Favorable economic and demographic conditions, plus an encouraging regulatory regime, are transforming India into an ideal target market for inbound M&A in Asia-Pacific. Since 2011, inbound transactions have trended up, and overall foreign direct investment (FDI) in the country reached a peak in 2015 that placed India as one of the leading destinations for global FDI, ahead of regional economic rival China.
Illustrating this trend, India attracted 6% of all US outbound M&A transactions (deal volume) in 2015, surpassing the 2% of outbound M&A directed at China that year. So far in 2016, India has continued to attract US interest, with US$3.1bn through 27 deals compared to similar US investment in China at US$1.3bn and 13 deals.
General sentiment among foreign investors for Indian investment opportunities remains strong, creating a bright outlook for inbound M&A through the rest of this year and into 2017. As the pipeline of deals grows, foreign investors are reminded to deploy a due diligence process that is rigorous, comprehensive and truly independent – one that will assist them in making decisions with confidence and to be in a better position to protect such investments, advises Kroll Managing Director and Head of South Asia Reshmi Khurana.
“Often the challenge for investors is to understand the potentially invisible aspects of the business, to gauge the true intentions of owners and to determine how such practices get recorded in the books,” says Reshmi. “For example, the owners of a company may be engaging in related-party transactions to generate cash. It is important for investors to understand whether the cash is being generated for legitimate business purposes or for paying kickbacks. This, combined with the fact that financial regulations, accounting practices and auditing standards are still evolving, means that investors cannot be sure that the financial statements necessarily represent the true health of the business.”
To mitigate investment risk and uncover instances of bribery and corruption in India, investors must undertake a higher level of deal due diligence than they may be used to. This often includes:
· A qualitative assessment of an entrepreneur or business owners background, reputation, political connections, ethical standards, and business practices
· An understanding of the full dynamics of the industry and business environment
· Adhering to a rigorous process, regardless of competitive pressures to speed up due diligence investigations
· Selecting due diligence providers on a “no compromise basis” to ensure the integrity of the process
An in-depth interview with Khurana highlights other areas where foreign investors must scrutinize transaction participants and investment specifics to avoid unnecessary risks.
Additional M&A trends and highlights in the newsletter include:
· In 2015, inbound M&A totaled 227 deals worth US$19.6bn. In the first half of 2016, 82 deals worth close to US$9bn were announced, putting the country on track for another banner year of inbound investment
· Technology, media and telecommunications companies accounted for 26% of deal value and 22% of deal volume since 2011 led by feverish interest in the country’s e-commerce market
· Inbound M&A in the consumer sector also saw substantial activity – 14% of deal value and 10% of deal volume – led by demographic factors such as the emergence of an increasingly young and working population and rapid urbanization
· The industrial and manufacturing space has also shown promise, courting 9% of deal value and 22% of deal volume since 2011, on the heels of Prime Minister Modi’s “Make in India” campaign to attract further overseas investment