Even as the year comes to an end and investment banking activity tends to get slower, there is an excitement about the promise and potential of a lot of action in the new year. Brijesh Mehra, head, corporate and investment banking, ABN AMRO India spoke with Akash Joshi and Udita Lal of The Financial Express on what he portends the econnomic scenario that the new year will hold along with a few key trends. Some excerpts?
There was some action that started to happen in the economy, especially the second-half. But there is not much action happening in M&A scenario. Is there any specific reason for that? Do you see it picking up in the near future?
A lot has happened not only around the world, but in India also. We have been through tough times. Corporates are currently focussing on rebuilding the momentum in their businesses. Going forward, over the next 12 to 24 months we would probably see more cross border M&As as there have been a lot of businesses in the western world, which have been severely hurt by the economic crisis, that maybe available at a reasonable value for Indian companies. The only constraining factor is that the underlying economies for such targets are still weak. Economic activity in Europe and America, although showing some signs of improvement, is very subdued right now. So I think the confidence of Indian companies in carrying out acquisitions abroad will be tempered by this.
Typically, when the markets are down it is a good time for people to pick up acquisitions. So, actually one should see more action. What do you have to say?
That?s theoretically sensible. But the practical reality is that when business confidence is not very high then even ?bargain acquisitions? are looked at very carefully. It takes a very bold person, willing to stay for the long term , to make acquisitions when business confidence is low. Indian companies, barring some of the larger groups who know the world very well, are relatively new comers as the opportunity in India itself is so large for them. This will change in the next few years as India continues to increase integration with the world economy. Today, a bulk of our GDP is still domestic.
There is a huge supply of paper coming into the market like IPOs, QIPs etc. Do you think that will have some kind of a crowding-out effect on the secondary market? What will be its impact?
Well. the market is very difficult to predict. But if you look at the stock market activity, it does not appear that primary issues have really hampered investment in the secondary stock market. A lot of it is liquidity-driven. There is lot of global liquidity on the back of the fact that central banks in the west have easy monetary policies and interest rates are low. Money is cheap and available. So, I think the rally is for a large part liquidity-driven. As the fundamentals in India are getting stronger, it remains a great long-term investment destination. Even if there are signals from the western world of liquidity becoming tight, you may see a slowdown in stock market activity. It is very difficult to predict exactly what will happen though. It?s healthy that in the last couple of weeks , the markets have seen some two-way movement
Well, you have been interacting with corporates a lot, basically to know their funding requirements. What do you see as a challenge, in terms of funding?
I don?t think there Indian corporates have had that much of a funding problem, apart from one or two months at the end of last year, because the government managed the rupee liquidity very well. The negativity of the economic crisis was significantly lower in India compared to elsewhere in the world. India is largely a domestic economy. It was relatively protected from the shocks that affected rest of the world. So, in that sense, I don?t see the corporates facing any fundamental funding problems. Yes, till May 2009 (when the markets rebounded) there was a limit on equity capital that could be raised. But since then, a lot of the corporates that needed equity capital rushed with QIPs. The bank-loan market has remained relatively open in the last 18 months. There are anecdotal data that suggest there are tens of thousands of crores of sanctioned loans pending disbursals. So, I don?t think Indian corporates have had the kind of funding challenges, their western counterparts have faced.
In the last few months, there has been a good number of issues in the debt market. Is the trend is getting better?
I think it is a function of cost- and interest-rates. There has been a fair amount of issuance in the NCD market along with some retail deposit issues also. But the retail issues are more exceptional. In general, retail deposit issues have reduced quite substantially for a couple of reasons. One, is the cost of maintaining a retail issue for corporates is relatively high. Two, with mutual funds coming in, they provide tax-effective returns. So. public deposit schemes have become less popular unless there are extreme circumstances like we saw earlier this year. The need for developing rupee bond market is quite strong. ? it has lagged the developments in the equity markets
What could be the reasons for this market developing?
First, there have to be investors. I think one of the challenges is that there are not many investors. The provident-fund and insurance companies are typical investors. They were constrained by regulations. But we need a holistic approach in developing this market.
A lot of people are blaming merchant bankers for aggressive pricing of the issues. Your opinion ?
If it was pure retail issue, I would buy that argument. You have pretty sophisticated investors in the Indian stock markets who understand cash flow, valuations, companies and profits. So, to some extent you can say, maybe the investment banks are on the aggressive side, but in other cases, it is different. It?s not like in every deal after issue of an IPO or a QIP, the stock prices fall. Typically, when the stock price falls it becomes big news and registers in everybody?s mind, but when a stock rises after listing , it is not that much of news. My sense says that its not a black-and-white-case that after every issue, stock prices fall.
Sebi just made a move to open up the upper limit of QIP bidding . What?s your view?
There is no harm in that. It?s a free market and the institutions, who are sophisticated buyers, know what they are doing. If they think that the stock-price deserves more than what the issue is doing, its their call. It is good move to free up the capital market.
From a regulatory perspective, is there anything in in 2010 you would want to have that would pump up the market? What would be your wish list?
India is fundamentally a very robust market. Some rationalisation of some of the regulations around minority share holders which make it difficult for companies to issue, may help. For example, the two-week average rule for QIP would be one theme I would talk about. Rebalancing of some regulations intended to preserve minority shareholders, inadvertently become hurdles for fresh capital issues.