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 Reserve Bank of India (RBI), India’s outward foreign direct investments (OFDIs) in equity, loan and guaranteed issue stood at ~US$ 1.85 billion in February 2021 vs. US$ 1.19 billion in January 2021.
Investments/Developments
Some of the major overseas investments by Indian companies were:
- Of the total investments in February 2021, funds worth US$ 1.36 billion of Indian companies' investment in international markets was in the form of a loan; US$ 297.37 million was in the form of equity investment; and the remaining US$ 183.82 million was in the form of guarantee issuance.
- In February 2021, companies such as Tata Steel (US$ 1 billion in a wholly owned subsidiary in Singapore) and Sun Pharmaceutical Industries (US$ 100 million in a joint venture in the US) were among the key players that invested in their overseas projects. Other players who invested overseas were as follows:
- ONGC Videsh Ltd. invested funds worth US$ 96.15 million in various joint ventures/wholly owned subsidiaries in Myanmar, Sudan, Russia, Mozambique, Colombia, Azerbaijan and Vietnam.
- JSW Steel invested funds worth US$ 62.85 million in its three joint ventures/wholly owned subsidiaries in the Netherlands and the US.
- GMM Pfaudler Ltd., a pharma equipment manufacturer, invested US$ 45.33 million in its Luxembourg joint venture; the Indian Hotels Company invested US$ 33 million in its Dutch joint venture; L&T Hydrocarbon Engineering invested US$ 37.55 million in a Saudi Arabia joint venture; and Millars Concrete Technologies invested US$ 34.26 million in its Luxembourg joint venture.
- Between March 01, 2021 and March 13, 2021, the foreign portfolio investors (FPIs) withdrew Rs. 531 crore (US$ 72.97 million) from equities and Rs. 6,482 crore (US$ 890.77 million) from debt. Net outflow stood at Rs. 7,013 crore (US$ 963.74 million).
Government Initiatives
- In the Union Budget 2021-22, the foreign direct investment (FDI) cap has been increased to 74%, and other changes to the insurance sector have been proposed to enable foreign ownership and control with safeguards.
- Other amendment proposes that the majority of board members and key management personnel would be resident Indians, with at least 50% directors being independent directors, and a defined percentage of income set aside as a general reserve under the new structure. According to experts, the proposed reforms could pave the way for private equity funds to enter the insurance sector.
- 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 March 2021 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)
