INDIA INTELLIGENCE REPORT
 

Corp Expansion despite Stalled Reforms
Despite a stalled disinvestment process and halt to reforms, several positive factors in the Indian economy, perhaps not to the optimal level, have emerged encouraging targeted overseas mergers and acquisitions (M&A) by many Indian companies.

 

 

Despite a stalled disinvestment process and halt to reforms, several positive factors in the Indian economy, perhaps not to the optimal level, have emerged encouraging targeted overseas mergers and acquisitions (M&A) by many Indian companies.

Reflecting to this bullish trend, the stock market oversight authority {Securities Exchange Board of India (SEBI)} released a set of impressive data for 2005-06:

Turnover in cash segment was at 43.4% encouraging a healthy equity valuation at Rs. 2,390,103 crore (USD 520 billion) during 2005-2006

Market capitalization to gross domestic product (GDP) ratio of 85.6%

Stock market index Sensex growing at 73.7% and S&P CNX Nifty at 67.1% last year

Mutual funds saw highest ever investment at Rs. 52,779 crore (USD 11,500 billion) or a 55% increase from previous year

139 companies raising Rs. 27,382 crore (USD 5.9 billion) through Initial Public Offering (IPO) or additional issues

SEBI recorded 224 new Foreign Institutional Investors (FII) taking the total to 882 such companies bringing in Rs. 48,801 crore (USD 10.6 billion)

Domestic venture capital funds grew to 80

To check stock market fraud, SEBI says it investigated 165 cases and brought 81 cases to closure and bringing in several safety monitoring, alerting, investigative, and remedying measures including electronic fund transfer mechanisms

The growth pattern reported by SEBI seems to be continuing. Pricewater-Coopers (PwC) say that in the last 6 months Indian companies signed 76 international outbound and inbound deals for a total of USD 25.6 billion within the first 6 months with June alone seeing 10 deals valued at USD 1.5 billion. This USD 8 billion or 220% rise from similar period last year has left China, South Korea, Indonesia, and Honk Kong far behind in terms of M&A in the Asia-Pacific region. Indian performance in M&A is bested only by Japan and Australia.

PwC says that the driving force behind this trend are a desire to create new markets, expanding existing production capacities, gaining domain knowledge through targeted technology acquisitions, and preparing for massive infrastructure investments. Unlike the past where investments were flowing into liberalized markets, the new trend is outbound where Indian companies are being more risk tolerant and aggressive to capture new avenues to fuel their growth. Most acquisitions in terms of numbers have been in Europe which absorbed 50% of the deals while South America taking the top slot in terms of value with pharmaceuticals, information technology, and auto ancillary segments taking the lead in this expansion. Indian pharmaceuticals have grown rapidly in the generic space especially in the EU market.

With increased deregulation allowing more investment flow on the cards, this trend is expected to continue and investments through foreign direct investment (FDI) (a major concern in India), private equity, and venture capital investments will grow rapidly. However, India has rightly indicated that its interest to grow the economy will not be at the cost of its national security. Intelligence agencies have warned that allowing Chinese companies, especially those without clear ownership or equity transparency, to invest or acquire Indian companies may be risky. For example, the acquisition bid by Dubai Ports World of Peninsular and Oriental Steam Navigation Co and the entry of Egyptian telecom company Orascom through investments in Hutch India have been stopped. India is not alone in this healthy paranoia on who invests in its infrastructure. The United States had declined an offer by State owned Chinese Oil Company CNOOC of American Oil Company Unocal. Despite strong scrutiny and restrictions, FDI proposals continue to trickle in. Finance Ministry officials say that it has approved 18 FDI proposals valued at Rs. 568 crore (USD 126 million) in luxury brands, telecom, oil exploration, and manufacturing.

In the near future, Oil and Natural Gas Corporation (ONGC) is leading the Indian expansion with plans to invest in Sakhalin oil fields and exploring oil investment opportunities in Libya. In inbound terms, Credit Rating Information Services of India Limited (CRISIL) says that the next major outsourcing opportunity is legal services that could rise to USD 4 billion and provide 79,000 jobs by 2015 from the present USD 60-80 million. The upward legal outsourcing potential is being pegged at USD 25 billion.