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Data tracker: Significant chunks of India's FDI inflows aimed at distressed corporate assets

Noor Mohammad | The Wire / 25 Sep 17 | 11:00 AM

India has seen strong foreign direct investment (FDI) inflows under the NDA government even as domestic private investment continues to remain muted. This situation has baffled many. But unfazed by that, Prime Minister Narendra Modi has claimed credit for FDI surge, citing it as an endorsement of his government’s overall economic policy.An analysis of FDI data however reveals that big chunks of inflows have been used to buy distressed assets of Indian companies. These are companies struggling with overleveraged balance sheets. The data therefore shows that a significant chunk of India’s FDI inflows aren’t boosting Modi’s flagship ‘Make-in-India’ initiative.

For example, nearly 23% of the $44 billion in FDI that India received in 2015 went into brown-field projects. This figure rose to 48% in 2016.

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The trend continues in 2017. Nearly 36% of the $7.6 billion that flowed as FDI into the country in January-March 2017 period was used to buy assets in distress deals.

Break-up of FDI inflows in recent years

YearTotal FDI inflows ($bn)FDI inflows into brownfield projects ($bn)2015449.920164421.42017 (January-March)7.62.7Sources: UNCTAD, DIPP, EY

Smelling an opportunity, global distressed asset buyers such as JC Flowers & Co and Apollo Global have flocked to India as corporate debt crisis aggravates here.

Corporate debt raiders

New York-based JC Flowers, which has invested over $14 billion across several countries, has recently announced a joint venture with Indian financial services group Ambit Holdings – Ambit Flowers Asset Reconstruction – in which it will hold a 47.5% stake.

US-based Apollo Global Management has set up an $825 million fund in partnership with ICICI Venture to purchase distressed assets in India.

Eye on stressed assets, Canadian funds including Brookfield Asset Management and Caisse de Dépôt et Placement du Québec (CDPQ) have landed here with a big war chest. In a short span of two-three years, they have invested more than $5 billion in brownfield projects.

CDPQ, the second largest pension fund in Canada, has signed a long-term partnership with Edelweiss Financial Service to invest about Rs 5,000 crore (nearly $750 million) in stressed assets and specialised corporate credit in India over the next four years.

Meanwhile, CDPQ is in talks with Bangalore-based Prestige Group to invest as much as $200 million in the commercial real estate assets of the Bengaluru-based real estate developer. It has also announced plan to invest $150 million in the renewable energy sector by 2020.

CDPQ’s investment in India is estimated at $2.3 billion.

CDPQ’s rival Canada Pension Plan Investment Board (CPPIB) opened its investment office here in October 2015. Aiming for a wide exposure to the infrastructure sector, CPPIB entered India as a direct investor with an investment of Rs 2,000 crore in L&T Infrastructure Development Projects Ltd (IDPL) in December 2014.

In April this year, CPPIB tied up with US-based alternative investment fund Kohlberg Kravis Roberts (KKR) to buy 10.3% stake in Bharti Infratel for Rs 6,193 crore. The Canadian pension fund contributed about Rs 2,000 crore.

Brookfield Asset Management, a Canadian asset manager, has acquired office and retail assets of Hiranandani Developers in the Mumbai suburb of Powai at a valuation of close to $1 billion—one of the largest commercial real estate deals in recent years.

Brookfield has tied up with SBI to launch a joint venture fund to purchase distressed assets. The Canadian fund has agreed to commit Rs 7,000 crore in the proposed fund.

Brookfield is also eyeing Reliance Communications’ tower business which is on sale. Sources said Brookfield, with $240 billion in global assets under management, has valued Reliance Communications’ tower assets at nearly Rs 15,000 crore, which is much lower than the Rs 21,000 crore valuation that the telco is seeking.

PSP Investments, another Canadian pension fund, is expanding its footprint in India’s highways sector. It has assumed ownership of four toll roads totalling 710km as part of a global transaction with Spanish infrastructure company Grupo Isolux Corsan.

In November 2015, PSP Investments bought a 49 per cent stake in Reliance Infrastructure’s electricity generation, transmission and distribution business in Mumbai for an estimated Rs 3,500 crore.PSP has more than 112 billion Canadian dollars in net assets under management. It manages a diversified global portfolio of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt.

In 2016, Russia’s Rosneft-led consortium bought out 98 per cent stakes in Essar Oil in a $13 billion deal which was consummated last month.

China’s Shanghai Fosun Pharmaceutical has agreed to buy out Gland Pharma for $1.26 billion. The deal is in abeyance. The speculation is that the government blocked the deal because of border stand-off with China.

Real estate major DLF has recently entered into an exclusivity agreement with an affiliate of Singapore-based equity firm GIC to sell 40% stake in its rental business arm. The deal size is estimated at Rs 12,000-13,000 crore.

Meanwhile, Vodafone is in talks to take over Idea Cellular as consolidation gathers momentum in the telecom sector due to aggressive pricing by new entrant Reliance Jio.

Stock market watchdog SEBI has recently relaxed rules for investors buying distressed companies from lenders in a bid to tackle the country’s aggravating bad debt problem.

Investors interested in acquiring companies, where banks have swapped part of their loans with equity, will not be required to make an open offer provided they are willing to comply with a three-year lock-in and get shareholder approval.

Credit growth plunged to a six-decade low of 5.08% in 2016-17 as indebted corporates continued to hold back fresh investments. But FDI inflows stayed robust, puzzling economists.

With big chunks of FDI inflows going into brownfield projects instead of greenfield ones, the future of ‘Make in India’ looks bleak.

Noor Mohammad is a senior financial journalist.

By arrangement with thewire.in

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