Oùallons-nous en 2014. In English… “where are we headed in 2014"!

Like everyone hoping for a better year ahead, stakeholders in the mergers and acquisition (M&A) markets too are keeping their fingers crossed. Overall M&A activity has been muted. Latest industry data shows that deal activity declined to its lowest level in three years to $28 billion in 2013, with inbound deals accounting for more than half of the kitty. Also worth noting is that while Indian M&A may account for a small percentage of the activity worldwide, the country sits among the top five destinations for M&A transactions, as per information available in the public domain.

The economic slowdown witnessed across the globe post the fall of Lehman Brothers in 2008 has had a severe impact. Governments across the world have been struggling to put in place a number of initiatives to pull the economy out of the rut. The slew of measures taken by the Indian government and Reserve Bank of India (RBI) to attract more FDI in the sectors such as retail, aviation, broadcasting and telecom are positive signals to the larger financial community. But let us look back a little to strive and decipher the future for M&A activity in India.

Deal activity currently remains moderate, which reflects the overall economic sentiment. As per the November edition of the Deal Tracker by Grant Thornton, private equity investments and M&A investments in terms of deal value in the last one month have seen an increase compared to those in November 2012. M&A deal value during the period increased 16% and value in 2013 was up by 36%.The month of November witnessed M&A and PE deal activity worth US$ 2 billion, which is similar to the levels seen in previous months of September and October 2013.

However the fact remains that completion of transactions is taking longer now, with more intensive due diligence and evaluation of regulatory risks, exit options and return on investments. The macroeconomic factors, other than lack of faith, are likely to be speed breakers for M&A activity’s growth momentum in the immediate future.

Inflation measured by the wholesale price index (WPI) rose in September 2013 for the fourth month in succession. The pass-through of de-valuation of the rupee has led to a rise in the prices of manufactured products. Consistent low growth and rising food and fuel inflation has offset any possible decrease in inflation. Retail inflation measured by the CPI has also risen sharply across food and non-food constituents, including services, keeping inflation expectations high. With the effects of the weaker rupee continuing to percolate through to consumers and quick interest rate hikes by the RBI (RBI has raised its policy rate by a total of 50-basis points since September 2013), core inflationary pressures are likely to persist, if not accelerate.

Persistent policy logjams, particularly in relation to delayed clearances on the part of the government; aggressive bidding on the part of private developers during the high growth phase; inadequate appraisal mechanisms on the part of financiers, brought the infrastructure sector to a standstill. Consequently project delays have seen India’s growth slowdown in a big way. As per RBI’s Macro Economic and Monitory Development Review 2013-2014, as of June 2013 about 50% of central sector projects (of 150 crores and above) were delayed, up from 44% in June 2008, for which the cost overruns rose from 12% to 20% during the last five-year period. Delayed projects were high in sectors, such as roads, followed by power, petroleum and railway.

The Cabinet Committee on Investments (CII) was constituted in January 2013, to expedite the clearance of projects. Up until mid-September 2013CCI has cleared about 209 projects. A Project Monitoring Group was also set up in the Prime Minister’s Office which has finalised deadlines for the intermediate steps to be taken to accelerate key mega infrastructure projects. While the impact of this is yet to be felt it is hoped that this was a move in the right direction and will contribute to boost investor sentiments.

As per the RBI Bulletin for November 2013, net FII divestment from the Indian debt market since 23 May 2013 (till September, 2013) was around US$ 16.6 billion as compared to net investment of US$ 5.6 billion during the period 1 January-22 May 2013. The subsequent weeks saw an inflow of FII’s due to the measures taken by the RBI to facilitate capital inflows and the country received a net inflow of 8,116 crores. Hence although FII investments have shown an upward curve, RBI’s 63rd round of Industrial Outlook Survey shows that the business expectation index dropped significantly in the 2nd quarter for 2013-14, falling below the threshold of 100, and touching the lowest point since the first quarter of 2009-10, which goes on to shown the uncertain investor sentiments still prevailing in the market.

Several other steps have also been initiated to uplift investor confidence. The Government and RBI have (i) liberalised FDI norms through review of limits and (or) routes for select sectors viz. telecom, asset reconstruction companies, credit information companies, petroleum and natural gas, courier services, commodity exchanges, infrastructure companies in the securities market and power exchanges, (ii) offered a window for banks to swap the fresh FCNR(B) dollar funds, (iii) increased the overseas borrowing limit from 50% to 100% of the unimpaired Tier I capital of banks (with the option of swap with the RBI, and (iv) permitted availing of ECB under the approval route from their foreign equity holder company for general corporate purposes.

All these elements would have a direct impact on M&A trends, which have been severally impacted over the last few years. There is light at the end of the tunnel and finally the government and its policies seem to be moving in the right direction.

As Bo Bennett (founder and CEO of eBookIt.com) once said “As sure as the spring will follow the winter, prosperity and economic growth will follow recession". Hope his vision comes true!!

Aparajit Bhattacharya is head of Corporate and M&A Practice at HSA Advocates.

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