Managing Director will consist of two parts: a fixed component of Rs. 1.8 Crore p.a. total cost to
Company and a variable component of maximum Rs. 1.2 crore p.a. in the form of bonus
calculated as 10 percent of the amount of consolidated Profit Before Tax (arrived at before
charging the above variable component) in excess of Rs. 18 Crore.

9. Transactions with Related Parties

The Company presently has media buying arrangement with a company promoted by the
friends and family of the Promoter which presently refunds the Company an amount of 75
percent of the commissions that it receives for media purchase transactions executed for the
Company. The Promoter will ensure that the media buying company will execute a contract with
the Company formalizing the presently informal commission sharing arrangement. For entering
into this contract the Company will not have to seek an approval from the Investors.
10. Creation of Subsidiaries

The Company plans to incorporate subsidiaries for carrying out businesses that are currently
being carried out from different divisions presently—for School Management Services and
IT/multimedia operations (RediLabs). The Company shall not have to take explicit approval from
the Investors for incorporation of these subsidiaries and for transfer of the relevant portion of the
existing business into these subsidiaries, provided that the stake of the Company in these
subsidiaries is not below 90 percent and that the balance stake is reserved only for ESOPs/equity
shares for the employees for these subsidiaries.
11. Minimum Holding

For a period of seven (7) years or such period that the Investors continues to hold Investor
Securities in the Company, whichever is lesser, the Promoters shall maintain legal and beneficial
ownership of their entire direct or indirect equity share holding and voting interests in the
Company at no less than 51 percent of the entire issued Equity Share Capital and voting rights of
the Company and Promoters will not transfer any shareholding without written consent from the
Investors.
12. Management Information Rights

The Company will provide the following information with the Investors: (a) MIS statement
on a monthly basis and detailed financials on quarterly basis, (b) Audited financials at the end of
financial year, (c) Business Plans on a yearly basis, (d) Internal audit reports
13. Rights to Participate in Future Round

The Investors shall have the right of first refusal to participate in any subsequent issue of
shares/securities to maintain its percentage stake in the company existing at the time of such
issue.
14. Right of Co-Sale/Tag-Along

Any sale of shares held by Promoters will be subject to written approval of the Investors and
further subject to right of first refusal of the Investors and standard co-sale/tag-along rights.
15. Assignment and Transferability

The Investor Securities will be freely transferable along with all rights and benefits to any
Investors’ assign. The Investors undertake not to transfer shares to a list of a maximum of Seven
companies (“Competitors”) without consent of Promoters. Such list can be revised once annually
by the Company’s Board on 1st April.

16. Anti-Dilution Rights

In the event the Company issues additional shares at a price less than the purchase price of
the Investors, the Investors will be issued additional shares at lowest possible price to bring down
the purchase price for the Investors equal to the share price of the new issue. It is clarified that
price of the Investors Securities will be adjusted pro-rata for bonus issues, stock split and/or
consolidation of the Company’s shares.
17. Exit Provisions

The Company and Promoters shall endeavor to list its common shares on recognized stock
exchanges in India, by way of an IPO/Offer for Sale, no later than four (4) years from the date of
initial investment by the Investors. In case of Offer for Sale, the Investors shall be entitled to
participate in the offer by offering Investor Securities on pro-rata (fully diluted) basis. The
Company shall undertake to bear all the expenses related to the listing of the equity shares. The
IPO shall be considered as a “Qualified IPO” for the purpose of the clauses below, only if the
following conditions are satisfied:
a. the floor price per share in IPO is such that it gets an IRR of at least 15 percent on
purchase price (subject to adjustments for stock dividends, splits, combinations, and
similar events)
b. the gross proceeds of the offer to the public by means of a fresh issue of shares are
not less than Rs. 150 Crores
In the event that the Company is unable to provide the Investors with an exit via a Qualified
IPO, the Investors will have following alternatives:
a. Sale to Third-Party Buyers: If the Investors exit has not happened in the manner
contemplated above, within 5 years from the date of initial investment by the
Investors, Promoters shall be required to enter into an agreement with the Investors to
sell up to a maximum of same number of shares as are held by the Investors at that
point in time, along with all of the Investors’ shareholding, to a third-party buyer. It
is clarified that for the purpose of this Clause, the Investors shall be entitled to sell to
any third party including Competitors.
18. Non-Competition and Non-Solicitation and Agreements

