Upswing in M&A activity expected to gather steam

By Rupinder Malik and Revathy Muralidharan, J. Sagar Associates
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The infrastructure sector – largely comprising power, roads and highways, urban built-up infrastructure, townships and construction development activities – is an integral factor in the rapid growth of India’s economy. The country has witnessed high volumes of merger and acquisition activity in the infrastructure sector in the recent past due to various government initiatives and liberalization of policies specifically aimed at attracting foreign investors.

Rupinder MalikPartnerJ. Sagar Associates
Rupinder Malik
Partner
J. Sagar Associates

Data released by the Department of Industrial Policy and Promotion show that from 1 April-31 December 2017 India received US$2.92 billion of foreign direct investment (FDI) towards construction development and infrastructure activities. The government has also stepped up its efforts to boost the infrastructure sector, by introducing the ambitious Bharatmala roadway and Sagarmala seaway projects, and has allocated approximately US$92.22 billion as a part of its budget 2018-19 towards development of the infrastructure sector.

The power sector is one of the key contributors to India’s long-term and sustained economic growth. Through various policy initiatives, India has attracted significant interest among foreign investors in the renewable energy sector. India is now considered the second-most attractive country, after China, for investment in renewable energy.

By virtue of being a signatory to the Paris Agreement, India aims to achieve 40% of its cumulative power installed capacity from non-fossil-fuel-based energy resources by 2030. The government aims to generate around 175 gigawatts of energy from renewable sources by 2022, with a maximum of 100 GW proposed to be generated through solar energy alone. In order to achieve this target, the minimum investment or capital required will be approximately US$160 billion (excluding investment required for ancillary infrastructure) and accordingly, a significant inflow of foreign investment and consequent M&A deals in the solar power sector can be foreseen.

Currently, regulations under the Foreign Exchange Management Act (FEMA) permit 100% FDI under the automatic route (i.e. no prior government approval required) for generation of power through renewable sources. However, challenges faced by this sector in India – such as lack of adequate power transmission infrastructure facilities, uncertainty in the policies issued by the renewable energy regulators and poor financial health of distribution companies in India – may keep foreign investment from reaching its full potential.

Revathy MuralidharanPrincipal associateJ. Sagar Associates
Revathy Muralidharan
Principal associate
J. Sagar Associates

Roads and highways is another sector that has witnessed an increase in M&A transactions due to recent favourable policy decisions of the government such as encouraging public-private partnership models and permitting road developers to exit from operational highway projects two years after completion of such projects, irrespective of the year in which the project was awarded.

As per the FEMA regulations, FDI in infrastructure development projects, which includes construction and development of roads, bridges and other city and regional-level infrastructure, is permitted up to 100% and falls under the automatic route, subject to certain conditions.

A spurt in industrial activities along with an increase in sales of private and commercial vehicles has helped in accelerating the government’s road and highway development activities, drawing the attention of private players to this sector. Further, the demand for good infrastructure and housing in India is reasonably high, given the rapid expansion and growth of tier-two cities.

The government is expected to make large investments in the infrastructure sector in the coming years with specific emphasis on connectivity and affordable housing. According to recent statistics and reports, approximately US$700 billion is required for infrastructural developmental activities in India by 2022 and highways, urban and rural infrastructure and renewable energy are expected to be the focus points.

This requirement will ideally be met by a strong influx of foreign investment in the sector. Cash-strapped players already engaged in this sector will look to partner with incoming investors to unload assets and discharge their debts. With a generally strong economy and growing investor interest, this is expected to lead to a proportional increase in the number and volume of mergers and acquisitions in the infrastructure sector.

Rupinder Malik is a partner and Revathy Muralidharan is a principal associate in the Gurugram office of J. Sagar Associates. Views are personal.

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Rupinder Malik | Tel: +91 124 439 0736
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Revathy Muralidharan | Tel: +91 124 439 0619
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