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Indian Investments Abroad

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Indian Investment Abroad - Overseas Direct Investment by Indian Companies

February, 2015

Introduction

Outbound investments from India have undergone a considerable change not only in terms of magnitude but also in terms of geographical spread and sectorial composition. Analysis of the trends in direct investments over the last decade reveals that while investment flows, both inward and outward, were rather muted during the early part of the decade, they gained momentum during the latter half. While FDI inflows between FY 2002 to FY 2014 witnessed a CAGR of 21 per cent, FDI outflows registered a higher growth rate of CAGR 35.1 per cent during the same period.

There has been a perceptible shift in overseas investment destination (ODI) in last decade or so. While in the first half, overseas investments were directed to resource rich countries such as Australia, UAE, and Sudan, in the latter half, ODI was channeled into countries providing higher tax benefits such as Mauritius, Singapore, British Virgin Islands, and the Netherlands.

Indian firms invest in foreign shores primarily through mergers and acquisition (M&A) transactions. With rising M&A activity, companies will get direct access to newer and more extensive markets, and better technologies, which would enable them to increase their customer base and achieve a global reach.

Market size

India has emerged as one of the strongest performers in the deal-street across the world in mergers and acquisitions. M&A activity increased in 2014 with deals worth US$ 38.1 billion, compared to US$ 28.2 billion in 2013 and US$ 35.4 billion in 2012. There have been M&A deals worth US$ 28.8 billion in the first 10 months of 2015.

M&A activity also witnessed increase in the inbound and domestic segments which together contributed over 80 per cent of the total M&A values. Value of inbound deals in 2014 was up by 35 per cent compared to previous year value that stood at US$ 8.7 billion. The value of domestic deals in 2014 increased by 189 per cent over 2013, though volumes increased by 43 per cent, according to the 10th Grant Thornton India LLP annual deal tracker.

Direct investments by Indian firms were US$ 2.28 billion in October 2015, as per Reserve Bank of India (RBI) data. The investments were primarily a mix of issuance of guarantees (US$ 1.72 billion), loan (US$ 210.94 million) and of equity (US$ 341.82 million).

Investments

FDI outflows in 2014 were mostly directed towards countries providing higher tax benefits such as Netherlands (26 per cent), Singapore (14 per cent) and Mauritius (12 per cent). On the sector front, transportation, storage & communication services drew maximum investment outflows from India (28 per cent). Companies have also been actively investing in sectors such as manufacturing (24 per cent), agriculture & mining (21 per cent), wholesale, retail trade & restaurant (10 per cent), financial institution & business services (8 per cent).

In a recent development, UK announced that India has become the third largest source of FDI for them as investments increased by 65 per cent in 2015 leading to over 9,000 new and safeguarded jobs.

Some of the major overseas investments by Indian companies were:

  • Wipro Limited, India's third largest information technology (IT) services company, has agreed to buy Viteos Group, a US based business process outsourcing (BPO) technology platform provider for capital markets, for US$ 130 million.
  • India's largest integrated power company, Tata Power, has prioritised four key regions for international foray - Africa, South East Asia, the Middle East and SAARC - and has deployed resources to constantly update itself with the market dynamics and opportunities in these areas.
  • Indian automobile major, Mahindra & Mahindra, together with its affiliate Tech Mahindra, has agreed to buy 76 per cent stake in the Italian car designer company Pininfarina SPA, in a deal worth US$ 185 million.
  • Luxury carmaker Jaguar Land Rover (JLR), owned by India’s Tata Motors Ltd, has planned to build a US$ 1.5 billion car plant in Slovakia with an annual output of up to 300,000 cars.
  • Religare Capital Markets is entering into a joint venture with Thailand’s Trinity Securities to expand its investment banking services in Southeast Asia. Religare had signed a joint venture in April 2015 in the Philippines to provide investment banking and equity capital markets services with FSG Capital. It is also exploring further growth initiatives in Bangladesh, Vietnam, and Myanmar.
  • The Essel Group ME , a wholly-owned subsidiary of Essel Group India, has signed an agreement for acquiring 60 per cent participating interest in the portfolio of African oil and gas exploration projects owned by Simba Energy Inc, a Canadian publicly traded oil and gas company.
  • Reliance Power plans to spend about US$ 3 billion to set up a 3,000- megawatt power plant based on imported liquefied natural gas in Bangladesh.
  • Auto major Tata Motors launched assembly operations for light commercial vehicles in Tunisia with its local partner ICAR SA. Tata Motors will commence production of pick-ups and light commercial vehicles in Tunisia from June 2015.Gujarat-based Adani Group plans to invest US$ 2.5 billion in building a 1,600-megawatt coal-fired power plant in Bangladesh.

Government initiatives

The Reserve Bank of India, encouraged by adequate forex reserves, has relaxed the norms for domestic companies investing abroad by doing away with the ceiling for raising funds through pledge of shares, domestic and overseas assets. In addition to joint ventures (JVs) and wholly owned subsidiaries (WOSs), the central bank has announced similar concessions for pledging of shares in case of step down subsidiary.

The Reserve Bank of India (RBI) also liberalised/ rationalised guidelines for foreign investments abroad by Indian companies. It raised the annual overseas investment ceiling to US$ 125,000 from US$ 75,000 to establish joint ventures (JV) and wholly owned subsidiaries. The government's supportive policy regime complemented by India Inc.’s experimental outlook could lead to an upward trend in outward foreign direct investment (FDI) in future.

The Union Cabinet chaired by the Prime Minister, Mr Narendra Modi, has given its approval for the framework of inter-governmental memorandum of understanding (MoU) which will be finalised by the Government of India and Iran.

The RBI has relaxed norms for foreign investment by Indian corporates by raising the borrowing limit. The financial commitment to be undertaken by an Indian party will be limited to within 400 per cent compared to the earlier 100 per cent of the company's net worth.

The RBI has also allowed limited liability partnership (LLP) firms to undertake financial commitment to/ on behalf of JV or wholly owned subsidiaries of Indian companies abroad.

The Indian government is making efforts to integrate the country's economy with the rest of the world. To help the country's firms raise capital abroad, the government will facilitate unlisted Indian companies to list on foreign markets without having to be publicly traded on domestic exchanges.

India and South Africa are considering prospect of setting up a joint venture (JV) for mining and owning coal blocks in South Africa.

Prime Minister Mr Narendra Modi has promised Africa a concessional credit of US$ 10 billion over the next five years, in order to further strengthen ties with the African countries.

Road ahead

Overseas investment is one of the foremost steps to enter the global marketplace and in recent times, India has taken necessary steps to make its presence felt in the global arena. Investment outlook in some of the overseas market looks positive. For instance, the Indian industry is projected to increase its revenue from Africa. Information technology (IT) services, infrastructure, agriculture, pharmaceuticals and consumer goods are vital to India boosting Africa revenues to US$ 160 billion by 2025, as per McKinsey & Co.

In another development, the Ministry of External Affairs has initiated a move to set up a direct sea and air link between India and the Latin American region, as Indian corporates plan significant investments in the mining, oil, IT and pharmaceutical sectors in that region.

Exchange rate used: INR 1: US$ 0.015 as on December 17, 2015

References: Department of Industrial Policy and Promotion (DIPP), Media Reports and Press Releases, Press Information Bureau (PIB), Reserve Bank of India (RBI), Directorate General of Foreign Trade