" I strongly believe that India has a lot of latest entrepreneurial energy, which needs to be harnessed so that we become a nation of job givers, more than job seekers. " -Shri. Narendra Modi, Honourable Prime Minister of India.
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Introduction

Outbound investments from India have undergone a considerable change not only in terms of magnitude but also in terms of geographical spread and sectorial composition. Analysis of the trends in direct investments over the last decade reveals that while investment flows, both inward and outward, were rather muted during the early part of the decade, they gained momentum during the latter half.

Outward Foreign Direct Investment (OFDI) from India stood at US$ 1.85 billion in the month of February 2016 as against US$ 3.14 billion in January 2016 and US$2.92 billion in February 2015.

There has been a perceptible shift in Overseas Investment Destination (ODI) in last decade or so. While in the first half, overseas investments were directed to resource rich countries such as Australia, UAE, and Sudan, in the latter half, ODI was channeled into countries providing higher tax benefits such as Mauritius, Singapore, British Virgin Islands, and the Netherlands.

Indian firms invest in foreign shores primarily through Mergers and Acquisition (M&A) transactions. With rising M&A activity, companies will get direct access to newer and more extensive markets, and better technologies, which would enable them to increase their customer base and achieve a global reach.

Market size

India has emerged as one of the strongest performers in the deal-street across the world in mergers and acquisitions. M&A activity increased in 2014 with deals worth US$ 38.1 billion, compared to US$ 28.2 billion in 2013 and US$ 35.4 billion in 2012. There have been M&A deals worth US$ 28.8 billion in the first 10 months of 2015.

M&A activity also witnessed increase in the inbound and domestic segments which together contributed over 80 per cent of the total M&A values. Overseas acquisitions by Indian drugmakers in 2015 stood at US$ 1.5 billion, a five year high, as against US$ 251 million in 2014. Domestic transactions in 2015 recorded 300 deals, the highest number of transactions since 2007, according to the 11th Grant Thornton India LLP annual deal tracker.

Direct investments by Indian firms were US$ 1.85 billion in February 2016, as per Reserve Bank of India (RBI) data. The investments were primarily a mix of issuance of guarantees (US$ 1.12 billion), loan (US$ 258.82 million) and of equity (US$ 471.52 million).

Investments

As per Grant Thornton's 11th Annual Dealtracker, domestic deals showed promising trends. Cross-border deals increased 16 per cent year-on-year driven by 11 deals valued over US$ 500 million each.

In a recent development, UK announced that India has become the third largest source of FDI for them as investments increased by 65 per cent in 2015 leading to over 9,000 new and safeguarded jobs.

Some of the major overseas investments by Indian companies were:

  • Pune-based Persistent Systems has acquired Australia's PRM Cloud Solutions, a certified Salesforce partner and cloud application development firm, which will help the company to further strengthen their ability to offer digitised solutions to their client.
  • Indian pharmaceutical major Lupin has completed the acquisition of US-based GAVIS Pharmaceuticals in a deal worth US$ 880 million, which is expected to enhance its product pipeline in dermatology, controlled substances and high-value speciality products.
  • Ashok Leyland Limited, India's second largest commercial vehicle manufacturer, has announced to expand its unit in Ras Al Khaimah (RAK) in the United Arab Emirates (UAE) by investing US$ 10 million which will help the company nearly double its bus production capacity at the unit.
  • Piramal Enterprises US-based database and consulting services subsidiary Decision Resources Group (DRG) has acquired Adaptive Software LLC, software solutions provider, for US$ 24.5 million, which will offer DRG a direct entry into the healthcare payer ecosystem, thereby expanding its addressable market opportunity.
  • Cipla Ltd, one of the major pharmaceutical and biotechnology companies in India, has acquired two US-based generic drug makers, InvaGen Pharmaceuticals Inc. and Exelan Pharmaceuticals Inc., for US$ 550 million, which is expected to strengthen Cipla's US business.
  • Aerospace component maker Aequs Private Limited has acquired European manufacturing company SiRA Group for an undisclosed amount with a view to expand its presence in Europe and achieve the revenue target of US$ 100 million by the end of this financial year.
  • Cipla Ltd, one of the major pharmaceutical and biotechnology companies in India, has acquired two US-based generic drug makers, InvaGen Pharmaceuticals Inc. and Exelan Pharmaceuticals Inc., for US$ 550 million, which is expected to strengthen Cipla's US business.
  • Wipro Limited, India's third largest Information Technology (IT) services company, has agreed to buy Viteos Group, a US based Business Process Outsourcing (BPO) technology platform provider for capital markets, for US$ 130 million.
  • India's largest integrated power company, Tata Power, has prioritised four key regions for international foray - Africa, South East Asia, the Middle East and SAARC - and has deployed resources to constantly update itself with the market dynamics and opportunities in these areas.
  • Indian automobile major, Mahindra & Mahindra, together with its affiliate Tech Mahindra, has agreed to buy 76 per cent stake in the Italian car designer company Pininfarina SPA, in a deal worth US$ 185 million.
  • Luxury carmaker Jaguar Land Rover (JLR), owned by India's Tata Motors Ltd, has planned to build a US$ 1.5 billion car plant in Slovakia with an annual output of up to 300,000 cars.
  • Religare Capital Markets is entering into a joint venture with Thailand's Trinity Securities to expand its investment banking services in Southeast Asia. Religare had signed a joint venture in April 2015 in the Philippines to provide investment banking and equity capital markets services with FSG Capital. It is also exploring further growth initiatives in Bangladesh, Vietnam, and Myanmar.
  • The Essel Group ME , a wholly-owned subsidiary of Essel Group India, has signed an agreement for acquiring 60 per cent participating interest in the portfolio of African oil and gas exploration projects owned by Simba Energy Inc, a Canadian publicly traded oil and gas company.
  • Reliance Power plans to spend about US$ 3 billion to set up a 3,000- megawatt power plant based on imported liquefied natural gas in Bangladesh.

