Outbound FDI spurts 144% as companies snap up assets overseas

Overseas direct investments by Indian firms rose 144% during the last fiscal at $43,929.18 million over the fiscal 2010 as they pumped money into their subsidiaries, bought companies and acquired technologies and brands.

This is the highest outbound investment by Indian firms since fiscal 2008 when it stood at $20,947.16 million, according to the Reserve Bank of India data.

Gopal Bhattacharya, head of global markets (India), Societe Generale, said, “Outward FDI from India picked up either for funding of subsidiaries or doing mergers and acquisitions.”

He said a fair number of these activities were for acquisition of not very large firms, with mainly mid-sized Indian companies buying small entities across the world.

Bhattacharya said, “These acquisitions may have been made to access existing clients of the company being bought or technology or for acquisition of established brands, etc. This is because firms are trying to establish manufacturing centres close to the product markets as sometimes it is very difficult to penetrate these markets from India.”

Investment bankers also feel in fiscal 2011 many Indian companies were looking out for natural resources/fuel securities for expansion in India.

“Companies were looking out for coal mines, etc. There were investments made by bigger companies for natural resources. They had a lot of projects for which they needed natural resources and fuel. This was one of the reasons for a spurt in outbound investments,” said Vinod Wadhwani, director, Ambit Corporate Finance.

The RBI data shows that out of the $43,929.18 million, guarantee issued contributed to the highest at $27,230.52 million. Guarantee issued is a kind of guarantee from a lending institution ensuring that the liabilities of a debtor (here an Indian firm) will be met. If the debtor fails to settle a debt, the lender covers it.

The data also shows that in the first two months of the current fiscal overseas direct investment by Indian firms stood at $5,090.88 million. But investment bankers feel there will be a slowdown in overseas direct investment in this fiscal.

“Last fiscal it was possible for Indian firms to get a foothold in regions particularly in the Europe and the US by buying these assets because the valuations were pretty cheap. But now those economies are not doing well due to which even if the assets are available for cheap, buying them will not help in increasing sales or revenue in the manner expected,” said Jyothi Prasad, head - investment banking, Asit C Mehta Investment Intermediates.

Prasad said the second reason being in last fiscal Indian companies had robust revenue growth.

“Due to which they were having cash surpluses which they were deploying abroad. Now these companies are facing problems like higher input and interest costs, due to which they would want to conserve cash rather than buy abroad.”