BUSN6730 Business in Emerging Markets: Legal Risks

After completing their undergraduate degrees at SRCC in 1990, Sabharwal and Reddy both moved to Hyderabad, Reddy’s home town. During his first few months there, Sabharwal stayed with Reddy’s family until he was able to find a place of his own, which further strengthened their relationship. After several years of work experience, both chose to return to school to earn MBAs. Reddy earned his at the Indian Institute of Management (IIM) Bangalore (1993-1995) and Sabharwal at The Wharton School at The University of Pennsylvania (1994-1996). It was during this time that the concept for India Life was born.

Sabharwal first developed the idea for India Life while working on a project for an entrepreneurship course at Wharton. He believed the Indian health insurance space was underserved and in the report he explored the possibility of applying an American model to the Indian market. However this idea was discarded shortly after Sabharwal realized that a large amount of capital was required to start the venture. He continued to strongly believe that „concept arbitrage‟ presented a unique opportunity for a quick entry into the Indian market with an established business model.

Sabharwal took a bet that India’s Provident Fund, the state sponsored pension and insurance scheme, could gain from an intermediary that handled benefit management and pension payment processing. This was already being done in the US by companies such as ADP, and Sabharwal believed that applying this model in India would work: it required only a small amount of financing, could be started quickly, and was proven in another market. As soon as Sabharwal returned to India in 1997, he re-connected with Reddy to share his idea.

Eager to make a change, Reddy took little convincing from Sabharwal to make his decision. A few weeks later, Reddy tendered his resignation and jumped head first into what was to later become India Life.Reddy and Sabharwal refined their plan for India Life over the next several months and then pitched the idea to Centre Partners, a division of Lazard‟s Alternative Investments Practice. With only an idea and a rough business plan in hand, Sabharwal and Reddy secured approximately $2 million in exchange for a 50% equity stake. The team used the funding to quickly enter the market by acquiring a small human resources consulting firmcalled Kumar and Associates. They changed the name to India Life and the new company was incorporated in 1997.

India Life mainly administered retirement schemes – including transaction processing,regulatory compliance, and investment advisory services – and helped corporations move from defined benefit pension plans to defined contribution plans. Over time, the company added payroll services and other administrative services related to pensions. The idea of concept arbitrage was looking more and more like a success, as India Life grew into what some considered the ADP of India. However, clients began asking for additional services such as pay-rolling1 and temporary staff, which Sabharwal and Reddy were not sure that India Life could provide at the time due to resource constraints.

The rapid growth of India Life caught the attention of several multinational corporations (MNCs) and in 2001, Reddy and Sabharwal were approached by Hewitt Associates. Hewitt placed an offer on the table: an initial payment of $4 million and an additional sum to be paid in one year’s time at a price based on performance. Reddy and Sabharwal considered whether the offer was priced fairly and if the timing was right

•    What do you like about the market for temporary staffing in India? What are your concerns?

•    How attractive is the temporary staffing industry in India? What are your concerns?

•    How well suited is this particular entrepreneurial team to this particular opportunity? What, if any, are the gaps in the team?

•    The business idea appears to be illegal. How might any legal risks be mitigated?

•    All things considered, should Manish and Ashok start the business, or should they look for an idea that’s more attractive or less risky?

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