Western Financial Firms Sour on Indian Investments

Aug 14, 2013

Western Financial Firms Sour on Indian Investments

By Kenan Machado and Nupur Acharya

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Exasperated by a lack of growth and profitability, Western firms, mostly financial institutions, are selling their Indian investments, with a weakening rupee expediting the departures. And bankers and analysts said more exits are expected. AvivaAV.LN +1.56% PLC and New York Life Insurance Co. are among insurers that are selling or have sold their India franchises in the past year. A person close to Aviva said last week that the U.K. insurer was leaving India because its venture hadn’t grown as much as expected. Banks, too, are scaling back, including BarclaysBARC.LN +0.63% PLC and Royal Bank of Scotland GroupRBS.LN +3.51% PLC, which said on Friday it would sell some of its Indian assets to a local bank as part of its strategy to exit noncore investments.“Life insurers exiting India have generally taken that decision as part of global strategic repositioning exercises, or because of concerns over the sector’s funding arrangements,” said Donald Lacey, Hong Kong-based managing director at CitigroupC -0.35%’s Asia financial institutions group.

“On the banking side, some foreign banks have shut down retail operations and others are reconsidering their positions, due to the additional regulatory constraints they face as foreign institutions as well as the considerable macroeconomic headwinds facing the country,” Mr. Lacey said.

The overarching concern for most Western companies is a slowing economy. India has grown at its slowest pace in a decade and the current account-deficit is widening.

Uncertainty leading up to India’s elections—set for next year—are also adding to concerns.

Bankers said the falling rupee, which has remained weak despite a raft of measures by India’s central bank, has further eroded the profitability of many investments foreign firms have in India.

In mid-July, the Reserve Bank of India restricted commercial banks’ access to cash and tightened rules on the percentage of deposits that banks must park with the central bank.

On Wednesday, it tightened rules on overseas investments to stem capital outflows and prop up the rupee.

Foreign investors fear that the rupee will continue to weaken, pulling unprofitable investments further into the red and leading to higher mark-to-market losses. The rupee has fallen 31% in the past five years and 12% in the last six months against the U.S. dollar.

With the U.S. economy on the rebound and flat growth in emerging markets, Western firms expect better returns back home, said Amrish Shah, who advises clients on mergers and acquisitions at Ernst & Young’s Mumbai office.

Foreign firms exited $1.64 billion worth of investments in India in the first six months of the year, compared with $1.3 billion a year earlier, according to Dealogic figures on the top mergers and acquisitions.

Of the total, financial institutions made up the bulk, selling stakes worth $1.18 billion in the first half of this year compared with $11 million in 2012 and $1.1 billion in 2011, data showed.

In both insurance and banking, foreigners have had a tough time in India.

India opened its insurance sector to foreign companies in 2000, but limited their ownership to 26%.

Foreign companies piled into the nascent sector in the hope of increasing their holdings, but the government hasn’t raised the cap. Meanwhile, the joint ventures needed additional capital to expand, which the government didn’t allow foreigners to invest and which the local partners have been reluctant to provide.

A handful of the foreign joint ventures have managed to expand and become profitable, but regulatory requirements remain onerous and state-owned Life Insurance Corp. of India continues to dominate India’s insurance sector.

Foreign retail banks in India are similarly hard-pressed. They can add only 12 branches a year, which puts them at a disadvantage because domestic banks have large branch networks across the country.

Earlier this year, Dutch insurer ING Groep NV sold its 26% stake in its Indian joint venture to domestic partner Exide Industries Ltd. Last year, New York Life Insurance sold its stake in its Indian venture to Max New York Life Insurance Co.

In June, Japan’s Daiwa Securities Group Inc. agreed to sell its asset-management business in India. In May, Morgan Stanley said it would sell its wealth-management business to Standard Chartered PLC, and in February, Barclays sold its small-business-loan operations in India to Kotak Mahindra Bank Ltd.

Most exits by foreign firms have been in assets where they can at least recover their investments, said N Jayakumar, a veteran Indian investment banker and chief executive at Mumbai-based boutique investment bank Prime Securities Ltd.

“There has been a serious erosion [in the value of investments] especially in the mid-sized Indian companies.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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