Indian Investment Abroad - Overseas Direct Investment by Indian Companies

Introduction

Outbound investment 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 investment 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.

There has been a perceptible shift in Overseas Investment Destination (OID) 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, OID was channelled 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). 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

According to the data provided by Reserve Bank of India (RBI), According to data provided by Reserve Bank of India (RBI), India’s Outward Foreign Direct Investment (OFDI) in equity, loan and guaranteed issue stood at ~US$ 1.06 billion in November 2020 vs. US$ 3.51 billion in October 2020.

Investments/Developments

Some of the major overseas investments by Indian companies were:

• In the first eight months of FY21, Corporate India invested US$ 12.25 billion overseas, most of which has gone into the company's wholly owned subsidiaries in countries such as the US, Singapore and the Netherlands, according to Care Ratings.
  • Of the overall US$ 12.25 billion, ~76% or US$ 9.25 billion was invested into wholly owned subsidiaries and the remaining US$ 3 billion into joint ventures. ONGC Videsh, which invested US$ 1.85 billion in multiple oil fields, led the chart of the firms.
  • JSW Steel was the second leading firm, which invested US$ 865 million, followed by Haldia Petrochemicals (US$ 599 million), HCL Technologies (US$ 587 million), Mahindra & Mahindra (US$ 551 million), Adani Properties (US$ 391 million), Lupin (US$ 382 million), Piramal Enterprises (US$ 312 million), Cadila Healthcare (US$ 222 million), Infosys (US$ 221 million), and Tata Steel (US$ 200 million).
• In 2020, the foreign portfolio investors (FPIs) made a net outflow of >Rs. 1 lakh crore (US$ 14 billion).
• In 2019-20, India invested in 120 projects and created 5,429 new jobs in the UK to become the second-largest source of foreign direct investment (FDI).
• In 2020, Zerodha announced to introduce an option to invest in US stocks on its platform.
• In August 2020, Axis Securities launched new platform to invest in US stocks to meet the increasing interest of the Indian retail investors in the US stock markets.

Government Initiatives

• In November 2020, the Securities and Exchange Board of India (Sebi) expanded the foreign investment cap for mutual funds to US$ 600 million from US$ 300 million, thus capping the total industry limit to US$ 7 billion.
• To boost domestic investments and reduce outflows, in August 2020, Mr Piyush Goyal, Commerce and Industry Minister, asked auto manufacturers to find solutions to reduce royalty payments to foreign parent companies for use of technology or brand names
• The RBI, 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 JVs and wholly owned subsidiaries, the central bank has announced similar concessions for pledging of shares in case of step-down subsidiary.
• The RBI also liberalised/ rationalised guidelines for foreign investment by Indian companies. It raised the annual overseas investment ceiling to US$ 125,000 from US$ 75,000 to establish JV and wholly owned subsidiaries. The Government's supportive policy regime complemented by India Inc.’s experimental outlook could lead an upward trend in OFDI in future.

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. IT services, infrastructure, agriculture, pharmaceuticals and consumer goods are vital to India boosting Africa revenue 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.

Overseas investment by India companies is expected to increase, backed by stable market conditions and considerable impact of the investment on local economies.

Note: Conversion rate used for December 2020 is Rs. 1 = US$ 0.014

References:  Media Reports and Press Releases, Press Information Bureau (PIB), Reserve Bank of India (RBI), Directorate General of Foreign Trade (DGFT), 'Indian Roots, American Soil' by the Confederation of Indian Industry (CII)