FDI JUMPS 77% ON M&A SPREE
ARIJIT BARMAN &NAYANIMA BASU Mumbai/New Delhi, 20 November
Even as moves are afoot to broaden its scope in the retail sector, foreign direct investments (FDI) are adding shine to the India growth story.
The latest available data from the Reserve Bank of India show a 77 per cent jump in the FDI in the first half of the current financial year (April-September), compared to what was $19.5 billion the same period a year ago. At this level, foreign investors have brought in as much money in the first six months of this year as as they did in the entire 2010-11.
Policymakers highlight these data point to allay fears of acrisis of confidence. FDI is more long-term versus fickle portfolio investments that can be repatriated in no time. That, in any case, has come down to a paltry $1.4 billion till September — a sharp 94 per cent fall.
While some key economic ministers have predicted that FDI would touch the $30-billion mark in this financial year, KPMG, the global network of professional firms providing audit, advisory and tax services, is even more optimistic; the professional services network’s consultants are looking at a $35-billion figure.
Some, however, are a little more circumspect about the FDI euphoria as they feel it’s largely riding piggyback on a handful of large mergers and acquisitions transactions like BP’s $7.2 billion stake acquisition of Reliance Industries’ oil and gas properties or Vodafone buying out Essar from their JV for a little over $5 billion.
Earlier this year, in May, in another headline transaction, Abbott bought out Piramal’s Healthcare’s domestic formulations portfolio for a whopping $3.72 billion, while PE major Apollo pumped in $500 million into Welspun group companies. Moreover, the $6-billion dollar Cairn-Vedanta deal is in the last leg of completion, awaiting ONGC’s nod and security clearance.
Even so, not all experts are keen to paint a rosy picture. Abheek Barua, chief economist, HDFC Bank, says the mega deals apart, there has indeed been an uptick on FDI inflows this financial year.
“The foreign institutional investors’ perception of gloom and doom, and policy paralysis in India are very different from long-term strategic FDI perception that is much more bullish and pro-investment. Only in mining or sectors involving large land acquisitions, there has been a reassessment of prospects,” he notes. “There have been quite a few new equity investments in India in the form of brownfield expansions across sectors — like auto and auto components, pharma and chemicals. Individually, they are small but the aggregate is areasonable sum.” So, is FDI more a matter of strategy? Investment bankers like Vedika Bhandarkar, vice chairman of Credit Suisse, who are typically involved in bulge bracket cross-border mergers and acquisitions agree, but have a word of caution.
“If the negative news flow continues for long, then even FDI sentiment may be affected. Compared to past few years, when there have been considerably more outbound deals from India, there has been more of a balance this year between inbound and outbound. Many North American firms have strong balance sheets, enough cash and are looking at new growth markets to invest in, and it’s the same with Japanese companies,” he notes.
“So, there will be continued interest in Indian technology, manufacturing and industrials and pharma” The leaders in the pack are pharma, services and telecommunications — in that order. It is clear from the department of industrial policy and promotion data, which gives figures from April to August (see table). Patni Computers finally got sold for close to a billion dollars in January this year. “FDI inflows in pharma,” points out Samiran Chakraborty, head of research, Standard Chartered Bank, “have risen disproportionately compared to other sectors. In the April-August period, the pharma sector’s share in total FDI inflows has gone up to 17.3 per cent versus the traditional three per cent average.” There are some interesting sidelights as well. For example, despite controversies, the telecom sector has already attracted $1.8 billion FDI, which is more than the inflows in the whole of 2010-11.
Paresh Parekh of Ernst & Young notes that this calendar year has, on an average, seen monthly inflows of a little over abillion dollars each. This is apart from April, May and June, when it jumped to anything between $3-5.5 billion, adds Parekh, who is partner (tax and regulatory services) of the accountancy firm.
FDI trackers and government officials say the surge is largely linked to a spate of clearances by the Foreign Investment Promotion Board. HDFC’s Barua agrees. “The clearances were reflected in the forex market as well,” he notes. The rupee then went below 44. Also there is a co-relation between the external commercial borrowing pickups and FDI. Most of these multinational corporations raise overseas debt too for their projects.” With the sudden government urgency on opening up of multi-brand retail or Indian aviation to foreign strategic players or even pension sector, the figure of $30 billion looks realistic. A section of industry, however, feels there is no reason to hype it up. Federation of Indian Chambers of Commerce and Industry cautions against euphoria. Reason: Last year was an exceptionally bad year for FDIs; so this is just the base effect. “Secondly,” points out Rajiv Kumar, the chamber’s secretary-general, “every month there is a capital outflow of a billion dollars from India. This explains the rupee depreciation.” Further, he thinks India has had a seven-year gestation period for key reforms initiative. “From Pension Fund Regulatory and Development Authority to banking regulations, retail FDI to the first round of telecom reforms or even the 1991 initiatives, they all more or less took seven years to get going,” he adds. But the real challenge will be to get political consensus on some of these reforms in Parliament.”
