Business and legal professionals share their hopes and fears for the year ahead
India Business Law Journal invited in-house counsel, private practice lawyers, an academic and a business strategist to share their predictions on the opportunities and challenges that India-focused companies will face in 2011.
Mergers and acquisitions
Vijaya Sampath, group general counsel, Bharti Enterprises: India has earned its place at the high table in the global league, with its year-end tally of domestic and cross-border deals being valued at more than US$20 billion.
The scorching pace of growth in Brazil, Russia, India and China (the BRIC countries) and the low or negative growth in emerged markets have made assets available at reasonable prices. Indian entrepreneurs have ventured into previously untapped markets like Africa and South America looking for energy, minerals and new clients. Global pharmaceutical companies have been attracted to Indian generics, to such an extent that the government is concerned about the impact of such acquisitions. The trend is expected to continue in 2011 with India Inc’s increasing confidence in its abilities to own and manage international resources and assets.
It is not surprising that the biggest deals have been in oil and gas, power and energy, pharmaceuticals, IT and telecoms, all of which have contributed significantly to India’s growth story. Funding for deals has become easier with cash from internal accruals, the easing of external borrowing regulations and the willingness of international banks to lend to Indian companies.
Indian companies would do well to tread cautiously and avoid the pitfalls associated with underestimating the scale, complexity, bureaucracy and the legal framework of multi-jurisdictional deals. For international companies, India presents a huge learning curve in understanding “unity in diversity” and the juxtaposition of poverty with luxury. Perhaps most importantly, they must learn that in India one size need not fit all. These companies will need to adapt their products and services to suit domestic requirements.
With a host of international conglomerates, bankers and lawyers treading a path to India, 2011 promises to be an exciting time for M&A, both inbound and outbound.
Shardul Shroff, managing partner, Amarchand Mangaldas: It is my perception that M&A will be on the decline in 2011 due to the spillover effect of serious scandals which have rocked India, tight economic conditions and high oil and gas prices. An M&A revival will only be possible when systematic changes are brought about to address these concerns.
Notwithstanding this negative outlook, the opportunities in outbound M&A will be in oil and gas, metals and minerals, natural resources and IT. Inbound opportunities will be in telecoms equipment, power, banking and financial services.
I expect that Reliance Industries (Mukesh Dhirubhai Ambani Group) will emerge as a major player in telecommunications, subject to it maintaining a clean chit from the 2G scandal. Areas like defence, nuclear energy, retail and insurance will remain sunrise opportunities.
Alka Bharucha, senior partner, Bharucha & Partners: Globally, I expect 2011 to be a relatively uncertain period for M&A. I think much will depend on how Europe handles the Irish crisis and also whether other members of the EU need to be bailed out. While the American economy seems to be recovering, there are perspectives which indicate that this is the second peak of a double-dip recession. Therefore, I believe the driver for M&A will be Asia.
In India, general economic trends seem to indicate a healthy environment but at the macroeconomic level the increasing trade deficit and current account deficit are worrying. Indian companies have traditionally managed to function regardless of these concerns and perhaps the greater worry in 2011 will be corruption with its attendant consequences. We’ve already seen Indian banks (especially public sector banks) curtailing disbursements and, given the way in which matters are proceeding, I am not quite sure how things will pan out. Having said that, corporate India has successfully dealt with similar conditions in the past.
I predict that defence, nuclear power, pharmaceuticals and telecoms will see the greatest M&A activity over the next 12 months. Banking could also be an interesting sector but that will depend on how the proposed guidelines for private banks take shape. The Reserve Bank of India has already encouraged public sector banks to seize opportunities for consolidation and growth, and it would be interesting to see how private banks, if permitted, capitalize on these opportunities.
The hurdles, of course, vary across sectors. For nuclear power and defence, dealing with regulatory and government consents are possibly the biggest hurdle; for telecoms, the legacy of corruption issues is a huge concern; and given the nature of the pharmaceuticals industry, considerations relating to the Competition Act will be important in any M&A.
