In the last few years, there has been a significant amount of investment by Indian businesses and corporate houses outside the country and worryingly enough, this trend seems to be on an upward curve. There is a significant change in terms of the regions where the investments are taking place as well as the sectors in which they are happening. If the investment trends of the last decade are analysed, it will be clear that in the first half, both internal and external direct investments were rather limited. The process gained traction in the second half of the period under consideration.
One of the major reasons in this case is a general slowdown in Indian markets and problems regarding policymaking that do not seem to go away. This has also forced the hands of Indian companies that are now looking outside the country for growth. Jindal Steel and Power is one of the newest names to become a part of this group. It will invest USD 2 billion in a power plant to be built in Africa. The Birla Group is also supposed to spend USD 750 million around the world in an effort to add to its aluminium stocks.
What Do Stats Reveal?
Between 2002 and 2014, FDI inflows experienced a compound annual growth rate (CAGR) of 21%. At the same time, the CAGR for FDI outflows was mapped at 35.1%. As may be evident from the abovementioned statistics investors in India are clearly interested in opportunities outside the country than in India. In the first five years, countries that are rich in natural resources such as Australia, Sudan, and the United Arab Emirates were the main targets. In the next set of five years, the focus shifted to countries such as Mauritius, British Virgin Islands, Singapore, and the Netherlands, where more tax benefits were on offer. The Reserve Bank of India has stated that in February 2015 alone, Indian companies have invested almost USD 1.65 billion outside India. During January 2015, Indian companies had invested USD 3.3 billion in this regard. Tellingly, this amount is much higher than what has been invested in India by Indian companies or even the foreign direct investment for that matter.
Mergers and Acquisitions
Mergers and acquisitions represent the most often followed mode for Indian companies to invest outside the country. They also allow them to enter newer markets, which happen to be more extensive and technologically better as well. This also helps them get across to newer customer groups and thus expand the base of their operations to different corners of the world in the process. As far as M&As are concerned, India is right now one of the strongest performers. In 2014, the total worth of such deals concluded by Indian companies was to be USD 38.1 billion. In 2013, the same number was USD 28.2 billion and in 2012, it was USD 35.4 billion.
The 10th Grant Thornton India LLP annual deal tracker states that in 2014, the aggregate worth of inbound M&A deals increased by 35% compared to 2013 when the aggregate worth of such deals was USD 8.7 billion. As far as domestic M&A deals are concerned, 2014 saw an increase of 189% over 2013. There was also an increase of 43% in terms of volume of deals signed in the said period. RBI data reveals that during December 2014, Indian firms made direct investments worth USD 2.47 billion. Out of this amount, guarantees amounted to USD 1.69 billion, equity investments were worth USD 180.23 million, and loans amounted to USD 178.72 million.
Break-up of Investments
In 2014, countries that provided more tax benefits were high on the priority list of Indian companies investing outside the country. With 26.2% Netherlands headed the list. Mauritius (12%) and Singapore (14%) were the other major names in this regard. From a sectoral perspective, the main names were transport, storage and communication with 26% of investment, manufacturing with 24%, agriculture and mining with 21%, wholesale, retail trade and restaurant with 10%, and financial institution and business services with 8%. A few days back, the UK had stated that India was the third leading investor in the country. In 2015, Indian investments in the UK have increased by 65%. This has led to the creation of more than 9,000 new jobs with complete security.
Leading Overseas Investors
Tata Motors, one of the leading names in the automobile industry in India, has started its assembly operations for the lighter commercial vehicles in Tunisia. Its local partner over there is ICAR SA. It has started making light commercial vehicles and pick-ups in the North African country from June 2015 onwards. Wipro has started talks with Equiniti, an outsourcing group based in the UK. It is looking to take the company over and the deal, if sealed, is expected to cost a billion pounds and be one of the biggest acquisitions made by the Indian IT giant. Religare Capital Markets is looking to get into a joint venture with Trinity Securities of Thailand. This deal will help it provide its investment banking services in Southeast Asia as well. During April 2015, it started a similar venture with FSG Capital to provide equity capital markets services and investment banking in the Philippines. It is looking for similar opportunities in Bangladesh, Myanmar and Vietnam.
Essel Group ME, owned by Essel Group India, has signed an agreement with a publicly traded oil and gas enterprise from Canada named Simba Energy Inc. As per the deal, it will be buying 60% participating interest in the exploration projects of the company in Africa. Tata Motors has associated with Manahil International Company, an organization based in Saudi Arabia, and launched an automobile showroom and service facilities in Riyadh. This is one of the biggest facilities of its kind in that city. Nava Bharat Ventures Limited, based in Hyderabad, is set to start a thermal power project in Zambia that will have a production capacity of 300 megawatt and run on coal.
Reliance Power will spend USD 3 billion in Bangladesh in order to start a power plant that will run on imported LNG (liquefied natural gas) and have a production capacity of 3000 mega watt. Adani Group, of Gujarat, has similar plans in Bangladesh. It will spend USD 2.5 billion for a power plant that will run on coal and produce 1600 megawatt. Bangladesh, it seems, has picked up this chance to improve its bilateral trade with India and has allowed the establishment of a couple of SEZs (special economic zones) that will be used by Indian companies. This will also allow the Life Insurance Corporation to start functioning over there.
Facilitation by Government
The Reserve Bank of India is enthused by the volume of forex reserves and has relaxed the rules for Indian companies to be able to invest outside the country. It has removed the upper limit of increasing funds by pledging shares as well as assets held by these companies within India and outside the country. It has allowed shares to be used for JVs, WOSs (wholly-owned subsidiaries) and step down subsidiaries.
RBI has also made its guidelines for Indian companies investing abroad less strict as well as more rational. The maximum amount that can now be invested outside India has been increased to USD 125,000 from USD 75,000. It is expected that this would help Indian companies enter JVs and buy more WOSs. It is expected that thanks to these beneficial laws, Indian companies will be investing in greater amount in other countries. Narendra Modi has given his consent to a MoU (Memorandum of Understanding) to be signed between the governments of India and Iran. It has also increased the borrowing limit so that Indian corporate houses find it easier to invest abroad.
Previously, Indian companies were allowed to take loans within 100% of their net worth. Now, the amount has been extended to 400%. RBI has also permitted Limited Liability Partnership (LLP) firms to financially commit to JVs or WOSs of Indian companies outside the country. They can commit on their behalf as well. These days, the national government is making efforts to create a bridge between Indian and global economy. This is why it has also allowed unlisted Indian companies to be listed in markets outside India even if they are not listed in India.
What Does the Future Hold?
Overseas investment has now become one of the major ways in which companies can gain entry in the global markets. It seems that India has recognized this and is trying to create a presence in the global arena. Indian companies, too, are big on investing outside the country. It is expected that in the days ahead Africa is going to be a major source of revenue. McKinsey & Co states that by 2025, Indian companies would be earning USD 160 billion and the main areas in this regard are going to be information and technology services, pharmaceuticals, infrastructure, consumer goods and agriculture.
The Union External Affairs Ministry has stated that it would be setting up direct sea and air links to Latin America. Indian companies are eyeing several sectors in the region such as mining, IT, oil, and pharmaceuticals. It is expected that the steps taken by the Indian Government along with the outlook of Indian companies will soon see greater investments in the international arena.
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