The Promoters and their family undertake not to start any other competing business and will
focus their entire efforts on the Company. Any violation of this would trigger the Buyback of
Investor Securities by the Company and/or Promoters, at an IRR of 18 percent.
19. Non-Disclosure Agreements

Each Key Employee with access to Company confidential information/trade secrets will enter
into a non-disclosure and proprietary rights assignment agreement in a form reasonably
acceptable to the Investors and intended to be for a period of three years.

20. Conditions Precedent and Subsequent

a. Key Man Insurance to be in place for the Chairman/Managing Director and other
Key Employees (to be finalised after discussion with the Investors) before
Shareholders agreement
b. The Investors would review the incentive/stock options of senior teachers and
management. If required by Investors, suitable changes will be made to this.
c. Completion of satisfactory financial, business, and legal due diligence of the
Company
d. Tying up of any debt as necessitated by the Business Plan, as decided in consultation
with the Investors
e. Appointment of one of the Big Six as statutory auditor and internal auditors
f. Appointment of CFO in consultation with Investors within 3 month of investment.
The CFO should be a qualified Chartered Accountant with at least 10 years of
experience in a company preferably with M&A/IPO experience.
g. Any other matter to be included post due diligence by the investors
21. Representations, Warranties, and Indemnities

The definitive agreements shall contain the representations and warranties and indemnities by
the Company and Promoter as are usual to transactions of this nature and such other
representations and warranties as are found necessary on conclusion of the due diligence exercise
by the Investors.
22. Confidentiality
The Company/Promoters will not disclose the terms of this Term Sheet to any person other
than officers, members of the Board and the Company’s accountants and attorneys, without the
written consent of the Investors.
23. Investor Protection

The Investors will be indemnified from any legal proceedings initiated against the Company
to the extent that there was no negligence or willful misconduct on the Investors’ part. The
Company shall take Directors’ Liability Insurance to the satisfaction of the Investors.
24. Fall Away of Rights

Subsequent to the Equity Shares having been listed on a Stock Exchange, all rights available
to the Investors will fall away save and except for the rights which are legally and regulatorily
permissible to survive including, but not limited to, (i) the right of the Investors to nominate a
Director to the board of directors of the Company and each of the Subsidiaries, and/or committees
of the above, and (ii) the right to receive information in accordance with Clause 8 above.

25. Exclusivity
The Company and its shareholders/Promoters shall not entertain, discuss, solicit or negotiate
any investment in the Company by any party other than the Investors for a period of 60 days from
the date of this Term Sheet.
The Confidentiality provision of this Term Sheet shall be a binding obligation whether or not
the financing is consummated. This Term Sheet is contingent on the completion of detailed due
diligence (financial, business and legal) and documentation that is satisfactory to the Investors.
This process is likely to take between 4–6 weeks and the Company will bear the expenses up to a
maximum of Rs. 20 lakhs upon successful completion of the transaction (if transaction is not
concluded, Investors will bear the due diligence expenses). The definitive agreements will be
executed amongst the existing Promoters, Company, and the Investors.
This Term Sheet is valid till March 31, 2010 and we request you to sign and return a copy as
a token of your acceptance.
For, For,
ZenCap Private Equity Fund Surya Tutoring Private Limited
Nishit Verma, R. K. Sharma,
Managing Partner Managing Director
Witnessed by: Witnessed by:

Ashok Bhatia, Sunil Gupta,
Advocate Managing Director, Omkar Investment
CAPITALIZATION TABLE
Post-Financing Post-Financing
Pre-Financing (pre-warrants, max) (post-warrants, max)
# of # of # of
Security Shares % Shares % Shares %
Common—Founder 15,00,000 100 13,36,955 82 13,36,955 78.5
Family — — 163,043 10 163,043 9.5
Series A Preferred (ZenCap) — — 1,30,434 8 2,04,545 12
Total 15,00,000 100 16,30,434 100 17,04,545 100
100,000) is referred to as 1 lakh and denoted as 1,00,000. One hundred lakhs (i.e., Rs. 10 million) is referred to as 1 crore and denoted as
1,00,00,000.