Key players will clearly be those with the resources on their own balance sheet to fund M&As. These players will be, to a large extent, insulated from systemic liquidity crunches and may well be able to capitalize on the attractive valuations presently available.
Jagannadham Thunuguntla, strategist and head of research, SMC Global Securities: Pricing is the most important factor for companies planning to hit the Indian capital markets in 2011. Many aggressively priced issues in 2010 failed to generate the desired investor response or floundered after listing. Investors in those issues are still licking their wounds. Issues that are priced too low could lead to poor returns for promoters.
Another crucial factor is timing, especially for large issues. Overcrowding of the primary market may lead to an underwhelming response from investors. This is something that investment bankers should definitely watch out for.
With the successful listing of MakeMyTrip.com, one can expect a flurry of smaller companies to tap the global capital markets to fund their expansion plans. Moreover, some niche businesses are better appreciated by the international investor community than by domestic investors. For businesses in sunrise sectors such as e-commerce, m-commerce [using smart phones and other mobile devices] or biosciences, this is a great opportunity to raise growth capital.
Looking ahead, the markets are expected to do well and perform in line with the economic growth of the country. Having said that, investors should not expect the Indian markets to produce supernormal returns in 2011, since the market has already factored in most of the good news.
The worsening crisis in Europe and the US has added to concerns about foreign portfolio inflows. The record inflow received by the Indian markets this year appears to be a one-off instance and should not be seen as a continuing phenomenon.
China has made up its mind to slow down its ferocious rate of growth. This may be warranted, but it will not be a smooth process. The ripple effects of a slowdown in China will be felt globally, hitting commodity markets first and also the sales figures of global auto majors that now have a huge dependency on Chinese sales.
Overall, one should expect India’s capital markets to perform well, but not outperform in 2011.
Sidharth Bhasin, partner, Shearman & Sterling: Given the depth that the Indian markets have shown recently, I expect the market to remain robust and perform strongly in 2011. There may be some correction and the market may move sideways over certain periods in 2011, but I believe that the Indian capital markets will continue to provide good liquidity to quality issuers.
With the Indian economy projected to grow at almost 10% in 2010-11, there will be several companies in India that are at an inflection point that may wish to consider accessing the capital markets. Capital markets in India may also prove to be an attractive avenue for companies that are looking to grow inorganically, whether in or outside of India. For example, India’s infrastructure, healthcare, IT and education sectors are seeing a great deal of private equity and M&A activity now, both inbound and outbound. This sector-specific interest should have direct implications for Indian exchanges and likely others in the greater Asia region.
There may be a level of uncertainty in the Indian market due to recent scams and the government’s proposed response to them. The implementation of the government’s proposals may have an impact on investor sentiment and general market conditions. There is also some concern that the mega disinvestment projects by the government of India could dry up liquidity in the market. That coupled with the poor performance of certain IPOs recently may make 2011 a difficult market for certain issuers.
We are seeing an increasing number of Indian issuers exploring international listings and financings on both the equity and debt side.
The recent success of some international deals, such as, MakeMyTrip’s Nasdaq listing on the equity side and Reliance Industries’ US$1.5 billion bond offering on the debt side, has clearly made Indian issuers sit up and take notice of the advantages of accessing international markets, both in terms of coverage and valuation. I believe we will see an increased number of international financings coming out of India.
Jane Niven, regional general counsel, Jones Lang LaSalle: The success of the Delhi Metro system should be seen as a role model for infrastructure projects across India. If city and state governments can leverage the success of this project, the future for infrastructure looks very good. Energy is a sector that should yield good results for public-private partnerships, especially in the “green” sector.
Businesses should be prepared to jump when the government starts to move on these projects. In addition, being equipped to bring innovative ideas to the table has the potential to add great value to India.
Unfortunately corruption remains an issue and until it is tackled in a more systematic and thorough way it will impede development. There needs to be a top-down approach to anti-corruption activities. India has very good anti-corruption laws but they are not thoroughly implemented and there is a sense that senior politicians and bureaucrats have immunity from the laws.
