December 30, 2008
An increasing number of Indian companies are now reaching out for overseas destinations in order to access high growth markets, technology and knowledge, boost their positioning in the value chain, attain economies of size and scale of operations, to tap global natural resource banks and leverage international brand names for their own brand building.
According to the latest UNCTAD's World Investment Report 2007 (WIR '07), India’s outward foreign direct investment (FDI) was the second highest at US$ 20.4 billion after Brazil at US$ 28 billion. Significantly, while China's outward FDI rose by 32 per cent, to US$ 16 billion in 2006, India's outward FDI went up by almost four times.
According to a Reserve Bank of India's (RBI) report published in July 2008, India's total outbound investments in joint ventures and wholly owned subsidiaries (WOS) abroad grew by 53.2 per cent in financial year 2008, at US$ 23.07 billion, as against US$ 15.06 billion in the previous fiscal. The overall number of proposals during financial year 2008 has totalled to 2,261, with a growth of 24.4 per cent over the 1,817 proposals registered, and 53.2 per cent in amount of investment over the previous year.
Further, according to the RBI report, actual outward FDI during 2007–08 totalled US$ 17.43 million, a rise of 29.6 per cent over US$ 13.45 million, in the previous year. Of the total investments, 81.6 per cent were in the form of equity and the remaining 18.4 per cent in the form of loans. Almost 35 per cent of the proposals for outward FDI were directed towards Singapore, around 23 per cent to Netherlands, followed by British Virgin Islands with seven per cent. Equity accounted for 61.2 per cent of the proposals for investment, loans for 11.4 per cent, and guarantees for 27.4 per cent. During 2007-08, automatic route covered 99.6 per cent of the proposals, involving 96.4 per cent of the amount of investments. The remaining was through approval route. Inflows from India's outward FDI amounted to US$ 916 million in FY 2008, registering a 76.7 per cent growth over the previous year's figure of US$ 518 million.
Actual outward FDI during the quarter January-March, 2008 stood at US$ 7.32 million, which was higher by 63.4 per cent than the figure during previous year. Of the total investments, 70 per cent were in the form of equity and the remaining 30 per cent were loans. For the quarter ended March, 2008, Singapore, Mauritius, Cyprus and UAE together received 50 per cent of the outward proposals worth US$ 5 million or above, RBI said. During the year, almost 43 per cent of the proposals came from manufacturing, followed by non-financial services with 11 per cent, and trading with four per cent.
Mergers and Acquisitions
A significant part of Indian overseas investment has gone into acquisitions abroad.
In its latest report, Grant Thornton, a global consultancy firm, stated that "The total number of M&A deals during the first 11 months of 2008 stood at 433, with an announced value of US$ 31.95 billion. The number of outbound deals has far exceeded the domestic ones in terms of value break up. According to Grant Thornton’s Special Advisory Services official, for the month of November alone, there were 26 M&A deals with a total announced value of US$ 3.40 billion, which is higher than October 2008 at US$ 2.13 billion and comparatively higher than November 2007 levels at US$ 850 million. Out of the 15 cross-border deals in November, eight were outbound wherein Indian companies acquired business abroad with a value of US$ 0.04 billion. The most important acquisition has been that of UK-based Axon Group by HCL Tech for about US$ 658 million.
Also, the total number of PE deals during January-November 2008 stood at 295, with a total announced value of US$ 10.11 billion. Further, as many as 21 PE transactions were confirmed during November with an announced value totalling US$ 449 million.
The overall deal value added up to US$ 26 billion till September 2008, and at more than US$ 11.8 billion, industries related to infrastructure carved out a major chunk of the mergers and acquisitions (M&As), accounting for 45 per cent of the deals. With 42 per cent of the deal value in the infrastructure sector, the power sector accounted for US$ 5 billion. It was followed by telecommunication sector with US$ 3.75 billion.
According to global audit and consultancy giant, KPMG, "With outbound deals now having outnumbered inbound deals for the each of the last three six-month periods, India seems well set to become a net 'deal exporter' in the next Emerging Markets International Acquisition Tracker (EMIAT) in 2009."
As per KPMG's EMIAT study, in an analysis of deals between developing and developed economies since 2003, it was revealed that there were 322 completed deals wherein Indian buyers had bought companies in the major developed economies. Against this, there were 340 concluded deals in which companies from developed countries acquired Indian companies.
The total number of M&A deals announced during August stood at 31, totalling US$ 4.63 billion apart from 43 deals valued at US$ 580 million during July 2008, according to the latest deal tracker report of advisory firm Grant Thornton. Among the top M&A deals during the month was ONGC's acquisition of Imperial Energy Plc followed by Infosys Technology's announcement to acquire UK-based Axon and CBay Systems deal for MedQuist.
In all, there were nine domestic deals where both the buyer and the target were Indian firms, with a committed value of US$ 80 million. Also, there were 22 cross-border M&A deals with a committed value of US$ 4.55 billion. Out of this, 17 were outbound deals worth US$ 4.48 billion involving Indian companies acquiring business overseas and five were inbound deals where multinational firms picked stake in domestic companies for US$ 80 million. During January-August 2008, the M&A deals thus totalled US$ 22.74 billion spread over 346 transactions. During the same period last year, India Inc had recorded 456 deals amounting to US$ 48.23 billion.
Further, India has outperformed China by a huge margin in merger and acquisition (M&A) deals. According to a survey on global M&A transactions by Ernst & Young, the value of deals for India stood at US$ 28 billion in 2007, as against US$ 2.3 billion deals in China. The Indian deals were dominated by Tata's acquisition of Corus and AV Birla Group's Novelis deal (both accounting for US$ 22 billion).
India's foreign investments are testimony to the continued growth in the Indian economy and Indian companies.
Favourable Policy Changes
In a bid to give further impetus to overseas investments, the Reserve Bank of India has further liberalised overseas investment norms for both direct and portfolio investment with the following steps:
With more mergers and acquisitions, Indian companies would be getting direct access to new and more extensive markets, and new products and technologies, which would enable them to increase their existing customer base and market hold. This would otherwise take years to develop through the organic route.
In a bid to increase business and strengthen their global presence, more overseas investments by leading Indian firms are on the anvil.
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