Overseas Investment Winter For India Inc.

ON AUGUST 22, 2022, the Central government announced a review of overseas investment framework to bring clarity on direct and portfolio investments abroad. It brought various transactions under automatic route to enhance ease of doing business. Overseas investments rules and regulations superseded the earlier framework governed by Foreign Exchange Management (Transfer Or Issue Of Any Foreign Security) Regulations, 2004, and Foreign Exchange Management (Acquisition And Transfer of Immovable Property Outside India) Regulations, 2015. The government said the framework is aligned with current business and economic dynamics. The changes were projected as important "in view of evolving needs of businesses in India" that needed to become part of global value chains in an increasingly integrated global market.

A year later, in August 2023, India's outward foreign direct investment (OFDI) was $595 million, the lowest in 17 months since February 2022. The cumulative outflow was $4.2 billion in first five months of FY24. It was $13.3 in FY23 as against $18.1 billion in FY22. The slowdown was a grim reminder that investment decisions are market-driven — poor global economic conditions in this case — and increasing ease of doing business can aid but not trigger overseas investment by Indian companies. "All inbound and outbound investments are a result of economic activity. Considering the buoyancy in Indian economy and wide consumer base, more and more multinationals are setting up offices in India. Indian companies will also invest overseas depending on business opportunities. As global economic situation improves, Indian companies will invest overseas," says Puneet Gupta, partner–Tax, KPMG in India.

One year is perhaps too early to gauge the impact of a reform but finance ministry data says OFDI has been in the $13 billion to $15 billion range since FY17 with FY22 being an aberration (See: Overseas Direct Investment). Whether India Inc. makes a splash globally or not, the current trend indicates economic resilience and promise of far higher OFDI in the future. But first, let's see what the numbers say.

Official Data

Monthly data compiled by finance ministry says 40% OFDI during April 2021-August 2023 went to financial, business and insurance services sectors. Manufacturing followed with 24% share. The category of trade, hotels and restaurant, with 17% share, was at third position. The data says Singapore, Mauritius, the U.S., the Netherlands and the U.K. were top destinations for OFDI during the period. In fact, the five have been at the top, in the same order, since April 2000. So, the top sectors have more or less remained the same, as have the destination countries.

But there is a twist. The data doesn't give the real picture. Data of cumulative overseas investment given by Indian companies in each country will not tally with OFDI figures published by the finance ministry. The reason: while U.S. and U.K. are major destinations for Indian investments, Singapore, Mauritius and Netherlands are mere routes through which investments flow to destination countries. Fluctuations in OFDI to specific countries cannot be seen as a proxy for investment opportunities in those countries as the flows are also driven by a host of factors ranging from the structure of the deal to legal, regulatory and tax structures of the recipient country. The destination of the flows could even be India if money to acquire a local asset from a foreign owner has been routed from abroad.

"There may be differences in reported data and where actual investment is flowing because you might have special purpose vehicles in between. So, in case of Singapore or Netherlands, operating entities may not be in those locations. The country to which the investment is going and the country which is the actual beneficiary may be different," says KPMG's Gupta. But that is not all.

Guarantee Component

Reserve Bank of India's (RBI's) overseas investment division under foreign exchange department classifies OFDI under three heads. The first and the biggest is 'guarantee issued'. The other two are 'equity' and 'loans'. Finance ministry refines it slightly. It compiles 'actual outflow' by adding 'equity' and 'loans' and keeps aside 'guarantee'. However, it adds all three to arrive at OFDI numbers. The 'guarantee' component in $1.22 billion OFDI commitments for August 2023 was $494.96 million. In July, out of overall OFDI commitment of $1.8 billion, bank 'guarantees' were $769.06 million.

Murali Kallummal, professor (Tariffs, Standards and FTA), Centre For WTO Studies, Indian Institute of Foreign Trade, says only a fraction of bank 'guarantees' are invoked. "However, the provision of adding them in investment commitment allows companies to indicate the same in annual reports as part of their overseas investment plan. A few of these companies may be making such claims with a dubious intention of not investing the entire amount. As for listed companies, such claims could push up their stock prices and boost secondary market activity. After 2015, it is encouraging to see increasing preference towards 'equity' and 'loans' even though 'guarantee' by far remains the biggest component of companies’ OFDI commitments," he says. Kallummal also says that RBI data covers dozens of individual investments.