Government initiatives

The Reserve Bank of India, encouraged by adequate forex reserves, has relaxed the norms for domestic companies investing abroad by doing away with the ceiling for raising funds through pledge of shares, domestic and overseas assets. In addition to joint ventures (JVs) and wholly owned subsidiaries (WOSs), the central bank has announced similar concessions for pledging of shares in case of step down subsidiary.

The Reserve Bank of India (RBI) also liberalised/ rationalised guidelines for foreign investments abroad by Indian companies. It raised the annual overseas investment ceiling to US$ 125,000 from US$ 75,000 to establish joint ventures (JV) and wholly owned subsidiaries. The government's supportive policy regime complemented by India Inc.'s experimental outlook could lead to an upward trend in outward foreign direct investment (FDI) in future.

The Union Cabinet has approved a proposal to provide US$ 150 million credit from Export Import Bank of India (EXIM Bank) for the development of Chabahar Port in Iran, which will also help India to facilitate the growing trade and investment with Iran and other countries in the region.

The Union Cabinet chaired by the Prime Minister, Mr Narendra Modi, has given its approval for the framework of inter-governmental memorandum of understanding (MoU) which will be finalised by the Government of India and Iran.

The RBI has relaxed norms for foreign investment by Indian corporates by raising the borrowing limit. The financial commitment to be undertaken by an Indian party will be limited to within 400 per cent compared to the earlier 100 per cent of the company's net worth.

The RBI has also allowed limited liability partnership (LLP) firms to undertake financial commitment to/ on behalf of JV or wholly owned subsidiaries of Indian companies abroad.

The Indian government is making efforts to integrate the country's economy with the rest of the world. To help the country's firms raise capital abroad, the government will facilitate unlisted Indian companies to list on foreign markets without having to be publicly traded on domestic exchanges.

India and South Africa are considering prospect of setting up a joint venture (JV) for mining and owning coal blocks in South Africa.

Prime Minister Mr Narendra Modi has promised Africa a concessional credit of US$ 10 billion over the next five years, in order to further strengthen ties with the African countries.

Road ahead

Overseas investment is one of the foremost steps to enter the global marketplace and in recent times, India has taken necessary steps to make its presence felt in the global arena. Investment outlook in some of the overseas market looks positive. For instance, the Indian industry is projected to increase its revenue from Africa. Information technology (IT) services, infrastructure, agriculture, pharmaceuticals and consumer goods are vital to India boosting Africa revenues to US$ 160 billion by 2025, as per McKinsey & Co.

In another development, the Ministry of External Affairs has initiated a move to set up a direct sea and air link between India and the Latin American region, as Indian corporates plan significant investments in the mining, oil, IT and pharmaceutical sectors in that region.

Exchange Rate Used: INR 1 = US$ 0.0147 as on March 01, 2016

References: Department of Industrial Policy and Promotion (DIPP), Media Reports and Press Releases, Press Information Bureau (PIB), Reserve Bank of India (RBI), Directorate General of Foreign Trade