Last year marked a stellar year for global capital markets and the case for India proved no exception.
Across all three investment banking pillars; equities, debt and M&A, the Indian market delivered on robust momentum, with over $35 billion of issuances across ECM in both 2020 and 2021, according to Dealogic data. Sure enough, 2022 was off to a solid start, with activity propped up by a strong IPO pipeline.
But while the first quarter saw large onshore and offshore DCM issuances to the tune of $6.79 billion from India’s government and corporate sectors, India would go on to take a 15% hit. Concurrent with all markets falling from peak levels, India was impacted by the ramifications of geopolitical turmoil, and volatile market conditions turned investors risk-averse amid a rising interest rate environment. However, some experts are optimistic.
“India has been an outperformer since March 2020, even compared to the US, and in particularly among BRIC countries,” Gautam Shroff, managing director and co-head of Institutional Equities at Edelweiss Securities, told FinanceAsia.
While its domestic capital markets volatility barometer, the Indian VIX (an index that tracks the performance of 50 of the largest companies listed on India’s National Stock Exchange [NSE]) has averaged at 21.3 points year to date (YTD) versus 18.0 in 2021, Ravi Kapoor, head of Banking, Capital Markets and Advisory for Citi South Asia, thinks that the market will remain distinguished among its peers.
“Macro factors including geopolitical news from Ukraine, the efficacy of interest rates hikes by central banks in tackling potential stagflation and further Covid-19 variant outbreaks are expected to chart the market direction over the next 12 months.”
“India, however, is expected to be one of the better performing markets with one of the highest projected GDP growth rates among major economies and trapped domestic liquidity fuelling markets.”
Sharing figures that reveal overall India equity capital market activity to be down by 41% year-on-year (YoY) and IPO activity by 60% YoY between January and May 2022, Kapoor noted that the global risk-off environment had also triggered one of the longest ever sell-off periods in the market. Driven by redemptions across emerging market funds from mid-October last year, he said that foreign institutional investors had already cut down their India holdings by circa $25 billion.
“Domestic capital pools have, however, kept the markets afloat, making India one of the most resilient markets amid the global sell-off. Nifty has lost approximately 9% since the start of 2022, while its peers, Hang Seng and Nasdaq, have fallen by around 15% and 26% respectively, during the same period.”
The rise of the retail investor
Ganeshan Murugaiyan, head of Corporate Coverage and Advisory for India at BNP Paribas, told FA that a move by India’s financial regulators to tighten regulatory oversight has led to a deepening of India’s capital markets and the rise of the retail investor. Shroff echoed this, explaining that close consultation with the industry by the market regulator has brought efficiencies into the IPO market, while a campaign by the Association of Mutual Funds in India (AMFI) has encouraged savings to shift into equities.
The IPO of Ant Group-backed Indian food delivery start-up, Zomato, in July 2021 served as a positive demonstration of retail participation. The $1.3 billion listing – the biggest in the market since March 2020 – was fully subscribed within its first day, offering up a display of confidence for a market of homegrown online players who had turned to public bourses, having outgrown the support of venture capital and private equity. Shares were also anchored to global players including BlackRock and Fidelity International, among others.
Similar was the case for Bollywood-endorsed e-commerce beauty site, Nykaa, which priced in November and raised $722 million, causing the valuation of its parent, FSN E-Commerce Ventures, to soar by 89%.
A Credit Suisse report published last year highlighted the presence of 100 unicorns in India, with a combined market value of over $240 billion. While this burgeoning community may pursue the public markets, doing so would mean increased disclosure and potentially, pressure to delivery on profitability.
“We will see the ECM markets becoming more selective on IPOs as investors have become more discerning with quality of companies and valuations,” said Murugaiyan.
“The remainder of the year is likely to be sombre in terms of deal activity,” said Pramod Kumar, managing director and head of Banking for India at Barclays. “But there is the possibility that planned IPOs might convert to private capital raising, or M&A.”
While prime minister, Narendra Modi’s sale of the Life Insurance Corporation of India (LIC) in May – India’s largest IPO to date – is considered by some to have fallen short in pricing, the deal drew strong uptake by local investors and many of its 286 million policyholders. Originally postponed due to the Ukraine crisis and in spite of global market sentiment, the listing raised $2.7 billion and was nearly three times oversubscribed.