OFDI numbers may be fluctuating within a range but the United Nations Conference On Trade And Development's World Investment Report 2023 says though outward investments by Indian multinational enterprises (MNEs) fell 16% to $15 billion in FY22, greenfield project announcements more than tripled to $42 billion. "Two of the largest greenfield projects were in renewables with Acme Group announcing a $13 billion plant in Egypt to produce 2.2 billion tonnes green hydrogen annually and ReNew Power announcing that it will set up a $8 billion green hydrogen plant in the Suez Canal Economic Zone," says the report. It also notes that the second largest deal of the year globally was Biocon Biologics (India)'s purchase of the biosimilars business of Viatris (U.S.) for $3.3 billion.

What number of deals and size of investments do not show, however, is the mood of India Inc., which industry associations like Confederation Of Indian Industry (CII) say is positive.

The Hope

"India's investments on global stage have been on a steady upward trajectory, closely mirroring international trends. Indian companies have emerged as key players in U.S., U.K., Europe and various developing nations. Their primary objective has been to gain access to markets, cutting-edge technology and pivotal infrastructure projects," says Chandrajit Banerjee, director general, CII.

Shanthi Vijetha, partner, Grant Thornton Bharat, says deal volumes declined after 2020 as Indian companies became more cautious following the outbreak of Covid, which had a profound impact on global business activities. "However, there was a noticeable uptick in value of outbound investments in 2021 and 2022 despite the relatively low number of investments. This can be attributed to a few large transactions such as Adani Group's acquisitions in energy and natural resources and Biocon's acquisition of Viatris in pharma and biotech. The recent trend indicates domestic resilience is helping Indian groups evolve their global strategies," says Vijetha.

If Indian industry has appetite for investing abroad, reforms by government and RBI can act as facilitators. "The simpler and faster approval process (delegation of approval authority, streamlining of process) has reduced the time and effort required to invest overseas. Increased investment limits (for certain sectors such as real estate and media) are giving companies more flexibility. Removal of investment restrictions (for certain types of overseas investments) gave companies more choices. Overall, revised rules and guidelines have made it easier for Indian companies to invest overseas and boosted outbound investments," says Vijetha.

KPMG's Gupta says one should look beyond numbers to understand the significance of OFDI. "When an outbound investment is made, there are a lot of intangible benefits. That investment may give access to global technology, best practices, workforce and markets. So, I would not go solely by the amount but the intangible benefits it brings to the country. I think that was the entire purpose behind these guidelines," he says.

What's More

The Indian pharmaceutical industry, which saw rise in outbound investments even during sluggish global economic conditions, perhaps illustrates what domestic companies can do to expand their global presence. Experts say it can teach aspiring global players in other sectors how to find new markets and maximise India's strengths. "India has a strategic advantage in scale and reach, digital infrastructure and demographic dividend for the pharmaceutical sector. The synergy between IT and pharmaceutical sectors holds great potential for India. Given the prevailing geopolitical uncertainties and growing significance of robust supply chains, it is imperative to harness strengths in manufacturing and digital capabilities across markets," says Sudarshan Jain, secretary general, Indian Pharmaceutical Alliance. He says that Indian pharmaceutical companies, which account for nearly 40% of generic drugs sales in the world's biggest pharmaceutical market, U.S., are venturing into new markets. "Several Indian companies have entered Mexico and Greece by establishing manufacturing facilities. Additionally, these companies are exploring opportunities in African countries. While their market shares in Japan and China remain relatively modest, they continue to make efforts to expand in these markets," he says.

Experts also say that unpredictability of geopolitical relations will continue to play a major role in outbound investments. Canada and India have pressed the pause button on free trade agreement talks. Indian companies that have invested in Russia are finding the ongoing Ukraine war and Western sanctions against Russia a roadblock in recouping investments. Geopolitical uncertainty will make investments risky and that will be reflected in investment numbers. One can only hope that the global situation improves and Indian companies, with supportive government policies, capitalise on global opportunities for financial and strategic gains.