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Pharmaceutical bottling line: the smooth running of |
India inched its way closer towards full convertibility of the rupee early last month when finance minister Jaswant Singh unshackled foreign investment by Indian companies, mutual funds and investors. However, the fine print shows that the old control mindset of the Indian authorities has not changed.
For the first time, Indian investors, mutual funds and companies can invest in shares of foreign-listed companies, but there is a caveat. Foreign companies will qualify for Indian investment if they own at least 10% equity in an Indian-listed company. Only around 300 multinationals qualify since they have Indian subsidiaries. Dipesh Pande, a fund manager at Templeton Asset Management, which manages around $2 billion in India, says it is hard to maximize returns to investors on a limited basket of investment.
For Indian companies, investment in foreign-listed shares is capped at 25% of their net worth. They now have greater flexibility in deploying their foreign equity (ADRs and GDRs) and foreign currency loans. They can keep and invest it abroad for longer. Indian companies that have offices abroad can now acquire property. However, the central bank’s notification has an important rider: these “concessions” are available until June 30 when they will be reviewed, after which, presumably, they could be reversed.
The latest measures come as part of a gradual easing of capital controls over the past year, and reflect a growing level of confidence that Indian officials draw from the country’s $71 billion-plus foreign exchange reserves. The Indian rupee has appreciated steadily against the dollar over the past seven months and has gained just under 1% in the past year. India’s foreign currency sovereign rating is likely to be upgraded this February in view of the improved external payments situation, Kristin Lindow of rating agency Moody’s said in early January. Indian companies might then be encouraged to borrow more abroad.
In the midst of the flood of dollars into the country, there is a lurking sense of unease among the Indian authorities, possibly because the memory of the last balance of payments crisis, in 1991, still rankles.
That crisis forced the government to mortgage the country’s gold reserves with the Bank of England, and was sparked, in large part, by expatriate Indians who abruptly pulled out their foreign currency deposits in India. The Asian crisis in the late 1990s reinforced the virtue of curbing short-term debt. The caveats and riders that tag the recent easing of exchange controls also reflect a nervousness caused by rising gold and oil prices. A sharp spike in their prices could, officials fear, send importers and corporate borrowers scurrying for forex cover and precipitate a hard fall for the rupee.
Yet the loosening of the leash, even if gradual, is vital for Indian companies that want to grow globally. In March last year, for instance, the limit for acquisition deals that got automatic approval from the central bank was raised from $50 million to $100 million or 50% of the net worth of the Indian acquirer, whichever was lower. Soon after, controls on foreign currency borrowings and re-issuance of foreign equity by Indian companies were eased.
Pharmaceuticals company Ranbaxy acquired a few generic brands from Bayer last year and Mphasis-BFL Software announced late last year the acquisition of Shanghai-based Navion Software from Capital One. Sun Pharma acquired US generic company Caraco, and Tata Tea acquired Tetley some years back. Other top IT and pharmaceutical companies such as Nasdaq-listed Infosys, Wipro and Dr Reddys are looking to acquire foreign companies that will give them access to markets abroad.
Rajiv Saxena, managing director, Lazard India, says: “Indian companies can look at sizable deals now and the smoothing out of the regulatory process should make more deals happen.” Indian companies also have more flexibility to finance acquisitions either by debt or equity, raised at home or abroad, and where asset prices are attractive, deals should happen, says Sughosh Moharikar, a mergers and acquisitions specialist at investment bank Kotak Mahindra Capital.
Futile micro-management
Fund managers hope that the illogical restriction on overseas investments will be eased in time as Indian officials recognize the futility and hassle involved in micro-managing outward investment. There are no details on how investors and companies can directly invest abroad and how any profits or losses they make will be taxed. Late last year the government allowed Indian residents to open zero-interest-earning foreign currency bank accounts. Long-term capital gains (profits made on investments held for more than one year) are taxed at 10% in India. Bankers expect that the annual budget in February will help clear up those issues.
The cap on total investment by all Indian mutual funds abroad is now doubled to $1 billion but few managers are in a great hurry to invest abroad. Last year the government allowed Indian mutual funds to invest abroad in triple A-rated debt securities but few fund managers were enthused. Sun Foreign & Colonial and Templeton Asset Management launched two small international funds but a rising rupee and falling international interest rates made it hard to invest the money profitably outside India.
Templeton’s India International Fund is a feeder fund that invests into a bigger US fund that invests in US mortgage-backed securities, says Krishna Prasad, a marketing manager at Templeton India Asset Management. Sun F&C’s $1 million international fund has high-net-worth investors who are looking to diversify their portfolio, says Milind Nandurkar, a fund manager there.
The fund has invested in US treasuries, expecting a rally in the event of a war with Iraq, Nandurkar adds. Equity fund managers say that higher returns on foreign equity could neutralize the currency risk of an appreciating rupee. Few, though, are willing to take that call in choppy global markets. Indian investors feel as if they have been invited to a party that just ended.