It brought to the fore “the strength of conviction of retail investors who have traditionally been known to follow institutional money,” said Kapoor, noting the 7.3 million applications it drew. Shroff added that a similar trend was seen in the US, where for a period of around 18 months, retail investment was dominating flows instead of institutions.
In spite of reported last-minute sovereign participation by Norway and Singapore, the LIC deal was dubbed “India’s ARAMCO” for its scale and significant uptake by the local market.
India's growth story
“In M&A, we see a trend of several Indian corporates focussing on the India growth story rather than eyeing mega overseas acquisitions,” said Murugaiyan.
“The Holcim-Adani transaction is a clear example where all the potential buyers have been large Indian groups.”
On May 15, Swiss construction materials firm, Holcim, entered a binding agreement to sell a 63% stake in its Mumbai-listed Indian operations, Ambuja Cements, to India’s Adani Group. Expected to close in 2H22, the transaction will see the renewable energy developer and infrastructure operator take a controlling stake in domestic cement producer, ACC.
Through a number of recent reforms and initiatives, the government of India has ramped up its efforts to make the market more hospitable to private capital.
Previous attempts at privatising national assets saw failure due to bureaucracy, legacy issues and regulatory hurdles that discouraged investor demand. But recent changes, including a relaxation of foreign direct investment (FDI) limits and processes around identifying sellable assets, signal that the government intends to make strategic sales more attractive to private foreign buyers, said Vikram Utamsingh, head of Transaction Advisory at Alvarez & Marsal India.
Tata takes off
Before now, potential asset sales were identified on the basis of budget-related disinvestment targets, he explained, adding that this exposed issues such as hidden assets (such as property held by a firm but not central to its business), and overlooked important regulatory implications that curbed appetite.
The sale of Air India to Tata, which finalised in January, marked a milestone for the Indian government and furnished valuable lessons on how to make future sales more compelling, Utamsingh posited.
The government was forced to increase the asset stake sale from 76% to 100% after failing to attract sufficient interest for its initial proposal, and following further market consultation, it also agreed to absorb a portion of the airline’s debt to make it more manageable and in line with current cash flows.
Utamsingh emphasised that the move effectively presented the asset to the foreign market, through the provision of more investment options. He added that the entire transfer of a publicly controlled business to the private sector also set a precedent for other forthcoming national strategic sales.
Reversing the retrospective
With strong privatisation potential across the infrastructure space, in the February 2021 budget, finance minister, Nirmala Sitharaman, laid out various incentives to encourage market participation. These included: a $2.75 billion development finance institution (DFI); the creation of a national asset monetisation pipeline; and the launch of new government-sponsored infrastructure development trusts (InvITs) – pooled investment vehicles that can be used to monetise infrastructure assets.
Abhishek Poddar, managing director and head of Business Development for Southeast Asia and India at Macquarie Asset Management, commended the government for pushing ahead with reform in the context of the challenging Covid-19 period. He highlighted the successes of transmission grid owner, Powergrid’s InvIT, which listed on both the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) in April 2021; and the launch of the National Highways Authority of India (NHAI)’s private, unlisted InvIT in October, which raised around $750 million in long-term capital.
But the infancy of some of these initiatives means that it may be too early to evaluate their long-term efficacy at drawing investor capital, and they may require further amendment down the line.
In the international arena, India’s Ministry of Finance is working on a proposal to allow foreign private investors to fill board seats in government-led InvITs, which current regulation inhibits, local media reported in May.
The development follows a move by the government in August 2021 to scrap a controversial retrospective tax law. Resulting in reputation-harming litigation with foreign investors – including high-profile cases with Vodafone and Cairn Energy – the law had enabled authorities to impose capital gains tax on completed deals dating back as far as 1962, which had involved the transfer of Indian assets by foreign companies.
“The continued re-evaluation of current laws and legal challenges is a strong indicator of the government’s adaptation to welcome different types of investors, such as foreign buyers,” said Utamsingh.
Such reforms are indicative of the government’s continued push to build confidence among foreign investors, experts concurred.
“The inbound investment theme, meanwhile, has been largely dominated by renewable investments,” said Murugaiyan, adding that India provides a scale of implementation across the clean energy sector that is unparalleled.
