We're a leavin', on a jet plane, not sure when we'll be back again
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Strangled by red tape and other problems, India’s emerging multinationals buy overseas
Policy paralysis, bureaucratic delays, a shambolic national
infrastructure and a fraught political environment are propelling India
Inc’s cash-rich emerging multinational enterprises on a search for
big-ticket investments overseas.
With the Congress-led ruling United Progressive Alliance (UPA) buffeted
by corruption scandals, policy U-turns and the inability to get on with
the basic task of governance, the pace has picked up, with disenchanted
Indian companies going abroad for investment in countries as far flung
as Argentina, Africa and Abu Dhabi.
Reserve Bank of India data show that Indian companies carried out more
than 400 overseas investment transactions that resulted in outward
foreign direct investment of US$3.46 billion during September 2011
alone. Outward investment by India companies or entities was at US$19
billion for the first six months of the fiscal year 2011-12.
It is a depressingly familiar phenomenon, stretching back to the days
when the country was ruled by the import-substitution philosophy,
according to Prema-chandra Athukorala, writing in a 2009 research paper
for the Asian Development Bank:
“There is evidence that the constraining effects of government policy on
business operations played a pivotal role in the emergence of Indian
MNEs,” Athukorala writes. “During this period, many big industrial
houses in India felt constrained not by the lack of profitable market
opportunities at home, but by government legislation that created market
imperfections and distortions affecting their ability to expand,
diversify, and export.”
According to the India Brand Equity Foundation, a trust established by
the Ministry of Commerce and the Confederation of Indian Industry,
Indian companies are on a continuing search for new investment
destinations.
“Despite India's vast opportunities across under-penetrated sectors,
companies are venturing abroad for inorganic growth," HDFC Securities
analyst Anupam Gupta wrote in a 2011 report. “While this is also partly
driven by rising global aspirations for Indian companies, another reason
for this is a tough competitive field, made no easier by the
unpredictable regulatory environment."
However, an official with the consultancy Bain & Co points out that
“these outreach initiatives by Indian companies shouldn’t be misread as
the `dynamism’ of a rising power. “It is fuelled largely by frustrations
back home while doing business.”
World Bank’s `Doing Business’ 2012 data ranks India at a lowly 132 in
the overall "Ease of Doing Business" of 183 economies surveyed. Is it
any surprise then that it took seven months to get the $7.2 billion
RIL-BP deal cleared and more than a year to approve the Vedanta-Cairn $6
billion transaction? asks the Bain official. Even Posco's US$12 billion
proposed investment, the largest FDI proposal in India, says the
expert, is stuck in a quagmire awaiting land clearances.
What is driving Indian companies to foreign shores are the perpetually
high bank interest rates, inflation and ferocious competition in Asia's
third-largest economy. Small wonder that two of the country’s largest
conglomerates -- Reliance Industries and the Tatas – earn more than half
their revenue abroad.
Mumbai stocks are among the world's worst performers this year, with the
Sensex down more than 9 percent. This week, the country’s leading
business chambers, the Confederation of Indian Industry, sounded the
alarm over the slowdown and emphasized that the government and the RBI
need to do something quick to revive the economy.
“A significant pull-down in investments is apparent and this can take
the overall economy down further since there are very few developments
in the country which can be termed as confidence boosters,” said CII
director general Chandrajit Banerjee.
The Federation of Indian Chambers of Commerce & Industry estimates
that GDP growth in the current fiscal year will now be in the range of
7- 7.1 per cent with significant downside risks as against 7.6 forecast
earlier by the RBI.
Due to near double-digit inflation, the cost of raw materials has
ratcheted up, resulting in slowing factory output. India Inc has also
blamed the tight monetary policy, which has increased the cost of
borrowing, for hindering fresh investment and crimping industrial
growth.