20 15 10 5 0 Apr-Sep ‘11 Source: RBI bulletin Apr-Sep ‘10 Drugs & pharma Services sector* Telecom Power Construction #19.5 11.0 2.9 2.8 1.8 1.1 0.78
DOLLAR DELUGE
Total FDI Inflows ($ billion)
THE BIG PICTURE
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 *Financial and non-financial #Including roads and highways Source: DIPP
DOLLAR MAGNETS
(The top 5 sectors attracting highest FDI inflows in April-Aug 2011-12) ($ billion)
LEGAL DIGEST
INTENT TO ARBITRATE CAN BE SEEN FROM CONDUCT OF PARTIES: SC
WHEN the terms of a contract are not clear as to the existence of an international arbitration agreement, the correspondence between the firms could indicate its existence, the Supreme Court held last week in the dispute between Powertech World Wide Ltd of Mumbai and Delvin International General Trading of Dubai. In this case, the Indian company sought arbitration, but the Dubai firm denied that there was a clear term in the agreement about arbitration. However, the court examined the correspondence between the two firms and the circumstances and concluded that there was an arbitration agreement. “Once the correspondence between the parties and attendant circumstances are read conjointly with the petition and with particular reference to the purchase contract, it becomes evident that the parties had an agreement in writing and were ad idem in their intention to refer these matters to an arbitrator,” the court said. It appointed retired Justice D R Dhanuka of the Bombay high court as the arbitrator.
Lending firms must follow norms before ‘re-possession’
The Supreme Court last week cautioned hire purchase firms not to take goods forcibly but follow the norms set by Reserve Bank of India. In the judgment, Citicorp Maruti Finance Ltd vs S Vijayalaxmi, it emphasised that “in case of mortgaged goods subject to hire purchase agreements, the recovery process has to be in accordance with law.” The court noted that the recovery process referred to in the agreements also contemplated such recovery to be effected in due process of law and not by use of force. “Till such time as the ownership is not transferred to the purchaser, the hirer normally continues to be the owner of the goods, but that does not entitle himon the strength of the agreement to take back possession of the vehicle by use of force. The guidelines which had been laid down by the Reserve Bank of India support and make a virtue of such conduct. If any action is taken for recovery in violation of such guidelines or the principles as laid down by this court, such an action cannot but be struck down.”
Insurance firm told to pay higher compensation
The Supreme Court last week raised the compensation amount steeply in a motor vehicle accident case in which a24-year-old carpenter was incapacitated due to multiple injuries. The motor accident claims tribunal awarded him `45,000 only. On appeal to the Karnataka high court, the amount was raised by `31,000. However, on further appeal to the Supreme Court, the amount was further raised to `8.37 lakh in the case, Sri Laxman vs Oriental Insurance Co Ltd. The youth had asked for only
`5lakh, but the court ruled that even if the victim asked for a lesser amount, the court could grant a “just” amount. The law does not limit the power of the tribunal to award a higher compensation. The judgment noted that the victim could not appoint a competent lawyer. The courts below also did not consider the pain and suffering of the young carpenter. Therefore, `1.5 lakh was awarded on that ground, apart from loss of livelihood. Further, `2lakh was awarded on the loss of amenities “including the loss of prospects of marriage, which has become an illusion for him.”
Demand for excise duty on caps of collapsible tubes quashed
If caps for collapsible tubes of a product are manufactured separately by a different firm, the value of the caps will not form part of the assessable value of the tubes manufactured for central excise purposes. In this case, Essel Propack Ltd vs Commissioner of Central Excise, Mumbai, the company manufactured plastic tubes in its factory and supplied them to Colgate. The caps for the tubes were supplied by Colgate. They are fitted to the tubes before removing them the factory of Essel. The revenue authorities issued notice to Essel stating that the caps should be included in the assessable value. The excise tribunal confirmed this view. On appeal, the Supreme Court set aside the tribunal’s order and stated that since the caps are not manufactured by Essel, but supplied to it by its customers, the value of the caps will not form part of the value of the tubes manufactured by it. MJ ANTONY
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