India's global expansion hopes hobbled

Concerns about an impending economic slowdown, a weak regulatory environment and high interest rates are threatening India's roaring M&A market.

Tata Steel's purchase of Corus set off a chain reaction of Indian acquisitions. Bloomberg News
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MUMBAI // Merger and acquisition deals worth a record US$71 billion (Dh260.79bn) last year, led by energy, metals and mining companies, put India on the corporate world map.

But concerns about an impending economic slowdown, a weak regulatory environment and high interest rates are spoiling the party for Indian companies looking to expand their footprints globally.

Mergers and acquisitions (M&A) worth $3.3bn involving Indian firms have been announced since April, down a whopping 83 per cent from $20.1bn in the April to June period last year, according to the global deal-tracking company Dealogic. M&A deals worth $25bn have been announced so far this year, compared with $36bn in the same period last year.

In recent years, M&A transactions have formed a major part of corporate strategy at several Indian companies. In 2007, Tata Steel's $12bn acquisition of the Anglo-Dutch steel maker Corus, a company four times its size, started a chain reaction among Indian companies for global acquisitions.

"Such transactions have turned Indian companies into serious global players," says N Venkiteswaran, a professor who heads the Thiagarajar School of Management in Madurai in southern India.

Indian companies have been more aggressive in acquiring overseas targets because "they were much less impacted by the global meltdown and they saw opportunities in undervalued overseas targets", he says.

To illustrate his point, Prof Venkiteswaran cites the example of Bharti Airtel's $10.7bn acquisition of the Kuwaiti Zain Group's telecommunications operations in Africa in June last year.

This offshore expansion by Bharti Airtel - India's largest telecoms operator and headed by the billionaire tycoon Sunil Mittal - gave the company access to Zain's 42 million subscribers spanning 15 African nations.

With this deal, the largest M&A transaction last year, Bharti Airtel emerged as the world's third-largest telecoms operator. But plenty of deals are stuck in a series of bureaucratic wrangles, reflecting what analysts say is the Indian government's decision-making paralysis.

The $9.6bn takeover of Cairn Energy's Indian subsidiary by the London-listed Vedanta group last year was meant to go down in India's corporate history as the largest foreign takeover in the energy sector. But the much-celebrated deal has been awaiting clearance from the Indian government since August when Vedanta - led by the billionaire mining tycoon Anil Agarwal - made an offer to acquire a majority stake in the company. Companies also baulk at India's high interest rates. In a desperate effort to quell inflation, the Reserve Bank of India has hiked interest rates 10 times since March last year, compelling big corporations to tap cheaper sources of funding in overseas markets.

The equity capital market volume for India so far this year is $7.8bn, less than half of the $15.4bn mark achieved in the same period last year.

Dealogic says M&A activity dropped to 55 deals so far this year, a 40 per cent decline compared with the same period last year.

Analysts say there is a pent-up demand for new acquisitions, but there is an urgent need for a well developed debt market to finance such deals, both in India and overseas.

"I expect the M&A spree among Indian companies to continue, limited mainly by their ability to raise capital to fund acquisitions," says Gunjan Bagla, the managing director of Amritt Ventures, an adviser based in California for global companies that wish to do business in India.