Currently standing at around 100GW in capacity, India would require approximately $20 billion in annual investment to achieve its domestic renewable capacity target of 500GW by 2030, Kumar said.
“The challenge for India will be raising the financing resources for the large investment required over the coming years. Also, India is dependent on technology and components for these plants from other countries. Having local manufacturing of these components so that we are less reliant on imports would be beneficial to the space,” said Murugaiyan.
HSBC’s head of Global Banking for North India, Dibirath Sen, explained that the imposition of a 40% Basic Custom Duty (BCD) on imported solar modules and a 25% BCD on solar cells from China would necessitate “a robust local procurement strategy.”
Murugaiyan pointed to India’s introduction of a production-linked incentive (PLI) scheme in 2020 as helping build domestic capabilities, but underscored that further investment is required.
The domestic market has also seen a recent push towards sustainable financing structures. Murugaiyan cited BNP Paribas’ involvement in two financings by Adani Green Energy Limited to secure $1.64 billion in funding towards over 2GW of renewable projects in Rajasthan. Last year also saw UltraTech Cement – India’s largest cement producer – become the first company in India and the second in Asia to issue sustainability-linked bonds (SLBs) in US dollar, totalling $400 million.
But Poddar thinks that India’s clean finance market could benefit from the concept of blended finance. Involving combined capital sources from multilateral development banks (MDBs), DFIs “which can take risk and provide some of the coverage for newer technologies”, and commercial capital, a blended mix of risk-taking and risk-averse capital could cater to the market's needs, offering a balanced approach.
Ongoing efforts to deepen India’s capital markets and make the country a more prominent player in the international arena, provide ample deal opportunity for public and private market participants.
With Indian edtech start-up, PhysicsWallah, clocking in as the country’s 101st unicorn in early June according to start-up tracker, Inc42, its fast-growing start-up ecosystem shows no sign of abating.
“Indian start-ups attracted over $42 billion in investment in 2021. The government has recognised start-ups as a large driver for capital formation and is supporting new ventures through efforts such as accelerator, SAMRIDH Scheme, and incubator, the Startup India Seed Fund,” said Kapoor.
Although not all planned IPOs are likely to materialise, the M&A deal pipeline remains robust, especially in the infrastructure space. Ongoing privatisation processes to watch include; railway firm, the Container Corporation of India Limited (CONCOR), the Shipping Corporation of India and IDBI Bank, noted Poddar.
In November 2019, the government approved the strategic sale of a portion of its 54.8% stake in CONCOR. While Adani Group expressed initial interest, a delay in changes to the market’s railway land usage policy – set to make the deal more appealing – proved a stumbling block. But following pandemic-related supply chain disruption, CONCOR has become a very valuable asset and its sale could occur within the next six to nine months, explained Shroff.
Meanwhile, the government’s proposal to sell its 52.98% stake in Bharat Petroleum Corporation Limited (BPCL) continues to be suspended temporarily due to rising oil prices prompted by the war in Ukraine. While the process invited expressions of interest (EOI) in March 2020, the asset’s valuation has slumped from ₹90,000 crore (approximately $12 billion) in November that year, to ₹70,338 crore at the end of May 2022.
“If markets had been strong, there would have been a case for revival [of these asset sales], but given where they are, this is harder,” said Kumar.
To affirm India as the investment destination, the government should look to apply lessons learned from its sale of LIC and Air India, suggested Poddar.
He explained that these include the assurance of sufficient engagement and consultation with investors pre-bid to ensure that any potential issues are raised and addressed. All involved stakeholders – from shareholders to employees – should be offered a platform to voice any concerns or impediments to maintain progress on a smooth and timely basis, he said.
With legal challenges a fairly common occurrence in sales processes even just a decade ago, Podder emphasised the importance of running a global and transparent bidding process. He underlined the need for any privatisation opportunity to be well defined, in order to allow investors to apply correct valuation estimates to target assets – the absence of which can lead investors to apply a higher risk premium.
But reflecting on the government’s efforts to incentivise inflows of foreign capital to date, Poddar is buoyant.
“Stepping back, the needle has moved. It could have moved faster, but we are all very enthused as investors by the amount of opportunity that we see coming,” he concluded.