Exhibit 3: Blackgem Term Sheet

CONFIDENTIAL
SURYA TUTORING
MEMORANDUM OF TERMS
Except with respect to the provisions entitled “Confidentiality,” which are intended to be, and
are, legally binding agreements among the parties hereto, this Memorandum of Terms represents
only the current thinking of the parties with respect to certain of the major issues relating to the
proposed private offering and does not constitute a legally binding agreement. This Memorandum
of Terms does not constitute an offer to sell or a solicitation of an offer to buy securities in any
state where the offer or sale is not permitted.
THE OFFERING
Issuer: Surya Tutoring, an India corporation (the “Company”)
Securities: Series A Preferred Stock (the “Series A Preferred”)
Valuation of the Rs. 600 crores post-money, i.e., 16x of the audited FY2010 Profit
Company: After Tax
Amount of the offering: Rs. 150 crores
Consideration: Cash
Number of securities: 5,00,000 shares
Price per share: Rs. 3000
Investors: Blackgem or affiliated entities, and other investors acceptable to

the Company
Capitalization: See Exhibit A for the pre-financing capitalization of the Company

and the pro forma capitalization following the proposed offering.
Anticipated closing date: Initial closing on or before March 31, 2010, with one or more
additional closings within 60 days thereafter
TERMS OF THE
PREFERRED
Dividends: Dividend rate. 8%
Cumulation. Noncumulative

Dividends (continued): Priority. Senior to common
Participation. Common may not receive any dividends unless

Series A Preferred receives a dividend (including the preference
amount) equal to the amount it would have received if converted
to common.
Liquidation preference: Amount. Original purchase price plus accrued dividends
Priority. Senior to common
Participation. After payment of preferential liquidation proceeds,

the Series A Preferred does not participate in further liquidation
proceeds.
Deemed liquidation. A sale of all or substantially all of the

Company’s assets or a merger or consolidation of the Company
with any other company will be treated as a liquidation of the
Company.
Redemption: Outstanding shares of Series A Preferred will be redeemed on

March 31, 2015. The redemption price will be the purchase price
plus declared dividends from the closing date plus 4% per annum.
If the Series A Preferred is not redeemed on the date or dates set
for redemption, the redemption price will increase to the purchase
price plus declared dividends plus 10% per annum from the date
originally set for redemption.
Conversion: The Series A Preferred may be converted at any time, at the option
of the holder, into shares of common stock. The conversion rate
will initially be 1:1, subject to anti-dilution and other customary
adjustments.
Automatic conversion: Each share of preferred stock will automatically convert into
common stock, at the then applicable conversion rate, upon (i) the
closing of a firmly underwritten public offering of common stock
(a “Qualified Public Offering”), or (ii) the consent of the holders
of a majority of the then outstanding shares of the preferred stock.
Anti-dilution: Adjustments. The conversion price of the Series A Preferred will

be subject to adjustment, on a broad-based weighted-average basis,
if the Company issues additional securities at a price per share less
than the then applicable conversion price.

Anti-dilution (continued): Exceptions. There will be no adjustment to the conversion price

for:
 shares issued upon conversion of the Series A Preferred;
 shares or options, warrants, or other rights issued to
employees, consultants or directors in accordance with
plans, agreements or similar arrangements;
 shares issued upon exercise of options, warrants, or
convertible securities;
 shares issued as a dividend or distribution on the preferred
stock or for which adjustment is otherwise made pursuant
to the articles of incorporation (e.g., stock splits);
 shares issued in connection with a Qualified Public
Offering;
 shares issued or issuable pursuant to an acquisition of
another corporation or a joint venture agreement approved
by the board (including at least one director elected by the
investors);
 shares issued or issuable to banks, equipment lessors or
other financial institutions pursuant to debt financing or
commercial transactions approved by the board (including
at least one director elected by the investors);
 shares issued or issuable in connection with any settlement
approved by the board (including at least one director
elected by the investors);
 shares issued or issuable in connection with sponsored
research, collaboration, technology license, development,
OEM, marketing, or other similar arrangements or
strategic partnerships approved by the board (including at
least one director elected by the investors);
 shares issued to suppliers of goods or services in
connection with the provision of goods or services
pursuant to transactions approved by the board (including
at least one director elected by the investors);
 shares issued pursuant to other transactions approved by
the board (including at least one director elected by the
investors); and
 shares that are otherwise excluded by consent of holders
of a majority of the Series A Preferred.

