Mumbai: The Indian financial system is flooded with cheap money at this point of time, but the liquidity overhang may not last for long and interest rates are bound to go up soon. So, companies, big and small, should raise money now and use it when needed.
This was the key takeaway from Mint CEO Briefing, the first of a series in partnership with Bain and Co., held in Mumbai on Thursday over breakfast, in front of a select audience of senior executives.
The panellists were Madhabi Puri-Buch, managing director (MD) and chief executive officer (CEO) of ICICI Securities Ltd (I-Sec); Motilal Oswal, chairman and MD of Motilal Oswal Financial Services Ltd; Romesh Sobti, MD and CEO of IndusInd Bank Ltd; Hetal Gandhi, MD of Tano India Advisors Pvt. Ltd; and Sri Rajan, head of private equity and M&A, Bain and Co.
Money talk: (from left) Romesh Sobti of IndusInd Bank Ltd, Motilal Oswal of Motilal Oswal Financial Services Ltd, R. Sukumar of Mint, Sri Rajan of Bain & Co., Madhabi Puri-Buch of ICICI Securities Ltd and Hetal Gandhi of Tano India Advisors Pvt. Ltd at the discussion in Mumbai on Thursday. The event, with the theme, ‘Financing options in the upturn’, was the first of a series in partnership with Bain & Co. Abhijit Bhatlekar / Mint
The discussion—“Financing options in the upturn”—was moderated by R. Sukumar, editor of Mint.
Rajan set the context of the discussion by posing key questions to the panel and the audience: Is there an upturn? Is money available to all, especially small and medium enterprises (SMEs)? Are companies using the right funding mechanisms for global acquisitions, and is there money available for these?
According to Sobti, funding options in an economic upturn are slightly different from those in a downturn, but the basis on which the chief financial officer of a company takes a decision remains the same—should the company go long or short while raising loans; should it opt for fixed or floating rates of interest; and finally, should the money be raised offshore or onshore.
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There are always two stances, a view-based stance and a hedge-based stance, he said.
“Today there is excess liquidity in the domestic market and everybody is going short, but I would suggest you take a contrarian view and go long when there is excess liquidity. This is particularly true about the small and medium enterprises,” Sobti said.
According to him, Indian firms are raising 90-day money at 4.5% from mutual funds, but this avenue won’t be open for long as interest rates will go up soon.
Puri-Buch of I-Sec, too, said it was “hard to tell” how long the liquidity would last. Her advice to companies was to “move swiftly even if you don’t need growth capital right now”. “Take it. Keep it and use it through the period when you will actually need it.”
She had yet another recommendation for India promoters who hate to sell their stakes for fear of losing control. “The way to go about would be perhaps through a holding company structure,” she said.
Many successful companies have spawned subsidiaries or divisions that started new lines of business. According to Puri-Buch, the operational entities need to be demerged into operating companies in their specific line of business while the promoters can continue to retain a strong control over the holding company. “They are free to do as much financing as required at the subsidiary level, based on the opportunities that the market presents without diluting control at the holding company level,” she said.
Oswal, who heads a listed brokerage, did not see any problem in terms of liquidity, today or tomorrow. His logic: the Indian economy is now worth $1 trillion-plus (nearly Rs46 trillion) and it will continue to grow at least 6-6.5%. Considering the fact that the savings rate in India is around 37% of its gross domestic product, there will always be plenty of money for corporations. Oswal said he did not believe in any “plug and play solutions” for funding.
Gandhi of Tano India, however, had a different take. According to him, the issue of choice of financing options has never been more important than perhaps in the last two years because today it is not just about the availability of finance, but dealing with larger structural and macroeconomic variables, such as currency volatility of the kind not seen thus far.
In Gandhi’s opinion, SMEs are the worst hit in the downturn and for them, the private equity (PE) route is the best form of funding as PE funds are well equipped to provide them not only with money, but also guidance on business strategies.
Rajan of Bain said smaller companies have not been able to access bank funds. However, he added that at a larger level, the environment was changing and that the level of uncertainty that existed six to 12 months ago was no more there.
Gandhi didn’t quite see things that way and said, “There is a false sense of security that things are coming back to normalcy.” According to him, bankers have money, but they are not lending. The same is the case with PE funds. “People are still not convinced that the risks associated with business is lower. … There is a complete misplaced sense of bravado with people coming out and saying the worst is over. Personally I feel there is no upturn. I sit on boards of several companies and I see that they are still struggling to do business.”
Puri-Buch said the PE route has not been utilized fully by SMEs as there is always a belief that they are giving away too much to somebody who is a financial partner. Sobti of IndusInd Bank offered a solution to this problem. The PE model needs to be tweaked for SMEs, he said. “Who knows the SME best other than the banker who has been funding the SMEs. The PEs should go through and target the SMEs through the banker. Put in your money, but don’t come on the board. Instead, work closely with the banks who know everything about the SME as they have given them debt. What they don’t like is people sitting on their board and breathing down their neck and saying three years down the line you need to do an IPO (initial public offering),” he said.
Rajan concluded the discussion by pointing out that it would be interesting to find out the reason for the “access” gap wherein bankers say they are willing to lend money, but companies, especially small ones, aren’t able to borrow money from them. He added that it would be interesting to look at the option of subsidiary or operation-company level financing as suggested by Puri-Buch.