Participants in IFLR’s
India 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
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 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
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-sizeunlisted
companies was relatively challenging.
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
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
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