Indian market players
have called for an increase in Indian private sector undertakings’ (PSU) natural
resources M&A activity. Here’s why.
Compared to Chinese
SOEs, which have been
acquiring high-value power and natural resources assets around the world, Indian PSUs such as
Coal India and Indian Oil Corporation have been very quiet.
Though some of this
can be attributed to India’s slowing economy, Gaurav Gupta, managing director
of Macquarie Capital said that in the last five years, the Chinese have spent
$120 billion in resource acquisitions. India has spent $18 billion in resource
acquisitions. “I don’t think money is the issue,” he said. “The government
entities are sitting on $25 to 30 billion in cash.”
executive director in Morgan Stanley’s investment banking division, agreed. He
said that he did not think that financing was so much an issue for PSUs at this
point. Instead, he said that the issue is the ability to move forward fast
enough to identify the right opportunities and complete transactions.
But Mohit Saraf,
senior partner of Luthra & Luthra, identified an immediate concern: the
cost of importing energy.
He noted that as
India grows, it will need to import 90 percent of its energy from overseas. He
said that though RBI may have a point in restricting overseas investment in
manufacturing sectors, if India cannot get access to cheap energy resources,
there is no way it will be able to maintain a growth rate of 7 to 8 percent for
the next few decades. “Though we do have cheap labour for maintaining our
competitive advantage, we will also need cheap and reliable power, he added.
greater vision on the natural government level regarding outbound M&A in the
natural resources sector. “It is important that we learn from China and
understand the need to be aggressive on acquisition of natural resources,” Saraf
Where Indian PSUs should invest
Issues surrounding natural resources
financing are often related to jurisdiction risk. Some of the areas with the
most promising natural resources deposits suffer chronic instability or are
focused on resource nationalism. Examples include Indonesia’s
requirement for foreign investors to divest mines after 10 years,
foreign investment law and Bolivia’s
move to nationalise Glencore’s tin and zinc mine.
But Thakur said that investors should
not shy away from risky jurisdictions. He noted that one of the first things
people started thinking about after Indonesia’s regulatory changes was to look
towards jurisdictions with more developed laws. However, he said that even a
place like Australia is going through its own evolution of these laws, which
will impact profitability.
“You can’t leave aside the big
opportunities in the African and South American countries just because
regulations change, and regulations change in the best of markets,” he added.
“You need to better anticipate these risks and address them.”
Saraf suggested that investors look
towards bilateral investment treaties for protection. He cited the recent
Vodafone tax case, which is now looking for more protection on account of
retrospective amendment of tax laws in India. He noted that the Export Credit
Agency of India offers insurance for overseas investment and in the past has
insured about $2 billion of Indian investment overseas. Though it may not be a
huge sum, Saraf said that is comforting to know it is there.
But given the slowing world economy,
Indian investors may not even have to look to emerging markets. Ajay Arora,
partner at Ernst & Young, said that buyers have become more cautious, and
clearly one of the key trends in acquiring energy and petroleum assets is that
larger Indian corporates are looking at US and Canadian assets. He commented
that in terms of asset portfolios, there is an increasing trend towards
allocating more than 50 to 60 percent of the capital pool in natural resources
acquisitions in safe jurisdictions.
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