India natural resources M&A: what lawyers want to see

Author: Ashley Lee | Published: 17 Jul 2012
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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."

Ashuman Thakur, 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.

Panelists advocated 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 said.

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, Mongolia’s 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.

For more from IFLR’s India Outbound Investment Forum:

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