General voting rights: Each share of preferred stock will have the right to a number of
votes equal to the number of shares of common stock issuable
upon conversion of each such share of preferred stock. The
preferred stock will vote with the common stock on all matters
except as specifically provided in the articles of incorporation or as
otherwise required by law.
Voting for directors: The holders of Series A Preferred will be entitled to elect two
directors. Any additional directors will be elected by the holders of
preferred stock and common stock voting together.
Protective provisions: Consent of the holders of the Series A Preferred will be required
to:
 alter any provision of the articles of incorporation or the
bylaws if it would alter the rights, preferences, privileges,
or powers of or restrictions on the preferred stock or any
series of preferred;
 increase or decrease the authorized number of shares of
preferred stock or any series of preferred;
 authorize or create (by reclassification or otherwise) any
new class or series of shares having rights, preferences, or
privileges with respect to dividends or liquidation senior to
or on a parity with the Series A Preferred or having voting
rights other than those granted to the preferred stock
generally;
 approve any transaction or series of transactions deemed
to be a liquidation of the company;
 approve any merger, sale of assets, or other corporate
reorganization or acquisition;
 approve the voluntary liquidation or dissolution of the
Company;
 increase the size of the board;
 encumber or grant a security interest in all or substantially
all of the assets of the Company in connection with an
indebtedness of the Company;
 acquire a material amount of assets through a merger or
purchase of all or substantially all of the assets or capital
stock of another entity;
 declare or pay any dividend or distribution or approve any
repurchase with respect to the preferred stock (except as
otherwise provided in the articles of incorporation) or the
common stock (subject to customary exceptions); or
 increase the number of shares authorized for issuance
under any existing stock or option plan or create any new
stock or option plan.

INVESTOR RIGHTS
Right to maintain Each holder of Series A Preferred will have a right to purchase its
proportionate ownership: pro rata share of any offering of new securities by the Company,
subject to customary exceptions. The pro rata share will be based
on the ratio of (x) the number of shares of Series A Preferred held
by such holder (on an as-converted basis) to (y) the Company’s
outstanding securities (on an as-converted and as-exercised basis).
The holders exercising this right will be required to purchase all of
the new securities to be offered. This right will terminate
immediately prior to the Company’s initial public offering.
Right of first refusal: In the event Mr. Sharma proposes to transfer any common stock or
other securities convertible into or exercisable for common stock,
the holders of Series A Preferred will have a right of first refusal
(on a pro rata basis based on the Company’s outstanding securities
(on an as-converted and as-exercised basis)) with respect to the
proposed transfer.
The rights of first refusal will be subject to customary exceptions

and will terminate on a Qualified Public Offering.
“Co-sale” rights: To the extent the rights of first refusal are not exercised, in the
event Mr. Sharma proposes to transfer any common stock or other
securities convertible into or exercisable for common stock, the
holders of Series A Preferred will have the right to participate in
the proposed transfer on a pro rata basis (as among the transferee
and the holders of Series A Preferred). Rights to participate in the
proposed transfer will be reallocated to the extent unexercised. The
co-sale rights will be subject to customary exceptions and will
terminate on a Qualified Public Offering.
“Drag-along” right: Subject to customary exceptions, if holders of a majority of the

Series A Preferred approve a proposed sale of the Company to a
third party (whether structured as a merger, reorganization, asset
sale, or otherwise), Mr. Sharma will agree to approve the proposed
sale.
Voting agreement: The principal stockholders of the Company will agree to elect to
the board:
 Two Series A designees as the Series A directors. The first
Series A designee will be chosen by Blackgem. The
second Series A designee will be chosen by Blackgem.
 Two common stock designees. The first common stock
designee will be chosen by Mr. Sharma. The second
common stock designee will be chosen by Mr. Sharma.