The RBI has hiked interest rates 13 times since March, 2010, to seek to
tame demand and curb inflation. Despite that, headline inflation has
remained above the 9 percent mark since December 2010. The decline in
the mining sector is worrisome too and could trigger higher input costs
for many companies, economists say.
HDFC chairman Deepak Parekh recently told an Indian daily that many top
industrial houses have admitted that it's “much easier” to invest
abroad. Their aim or strategy, said Parekh, is to now have 50 percent of
their turnover from abroad. “Take the top five to seven group—the
Tatas, Birlas, Ambanis, Ruias,” Parekh said. “Some have already achieved
their target. These are industrialists who have established their
reputation, capacity and stature in India."
A new report by the Macquarie Group identifies 80 key pieces of
legislation languishing in Parliament. In recent weeks, prominent
business leaders, including Ratan Tata, have warned that the lack of
reforms is causing Indian companies to concentrate their investments
abroad “as government chokes the economy.”
Tata has also argued that the government has to “remove barriers and
constraints that are making it difficult for the country’s economy to
flourish”.
India Inc is also demanding a more transparent and coherent tax regime
that can whittle down red tape and facilitate investment in the country.
Unfortunately, at the moment at least, there is little to suggest that
the Indian government is pushing through any of the reforms urgently
needed to uplift the economy and prevent billions from leaving the
country’s shores.
A list of the emerging multinationals that have recently invested overseas includes these:
• Fortis Healthcare (India) is to acquire Singapore-based Fortis
Healthcare International for US$665 million. The purchase, subject to
regulatory approval, is expected to close by mid-December.
• The Hyderabad-based GVK Power has invested US$1.41 billion in its
Singapore-based joint venture with GVK Coal Developers (Singapore) which
is involved in transport, storage and communication services. GVK has
also signed a memorandum of understanding to invest US$3-5 billion to
build airports on the Indonesian islands of Bali and Java.
• ETHL Communications Holdings has committed US$776.88 million in its
Mauritius-based wholly owned subsidiary ETHL Communications Mauritius,
which is engaged in financial, insurance, real estate and business
services.
• Tata Steel has invested US$173.55 million in its Singapore-based
subsidiary, Tata Steel Asia Holdings Pte, which is also engaged in
financial, insurance, real estate and business services.
• RHC Holding investments invested US$113.62 million to its Mauritius-based wholly owned subsidiary.
• Jindal Saw invested US$ 78.64 million in its Cyprus-based
manufacturing unit, Ralael Holdings Ltd. Jindal has also committed an
investment of US$48.31 million in its UAE-based unit Jindal Saw Holdings
FZE.
• In October this year, two companies from the US$83 billion
salt-to-steel conglomerate Tata Group as well as Larsen &Toubro and
the Aditya Birla group clinched agreements with Kizad, an Abu Dhabi
government-owned industrial zone to set up projects worth billions
there. Kizad is setting up one of biggest industrial zones in the UAE
and has signed 40 deals worth US$10 billion. Almost half of it is said
to be from Indian investors.
• Australia has emerged as a favored destination with Lanco Infratech
acquiring Griffin Coal for A$730 million. The Adani Group snapped up
Australia’s Abbot Port for A$1.8 billion while GVK acquired Hancock Coal
and Infra of Australia forA$1.21 billion.
• In far-flung Africa, Essar Steel has acquired Zimbabwe Iron and Steel
Company (ZISCO) with a commitment to invest US$750 million. Religare
Capital Markets acquires majority stake in South African broking firm
Noah Financial Innovation. Godrej Consumer Products acquired 51 percent
of a leading pan-African hair care company, Darling Group Holdings, for
over Rs5 billion. Tata Chemicals acquired the US-based potash miner EPM
Mining Ventures for an undisclosed sum.
• Indian home and personal care goods makers Godrej Consumer Products ,
Dabur India Ltd and Marico are also searching for properties in Africa
amidst fierce competition back home
(Neeta Lal is a New Delhi-based senior journalist;
neetalal@hotmail.com.)
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