Budget 2019

Proposed hike in FDI to drive up M&A deals

Rajesh Kurup Mumbai | Updated on July 06, 2019 Published on July 06, 2019

A proposed hike in Foreign Direct Investment (FDI) would benefit the M&A sector as existing foreign investors would look to hike their stakes in their Indian joint venture companies.

“The first impact would be foreign firms which have already invested in these sectors, such as insurance, would increase their investments. Insurance, for instance, has long gestation and break-even periods and I don’t think there will be a lot of M&A activity,” Riaz Thigna, Director at Grant Thornton Advisory told BusinessLine.

The Finance Minister in her Budget speech said the Government will examine suggestions of further opening up of FDI in aviation, media (animation, visual effects, gaming and comics) and insurance sectors. Local sourcing norms would be eased for single brand retail sector.

“With these proposals, there could be an increase in M&A activities in some sectors but not across all sectors where FDI has been proposed,” Thigna added.

For the aviation industry, which is facing a turmoil, this proposal may help revive some of the companies such as the national carrier Air India through divestment or private carrier Jet Airways, in case a foreign bidder comes in.

Industry experts were of opinion that for Jet Airways this would be a little late as the carrier has already filed for bankruptcy. However, if things move fast - with policies and decisions in place in the next month or two – itmight change.

“We don’t know the finer details yet, even though the Government said it would liberalise the aviation sector. Äviation needs capital and this could help a carrier raise funds from foreign airline and open up certain avenues,” Vivek Gupta, Partner and National Head (M&A and Private Equity, Tax), KPMG in India said.

“Likewise in media. In insurance intermediary – brokerages and Third Party Administrators (TPAs) – we might witness interesting transactions, while in single brand retail, relaxation of local sourcing norms will make foreign investment easier,” Gupta added.

At present, FDI in insurance is capped at 49 per cent, media at 26 per cent (news at 26 per cent and non-news and entertainment liberalised at 100 per cent), aviation at 49 per cent and single brand retail capped with legal sourcing norms.

“Increasing FDI limits in PSUs should help the Centre to meet its divestment target,” Rajesh Thakkar, Partner/Transaction Tax, Tax & Regulatory Services at BDO India said.

Published on July 06, 2019
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