Voting agreement  One mutual designee, as approved by (i) founders

(continued): holding a majority of the common stock held by all
founders and (ii) investors holding a majority of the
shares held by all investors.
Director liability: The directors will be entitled to customary indemnification from
the Company and reimbursement of reasonable costs of attendance
at board meetings. The Company will also obtain D&O insurance
reasonably satisfactory to the Company and its directors.
Information rights: The Company will deliver to each holder of at least 4,00,000
shares of Series A Preferred:
 unaudited annual financial statements within 120 days

following year-end; and
 unaudited quarterly financial statements within 45 days
following quarter-end.
The information rights will terminate upon an initial public

offering.
EMPLOYEE MATTERS
Vesting of founder shares: Shares and options held by all founders will be subject to a vesting
schedule to be mutually agreed upon with the investors. The
Company will have the right, upon termination of services, to
repurchase any unvested shares.
Vesting of employee Subject to the discretion of the board, shares and options issued to
shares: employees, directors and consultants will be subject to four-year
vesting, with 25% vesting on the first anniversary of the
commencement of services and the remainder vesting monthly
thereafter. The Company will have the right, upon termination of
services, to repurchase any unvested shares.
Proprietary information The Company will have all employees and consultants enter into
agreements: proprietary information and inventions agreements.
“Key person” life The Company will obtain a “key person” life insurance policy on
insurance: Mr. Sharma in the amount of 150 crores, with proceeds payable to
the Company.

OTHER MATTERS
Purchase agreement: The investment will be made pursuant to a stock purchase

agreement which will contain, among other things, appropriate
representations and warranties of the Company and the investors
and appropriate conditions of closing.
Finders: The Company and the investors will each indemnify the other for
any finder’s fees for which they are respectively responsible.
Legal fees and expenses: The Company will pay the reasonable fees and expenses of a
single counsel to the investors if the financing closes. Fees and
expenses payable hereunder will be payable at closing by wire
transfer.
Confidentiality: Until the initial closing of the financing contemplated by this

Memorandum of Terms, the existence and terms of this
Memorandum of Terms and the fact that negotiations may be
ongoing with the investors shall not be disclosed to any third party
without the consent of the Company and the lead investor(s),
except as may be (i) reasonably required to consummate the
transactions contemplated hereby (provided that any persons
receiving the information agree to the confidentiality restrictions
contained herein or are otherwise subject to confidentiality
obligations) or (ii) required by law.
Conditions precedent: The investment will be subject to customary conditions, including

but not limited to:
 completion of due diligence to the satisfaction of the

investors;
 negotiation and execution of definitive agreements
customary in transactions of this nature;
 receipt of all required authorizations, approvals, and
consents;
 delivery of customary closing certificates; and
 the absence of material adverse changes with respect to
the Company.
This Memorandum of Terms may be executed in counterparts, which together will constitute
one document. Facsimile signatures shall have the same legal effect as original signatures. The
legally binding portions of this Memorandum of Terms will be governed by India law, without
regard to conflicts-of-law principles.

For, For,
Surya Tutoring Private Limited Blackgem Private Equity Fund
R. K. Sharma, Greg Smith,
Managing Director Managing Partner
Signature Signature
Date Date
EXHIBIT A: CAPITALIZATION
Pre-Financing Post-Financing
Security # of Shares % # of Shares %
Common—Founder 15,00,000 100 15,00,000 75
Series A Preferred—Blackgem — — 5,00,000 25
Total 15,00,000 100 20,00,000 100
100,000) is referred to as 1 lakh and denoted as 1,00,000.

