As per the India Private Equity and Venture Capital Association (IVCA), there are around 200-plus active fund managers operating in India. Approximately, $80 billion investment has flowed to in Indian companies over the last ten years, with approximately 12% employment growth in companies backed by private equity investors.
This investor class will be hoping that the ruling party at the Centre, after their unexpected rout in Delhi assembly, will not slow the pace and derail the economic reforms ahead of the budget on February, 28. The investors expect the finance minister to present a reformist budget which will put the Modi-led government back in the game.
Undoubtedly, the government of India has been making efforts to make the FDI policy regime more attractive and investor-friendly. Recently, the government liberalised the FDI policy in several important sectors such as insurance; defence, construction and the medical devices sector. The Make-in-India initiative of the new government is passionately appealing the states to improve the ease of doing business to attract foreign investors.
The year 2015 appears to be a critical year for PE funds. Funds which invested just before the markets took the hit of the global recession will be hoping to ride on the improvement in the local economic sentiment and exit with favourable returns. The typical exit options could be secondary sale or the buy-back by the promoters. With the stock markets offering attractive return (as opposed to the last 6 months), exit routes such as IPOs will be on the cards for later this year.
Positive economic reforms, growing domestic consumption, declining global commodity prices and positive political scenario has, no doubt, created an advantageous atmosphere to position India as a preferred investment destinations in 2015. India’s growth story is catching increased interest globally.
One of the classic examples of the Indian consumption story is the e-commerce industry, which has been the highest recipient of PE investments in the last financial year. Domestic demand driven by sectors like education, healthcare, financial services and logistics should find favour now. It is expected that life-sciences will also receive significant attention from private equity investors in the current year. In view of the government’s ambitious plan to generate 100,000 MW solar power by 2020, it would be interesting to watch the performance of foreign inflows in the power sector.
Given that Make-in-India is designed to amplify investments, nurture innovation, and building state-of-the art manufacturing infrastructure in India, industry-watchers are hopeful that manufacturing as a sector will witness a revival in the near future. PE investment in the past two years has been concentrated (majorly) in metro cities such as Delhi Mumbai, Bengaluru, Chennai and Kolkata. After the PM’s grand announcement of setting up 100 new smart cities in the country, the tier-II and tier-III cities should gain momentum.
Another important sector which has confronted tough times, in past few years, is the Indian real estate sector. Difficult economic environment and high inflation affected the real estate market; and as a result, significant unsold inventory and execution delays were rampant during the past couple of years. The policy makers have taken several initiatives to revive the real estate sector such as relaxation of FDI policy, tax incentive on home loans, smart city projects etc. All these positive developments do give hope that the year, 2015 will be an optimistic year for this sector.
There will be hope from the investors that the budget will take care of their concerns in respect to the tax treatment being meted out to them as the tax policies are friendlier to short-term portfolio investors rather than to long-term FDI (primarily private equity and venture capital investors).
India’s image as an attractive investment destination has, over the last few years, been impaired by frequent policy reversals, corruption scandals and indecisiveness. Clarity and stability in the fiscal and tax regime are the critical factors for attracting foreign capital and for India to remain as an attractive investment destination in the years to come.
With the Modi government getting enough time to settle in, the global businesses are keeping a close watch on the Indian economy with the prevalent question being “Will Budget 2015 make India an attractive investment destination?”
Prakriti Jaiswal, associate with J Sagar Associates, Advocates and Solicitors, contributed to this column
By Sidharrth Shankar
The author is partner, J Sagar Associates, Advocates and Solicitors. Views are personal
