Participants in IFLR’s
Outbound Investment Forum said that they are looking towards new methods of financing
beyond traditional LBOs. Here’s what they recommend.
The most straightforward investment
method was mentioned by Ranbir Hunjan, a partner at Clifford Chance’s London
office. A recent trend had been developing, he said, for joint venture (JV) partnerships
or transactions using cash reserves.
But if a JV is not possible or a company
is not stockpiling cash, LBOs remain an option. The panel had mixed views about
LBOs, however, which have fallen out of favour with the Reserve Bank of India
(RBI). Some companies have received notice to collapse structures or to use
operating company structures.
But Hunjan remained positive. He said
that dollar borrowing by Indian companies will be subject to European Central
Bank guidelines. In addition any dividends from the target to the Indian
company will be subject to taxation and there is only so much taxation that can
be sheltered by the deductions from the interest on the financing. “An LBO
model with an offshore holding company will mitigate these concerns,” he said.
He added that deals have been done by
on a non recourse basis to the Indian parent. Although there are complications
and price implications, it keeps the deal outside of the Indian regulations as
it is offshore and there is no Indian parent guarantee.
Indian banks are not directly involved
in the acquisition financing. But they do have an integral role in establishing
the credibility of Indian companies.
Mohit Saraf, senior partner of Luthra
& Luthra, said when
foreign banks think of supporting Indian companies on an acquisition finance
transaction, they often require an Indian bank to stand behind the guarantee of
the Indian acquirer in the form of a letter of credit, largely because foreign
banks don’t have a relationship with most Indian promoters.
“On the other hand, though Indian promoters can invest 400 times
their net worth under the automatic route, often they may not have ready cash
available,” said Saraf. “Therefore Indian banks (including State Bank of
India) have a significant role to play in providing investment up to 400 times
the net worth, which essentially forms the corpus
for a LBO model.”
While LBOs are controversial, they
best suit large transactions. Gaurav Khungar, Religare Capital Markets’
managing director and corporate finance in India, said that raising capital for outbound
M&A by mid-size
unlisted companies was
Khungar encouraged Indian
corporates to look towards private equity as an untapped source of capital. “In
2011, 28 percent of the funds invested by private equity were in companies which
were formed in the last three years,” he said. “This indicates a scarcity of
quality assets that meet funding criterion. This trend cannot be ignored as
these companies will prospectively look at becoming global and will need
outbound investment funding.”
Rajiv Nayar, managing director and
head of capital markets origination, India at Citigroup,
added that private equity investments prove a company’s legitimacy. “For small
and medium businesses not well-known outside of India, including private equity
in the funding mix adds credibility and even sometimes makes debt raising in
places like the US easier,” he said.
Although Hunjan had observed a
shrinkage of the debt market, Nayar encouraged companies to look to the US bond
market, which he said was the world’s deepest source of liquidity. He believed
Indian corporates had not used this to the extent that corporates elsewhere in
the world had. “It has become more available,” he said.
He had a bullish outlook for companies
utilising the debt capital markets to raise funds, and said that the
environment for raising debt in the US market has never been better. He
observed that investors at the retail and institutional levels moving capital
from equity to debt.
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