Ebb and flow

On the face of it, latest data from the consulting firm, Grant Thornton, showing that Indian firms inked $21.8 billion worth of merger, acquisition and fund-raising deals in the first six months of 2016, slightly more than last year, is good news. It suggests that Indian businesses have been resilient enough to attract investor interest amid rising global uncertainty. The positive trends from the data are merger and acquisition (M&A) activity rising by 12 per cent to $15.7 billion, consolidation in domestic sectors such as energy and manufacturing, and IPO fund-raising rising two-fold over the same period last year. But a deeper analysis reveals some trouble spots that call for policy attention.

For one, it was M&A between domestic firms that buoyed deal activity, with 150 such combinations valued at $8.1 billion in the first six months. This was led by big-ticket transactions such as Ultratech acquiring Jaiprakash Cement, Birla Corp snapping up Reliance Cement, and JSW Energy acquiring Jindal Steel and Power. Many such deals represent attempts by leveraged business groups to sell their operating assets to larger rivals, as banks mount pressure for repayment. This trend is healthy as it not only helps troubled firms pay down debt, but also moves manufacturing assets from weaker to stronger hands in the economy. Two, while domestic firms have been open to acquisitions, foreign firms have turned wary as evident from the 32 per cent decline in inbound M&A. While retail and financial services, which have seen proactive reforms, have seen a pick-up in interest, waning interest in fancied sectors such as pharmaceuticals and IT services is worrisome. Three, the decline in private equity deals (down by 13 per cent to $6 billion) in the first half, after five years of rising inflows should give the Centre pause for thought, given the many incentives it has rolled out this year to keep the start-up juggernaut rolling. Part of the reason for lower private equity flows into sectors such as e-commerce could be due to a rethink of business models that rely excessively on cash-burn. But some of the caution could also be due to the still-difficult exit environment for earlier private equity investors in India. The recent revival in the IPO market offers some hope, but good valuations so far have been reserved mainly for fancied sectors such as consumer products and healthcare.

The deals called off this year, also highlighted by the report, deserve equal attention. Idea Cellular’s mega deal to acquire spectrum from the Videocon group was called off this March, after a new service tax levy on spectrum trades. BNP Paribas’s proposal to acquire Sharekhan, inked a year ago, is still hanging fire for lack of FIPB approval, despite clearance from SEBI, RBI and the exchanges. Overall, the findings suggest that global investor interest in India cannot be taken for granted. The Centre needs to redouble its efforts to smoothen the path by liberalising sector-specific regulations and cutting out red tape in the approval process for FDI.

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