Exhibit 4: Comparables
Quarterly Data Educomp Solutions Everonn Education
Date 31-Mar-10 31-Mar-10
Last traded price 747.85 370.35

Percentage change (from last quarter) 4.81% -9.65%
52-week high price 4,705.0 467.05
52-week low price 651.1 137.40
Results (in lakhs)

Sales 27,337.89 29,349.72
Profit after tax 6,752.48 4,544.61
Equity (market value) 355,629.93 55,998.40
Ratios
Operating profit margin 51.15% 25.8%
Net profit margin 24.7% 15.5%
Earnings per share 7.11 30.06
Ownership
Promoter and promoter group 50.08% 26%
Indian private? 50.08% 26%
Foreigner private? 0% 7%
Public 49.93% 67%
Institution 42.23% 45%
Non-institution 7.7% 22%
Date of IPO Dec-05 Jul-07
100,000) is referred to as 1 lakh and denoted as 1,00,000.
Exhibit 5: Financial Market Data

Interest Rates
5-year Treasury bond 8.19%


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REVISED NOVEMBER 16, 2015

PAOLA SAPIENZA, VINEET BHAGWAT, AND APAAR KASLIWAL KEL679

Indian Institute of Technology

Table 1: Acceptance Rates for IIT-JEE

IIT Testing-Prep Industry

2 KELLOGG SCHOOL OF MANAGEMENT

Private Equity in India

KELLOGG SCHOOL OF MANAGEMENT 3

4 KELLOGG SCHOOL OF MANAGEMENT

KELLOGG SCHOOL OF MANAGEMENT 5

6 KELLOGG SCHOOL OF MANAGEMENT

Exhibit 1: Surya Tutoring Financial Projections (in Rs. crores)

Interest expense 0.00 0.00 0.00 0.00 0.00

Tax expected @ 35% 19.74 30.18 45.57 58.85 76.17

KELLOGG SCHOOL OF MANAGEMENT 7

Exhibit 2: ZenCap Term Sheet

TERM SHEET FOR INVESTMENT IN EQUITY OF

1. Investor Securities and Investment Amount

“Investor Securities” shall mean and include the following (collectively):

2. Pre-Money Valuation and Post-Money Valuation and ESOP

8 KELLOGG SCHOOL OF MANAGEMENT

At maximum post-money valuation, Investor Securities (assuming the CCPS on an as-

3. Warrant Conversion Schedule

KELLOGG SCHOOL OF MANAGEMENT 9

a. amending any provision of the Memorandum of Association and the Articles of

c. purchasing or redeeming or paying any dividend on any capital stock which is in

10 KELLOGG SCHOOL OF MANAGEMENT

l. sell, transfer, license, pledge or encumber technology or intellectual property

8. Brand Holding/Promoter Remuneration

KELLOGG SCHOOL OF MANAGEMENT 11

9. Transactions with Related Parties

10. Creation of Subsidiaries

11. Minimum Holding

12. Management Information Rights

13. Rights to Participate in Future Round

14. Right of Co-Sale/Tag-Along

15. Assignment and Transferability

12 KELLOGG SCHOOL OF MANAGEMENT

16. Anti-Dilution Rights

17. Exit Provisions

18. Non-Competition and Non-Solicitation and Agreements

19. Non-Disclosure Agreements

KELLOGG SCHOOL OF MANAGEMENT 13

20. Conditions Precedent and Subsequent

21. Representations, Warranties, and Indemnities

23. Investor Protection

24. Fall Away of Rights

14 KELLOGG SCHOOL OF MANAGEMENT

Witnessed by: Witnessed by:

KELLOGG SCHOOL OF MANAGEMENT 15

Exhibit 3: Blackgem Term Sheet

Issuer: Surya Tutoring, an India corporation (the “Company”)

Securities: Series A Preferred Stock (the “Series A Preferred”)

Amount of the offering: Rs. 150 crores

Number of securities: 5,00,000 shares

Price per share: Rs. 3000

Investors: Blackgem or affiliated entities, and other investors acceptable to

Capitalization: See Exhibit A for the pre-financing capitalization of the Company

Dividends: Dividend rate. 8%

16 KELLOGG SCHOOL OF MANAGEMENT

Dividends (continued): Priority. Senior to common

Participation. Common may not receive any dividends unless

Liquidation preference: Amount. Original purchase price plus accrued dividends