Marc is responsible for Asia-Pacific client services and business development matters in New York, assisting and advising listed companies on...
Gateway of India (Photo credit: Wikipedia)
India will unveil its 2013 GDP after its fiscal year ends on March 31. Its growth rate is expected to have dipped slightly to 4.9% from 5.0% in 2012. That dip may disappoint those who had hoped for a sign of India's economic recovery. But from a global perspective, the number does not look all that bad. It tops the vast majority of growth rates worldwide and is forecasted to rise even higher in subsequent years.
Eswar Prasad, professor of trade policy at Cornell University and a senior fellow at the Brookings Institution, believes that things have bottomed out in India. In fact, the World Bank has forecasted India’s GDP rise to 6.2% this year, 6.6% in 2015, and 7.1% in 2016.
In a recent interview with the BBC, the Chief Economist of the World Bank, Kaushik Basu, said that India has the potential to achieve a high rate of growth. He cites India’s main competitive strengths as a high level of intellectual, technical, and engineering skills.
Basu viewed India's labor pool as a another possible competitive advantage. He is cautious about this huge resource, however, as it is overly concentrated in agriculture. That sector accounts for more than 50% of the labor force but only 14% of GDP. Raising agriculture’s productivity while urbanizing its surplus labor could help position India’s economy back on the fast track. He hopes former agricultural sector employees diversify into providing services to the global economy from small cities.
Despite India's strengths, it also has major challenges such as red tape and weak infrastructure, which could sidetrack its return to robust growth if not addressed. For example, without adequate roads and reliable energy production and distribution, urbanization and the labor-intensive manufacturing centers cannot flourish.
Addressing these infrastructure needs, the Indian government has called for an ambitious $1 trillion investment in infrastructure development from 2012 to 2017. About 40% will come from the private sector. The Twelfth Five Year Plan's targeted areas for investment included roads, railways, ports, airports, and energy.
While the Indian government has received external offers to help fund its mammoth infrastructure plan (e.g., World Bank, China and Japan - presumably for mutually beneficial reasons), Indian corporates still must cope with high domestic interest rates and a high cost of equity capital that averages over 15%.
To widen fund-raising options available to the private sector, the Indian government recently instituted a process ("Overseas Window") which, in effect, temporarily suspends a “list in India first” requirement in place since 2005. Amarshand & Mangaldas & Cyril A Shroff & Co Managing Partner Cyril Shroff said the Overseas Window process will “permit unlisted Indian firms to list and raise capital abroad (without prior or simultaneous listing in India).”
The Overseas Window was also “introduced on a pilot basis for a period of two years with effect from October 11, 2013,” Shroff notes. The proceeds must be used for retiring foreign debt or to fund overseas operations including acquisitions. The process is still evolving, as Mr. Shroff says that the Securities & Exchange Board of India “is soon expected to announce disclosure norms which such unlisted Indian companies will be required to comply with, in addition to the requirements of the primary listing jurisdiction.”
The Overseas Window is expected to enable unlisted Indian companies to directly tap into the world's deepest pool of investors, gain recognition for meeting international listing standards, and expand business overseas.
For Indian companies contemplating a U.S. listing, the timing of the Overseas Window could not be better from a regulatory perspective. It comes on the heels of the JOBS Act, which allows emerging growth companies to IPO in the US by filing SEC registration documents confidentially. The law also relaxed financial disclosure and Sarbanes-Oxley requirements. What’s more, India reportedly will require certain sized Indian companies to adopt International Financial Reporting Standards (IFRS) starting April 2015. This change is another cost saver. The U.S. already accepts financials of a foreign company without a U.S. GAAP reconciliation requirement, if prepared under IFRS.
U.S. investors might find it worthwhile to watch whether Indian companies take advantage of the Overseas Window this year and next. It will be interesting to watch the impact on the Indian economy as various parts of the economy, such as infrastructure, manufacturing, pharma, and technology, tap these funds.