New Delhi: Large amounts of private equity coming into India helped push the country’s gross foreign direct investment (FDI) inflows, which rose 153% to touch a record $19.53 billion (Rs79,096.5 crore) in 2006-07.
The Reserve Bank of India (RBI), which compiles the balance of payments statistics, confirmed that the FDI data it released last week did include private equity flows.
The central bank had, however, given no explanation about the data, triggering concerns in some quarters about the lack of transparency even as others wondered if the data exaggerated the robust outlook for the external sector.
Their argument rests on the claim that unlike FDI, private equity is “less sticky” and hence more prone to abrupt exits. By its very definition, private equity investment is with the intent of selling and recouping capital gains—as it happened in the case of UBS Warburg exiting from mobile phone giant Bharti Airtel Ltd.
“This is a huge jump in the space of one year in both in-bound and outbound flows. Although this was expected, the more interesting question is, where has this gone? RBI should have told us about it,” said Saumitra Chaudhuri, economic adviser at credit rating agency Icra Ltd and a member of the Prime Minister’s Economic Advisory Council, on 29 June, the day RBI released FDI data for 2006-07.
RBI, according to a spokesperson, follows the definition of FDI included in the Balance of Payments Manual put out by the International Monetary Fund (IMF). It lays down that private equity investments, wherever it exceeds 10% of a company’s equity, should be treated as FDI. While IMF seeks to standardize the rules, it does recognize that this inclusion should be based on the decision whether the stake has substantive voting power or not. The former should imply inclusion as FDI and the latter its exclusion.
RBI says it does not have a breakdown of the data and cannot identify the share of private equity. It is therefore only possible to guess the amount of private equity in the overall FDI from estimates put out by various outside experts.
Investments made by private equity and venture funds in 2006-07 came to $8.9 billion, of which about 60%, or $5.3 billion, was inflows from abroad, said Arun Natarajan, chief executive officer, Venture Intelligence, a research firm that tracks private equity investments.
In January, the Prime Minister’s Economic Advisory Council estimated gross FDI to be $12 billion, a figure that turned out to be 63% of the final FDI.
FDI numbers are closely monitored as it is viewed as a proxy of the confidence international investors have in India’s economic prospects.
“FDI has a very narrow definition in India,” said Ajay Shah, fellow, National Institute of Public Finance and Policy. “Until two years ago, India did not count reinvested earnings into FDI, which was a major difference between it and other countries (for instance, if Unilever has a controlling stake in Hindustan Unilever and for some reason decides to not issue dividends, it would be counted as reinvested earnings).”
But Shah also says “there’s no earthly reason why anybody should be at all worried about FDI flows or under-report or over-report it. The more, the better. I think we should do some comparison with like countries (Brazil, etc.) and calculate FDI as a percentage of GDP (gross domestic product) to get an idea of where we are and how far we can still go.”
Meanwhile, with private equity inflows expected to sustain themselves in the medium term, the country’s FDI flows are unlikely to witness an abrupt reversal. “As more sectors get organized and requirements are large, my sense is that the flows will continue,” said Pankaj Karna, head, advisory, with consulting firm Grant Thornton.