Investment Outlook , Published Feb 18, 2020
To boost the global economic slowdown, the government will continue to take measures to revive India’s entrepreneurial spirit, and infrastructure. Further, consolidation in the banking and real estate sectors with enhanced regulations is expected. With the Judiciary reengineering the investment landscape of India, stressed assets will be key in driving deal activity. While India’s potential is undisputed, only the test of time will tell whether it has been carefully harnessed.
Prime Minister Modi’s clarion call in recent debates for transforming India into a $5 trillion economy has been the subject of much heartburn and angst. Some termed it as a challenging but realisable goalpost, whilst others dismissed it as being an unfeasible option with three of India’s growth engines – private consumption, private investment, and exports slowing down significantly. Yes, it’s a wonderful aspiration to have, but how will we get there? Is Modi the best captain to steer India towards this utopia?
Whilst there is little doubt that India is currently in the midst of a significant economic slowdown, to its credit the government has not stood by idly as a silent spectator. To address this downward trend and the ongoing credit crisis which continues to bruise both lenders and bankers alike, the government implemented considerable changes to the Indian legal framework, particularly in the fields of social legislation and economic policies. Foundational shifts were witnessed by strengthening of the new insolvency framework, relaxation of the FDI policy, reduction of corporate taxation rates, financial sector restructuring and interest rate reductions. All these represented steps were taken by the government to cope with an economic slowdown caused partially by domestic factors and largely due to international geopolitics and trade tensions between other nations.
By other measures, India is still performing well as its forex reserves have risen to record levels and currently stand at approximately $455 billion and its current account deficit narrowed to $14.3 billion or 2 percent of the GDP during the April-June quarter from 2.3 percent during the same period a year ago. However, rising inflationary pressures on key food commodities have considerably dampened consumer sentiments and may lead to populist measures being implemented.
To reinvigorate the economy, the government has decided to charge headstrong into its ‘Make In India’ program with various corporate tax cuts and incentives being given to domestic manufacturers and start-ups. This is a significant step towards boosting India as a manufacturing centre in Asia – possibly capitalizing on the industry-wide shift manufacturers appear to have made out of China. But, it still remains a brutal fight, with India at a disadvantage when compared to manufacturing hubs like Vietnam. This move, coupled with other measures such as the easing of FDI norms in key sectors and local sourcing requirements for domestic manufacturing, improvements towards ease of doing business rankings and CSR compliances, evidently seem to be a bid to push Modi’s ambitious economic proposal.
The activist judiciary has also had a significant impact on the investment landscape of India such as upholding the constitutional validity of the insolvency code, deciding that home-buyers would be included as financial creditors under insolvency laws, striking down Section 87 of the Arbitration and Conciliation Act, 1996 (which provided for an automatic stay on an arbitral award as soon as it was challenged in court), its decision in the insolvency bids for both Essar Steel and Ruchi Soya, and the very recent quasi-judicial ‘protection’ of minority shareholder rights by the NCLAT through the Tata-Mistry case. These verdicts are bound to have far-reaching consequences on corporate India’s faith in dispute resolution and debt recovery processes with further developments unfolding in the Supreme Court in the Tata-Mistry case. Distressed M&A will continue to be the flavour of the year in 2020.
Deal activity (Mergers & Acquisitions and Private Equities) in the past year has been moderate but not insignificant. Start-ups, pharmaceuticals, and fintech remain sectors to look out for moving into 2020, having seen the most activity of late. Exemption of angel investments such as taxable income, three-year tax holidays for start-ups, and significantly relaxed compliance requirements may just be the final spur to the winning horse in a move to make the most of the Indian entrepreneurial spirit. Notably, the increased importance of data usage in a number of industries makes data mining another sector which is expected to see significant activity. Although, expectations for this may be dampened by the onerous terms of the proposed Personal Data Protection Bill – complying with this may increase the cost of doing business. Apart from these, significant infrastructure projects are also expected to commence in the near future due to the recent government announcement of its intention to spend INR 100 lakh crore on 10 different infrastructure projects (in an effort to boost rural employment and improve quality of life), making infrastructure and construction another sector in which flurry of activity is anticipated.
India Inc. is presently in ‘reset mode’ and the start of the new decade will witness a number of themes. These will include amongst others, the continuum of resolutions under the insolvency regime, stressed assets being the primary driver for deal activity, resurfacing of the private sector’s entrepreneurial spirit, foreign funds and foreign sponsors continuing to look to India (albeit with tempered expectations) and significant consolidation in the banking and real estate sector coupled with increased regulation. Indian entrepreneurs may also need to explore the ‘partnership model’ for doing business in India and learn how to share control, governance and risk.
Whether the Modi government has bitten off more than it can chew remains to be seen. What is not disputed, however is that India still possesses tremendous growth potential. This needs to be carefully harnessed.
The dawn of this new decade will require us to correct our course and undoubtedly present exciting opportunities as we draw closer to celebrating 75 years of an independent and vibrant India.
About Cyril Shroff
Cyril Shroff is the Managing Partner of Cyril Amarchand Mangaldas. Prior to this, he was the Managing Partner of Amarchand & Mangaldas & Suresh A. Shroff & Co. He has over 37 years of experience across corporate and securities law, disputes, banking, bankruptcy, infrastructure, private client, financial regulatory and others.
Investment Outlook 2020