India is on the cusp of driving global growth and considered the last oasis of hope amid a worldwide slowdown, say panellists at the biannual International Bar Association (IBA) M&A conference in the financial capital Mumbai in April this year.
Khaitan & Co’s Mumbai-based senior partner Rabindra Jhunjhunwala, an officer of IBA’s Corporate and M&A Committee and co-chair of the two-day event, captured the exuberance and optimism that marked the deliberations when he said: “India’s time has come.”
Jhunjhunwala also cautioned event participants of the risks and the complexities that could have an impact on investments.
While the economic growth across most developed nations is expected to slow down sharply in 2023 – due to rising inflation and the Russia-Ukraine war – India continues to be poised for growth, albeit a little slower than previously envisaged, to become one of the fastest-growing economies in the world.
“Every global major is looking at shifting their supply chains to India, which is becoming a big manufacturing hub for the West,” a panellist from one of the leading global banks said. Her views were echoed by many international lawyers who urged participants not to wait or they will miss the bus.
The biannual IBA gathering took place in Mumbai after an absence of five years because covid hit the world in 2019, impacting most gatherings.
This year was the largest gathering yet and widely attended by lawyers, bankers, corporate in-house counsel, and legal experts from across the world. The conference covered a wide range of topics including trends in M&A disputes, divestment, insolvency & bankruptcy, financial sponsors, and the changing regulatory landscape. It followed Chatham House rules, which is why many panellists could not be named.
India’s stable government, huge population, robust capital markets assuring investors of an exit option and the development of international arbitration granting comfort to international investors that they will get a fair trial were among the many factors cited by panellists on “why India is now the world’s largest everything”.
The government’s push towards digitisation is equally driving foreign investment inflows, panellists said.
Samsung and Apple have committed billions of dollars to set up manufacturing bases in India. Walmart has equally committed billions to outsource from India. Google’s artificial intelligence (AI) lab is based in Bengaluru, capitalising on India’s talent and innovation.
The money trail follows where development happens and India has seen a massive spike in deal flows into the country during the past two years, said Rajiv Gupta at Latham & Watkins, who leads the India practice from Singapore. “We haven’t seen any downturn yet in 2023,” he added.
New funds that had never come to India are redeploying their capital away from other economies including China into the South Asian giant, said panellists from investment banks.
Many credit funds are investing in India thanks to the Insolvency and Bankruptcy Code, 2016, which creates a consolidated framework governing insolvency and bankruptcy proceedings. The code has changed perceptions and given investors assurance that debt would be protected in the event of a bankruptcy filing.
Deal values in the private equity space have risen, say panellists, with good businesses never selling cheap and cheap deals having often floundered.
“Be prepared to pay,” said Narendra Ostawal, managing director of Warburg Pincus, telling participants that investors need to get conditioned to a high valuation environment.
There are, however, some investors still waiting and watching how geopolitics, the political environment, and India’s ability to deliver on ESG promises play out.
Deliberations centred on concerns over environmental, social and governance (ESG) as investors increasingly apply non-financial factors in their analysis of material risks and growth opportunities.
Cyril Shroff, the Mumbai-based managing partner at Cyril Amarchand Mangaldas, who also co-chaired the IBA conference, said ESG considerations are crucial to ensure a robust capital market framework.
“There is a greater need to focus on the ‘S’ in ESG in India,” said Nicola Yeomans, Singapore-based partner and co-head of private capital at King & Wood Mallesons.
Yeomans said there have been instances of private equity funds reassessing the business model of companies they acquire in terms of making changes to the lives of the workforce and ensuring manufacturing safety.
Though this affects valuations, it improves the “S” in ESG, Yeomans told India Business Law Journal, as funds use ESG to differentiate themselves and address the social and safety aspects.
Geopolitics has had a negative impact on India’s investment horizon especially in the case of some companies whose initial financing came from Chinese investors, following the issuance of the controversial Press Note 3 in April 2020, which signals intentions that investments related to Chinese investors require government approval.
Investments coming from a country, “which shares a land boundary with India or the beneficial owner of an investment into India who is situated in or is a citizen of any such country” would require going through the government approval route and obtain a necessary security clearance.
Though a lot of Indian transactions have been caught up in geopolitical issues, clients are not losing sleep over the geopolitical tensions involving Chinese investment, some of the panellists said.
Regulations like these are not uncommon in many other jurisdictions in the world, a panellist said, highlighting that India is not the first or the last country when it comes to adopting protectionism.
However, during a round table session on the protectionist regime, participants shared some of their war stories and experiences with Press Note 3. Many deals continue to be stuck, forcing corporations to seek new investors.
On a positive note, Press Note 3 has resulted in a shift in India’s foreign direct investment, another panellist said. While the majority of investments largely came from the US, over time, “we have seen Japan, Singapore, UAE, and a host of other countries investing in India”, the panellist said.
Had the overwhelming positive narrative not existed for India, then the geopolitical tensions would have gained a lot more attention, panellists said.
If India is to be the next China, it will have to deliver on its promises because, at the end of the day, it is going to come down to execution. It is imperative to convert the optimism properly, which is where the challenge lies, panellists said.