Recent revelations about the awarding of mobile phone licences and allegations of sleaze surrounding the Commonwealth Games are clear indications that corruption reaches the highest levels. While much of the information we receive about these issues is coloured by the bias of the Western media, it is clear that levels of corruption are still high and need to be addressed in a robust manner.
Priyabrat Tripathy, head of legal (India), Isolux Corsan: India will be pushing for better infrastructure as it tries to sustain the growth of its economy next year. A lack of clarity and transparency in long-term policy matters and delays relating to approval procedures could, however, impede these ambitions for growth. While India is bracing itself for big-ticket investments in the infrastructure sector, it has yet to take a long-term stand on basic policy issues such as land acquisition, labour reforms and environmental clearance.
India urgently needs a coherent and balanced approach to formulate a long-term policy on infrastructure development. It would also benefit from the introduction of a smooth, transparent and speedy approval process for infrastructure projects, which is essential to sustaining growth in the sector.
Despite these shortcomings, the highway and power sectors can be expected to draw substantial interest in the coming years. The National Highways Authority of India is coming up with tenders for mega road projects of 1,000 kilometres or more. Clean energy is also receiving considerable attention.
Although international infrastructure companies may have an advantage over domestic companies on large projects as far as pre-qualification requirements are concerned, ultimately, it is skilful execution and efficient project management that matters most. International companies with long-term plans to seize opportunities in the infrastructure sector in India have to sharpen their skill in efficient project execution and project management in India. Also, strict and proper due diligence both on corporate governance as well as other legal issues is absolutely necessary for any future investment in this sector.
Shamnad Basheer, professor in IP law, National University of Juridical Sciences: The emergence of a sophisticated market for ideas presents the biggest opportunity for IP owners. The IP world has witnessed a burgeoning of IP brokers such as Intellectual Ventures (IV), which helps build bridges between IP creators and users. IV’s key business model involves buying or licensing IP from various creators, aggregating it into portfolios and licensing it out to interested parties. Similarly, Ocean Tomo helps auction patents in an open market.
All of this is likely to lead to reduced transaction costs and a mature market for ideas in the near future, where one can simply leverage one’s mental wares without necessarily converting them to physical wares. Those with the brains create, and those with deep pockets develop the ideas into products. This transformation will be particularly important for India, where it could prove a great social leveller by leading to upward economic mobility for a large number of people who have no wealth or resources, save a creative mind.
This will also mean exciting new job opportunities for a new breed of players who are willing to learn and play this new “IP trade” game.
In terms of hurdles, I would immediately point to the enormous transaction costs associated with valuing intellectual property and in negotiating deals. Inventors almost always tend to overvalue their IP and users and buyers tend to undervalue them. The biggest challenge will remain the extraordinary costs imposed by an inefficient patent system the world over; a system that keeps away a large number of innovators who cannot afford to pay the costs associated with registration and enforcement. And a system that amounts to a lottery at best, where a Damocles’ sword of invalidity hangs over most granted patents.
If we need to foster a genuine international market for ideas, we need to rethink the global patent system. A single international patent would be ideal. However, given the politicization of patents and the negative backlash against an instrument widely perceived to be fuelling Western economic hegemony, this solution is as attainable as getting the US government to nominate Julian Assange for the Nobel Peace Prize.
Nishith Desai, managing partner, Nishith Desai Associates: There are a couple of things that can impact India’s growth in 2011. There is a risk that corruption could consume an unnecessary amount of resources as attention may be diverted from reforms and devoted to investigations and inquiries surrounding such cases. India’s ratings may plummet due to the attention corruption has attracted and investments may be affected.
Significant growth disparity within India could also impact economic development. Some states in India have enjoyed robust growth of 18-20% over the year, while others are crawling at 1%. Such discrepancies could create domestic tensions, particularly as prosperous states begin to overtake their less affluent counterparts by producing more and paying more taxes. In states where growth is stunted, there may be increased insurgency as a result of rising poverty levels. If government support and private investment is not challenged equally, these will continue to suffer.
Security issues also present a major threat to growth. There is a perception (right or wrong) in India that China is creating more influence in eastern parts of the country. This perception, along with terrorism issues, may divert government attention and resources away from where they are needed most.