Rising debt in India needs FDI support

As India faces record levels of government, corporate and household debt, entrepreneurs are offering more rational prices to private equity firms, according to a panel at the Milken Institute conference in LA.

Highly-leveraged businesses in India are considering making “good deals” with private equity firms as entrepreneurs struggle to refinance their debt, according to Sanjay Patel, managing partner and head of international private equity at Apollo Global Management, who yesterday spoke on a panel at the Milken Institute Global Conference 2013 in Los Angeles.

“It is very, very hard to get a good deal in India because people won’t dilute their equity. In this environment, where leverage has gone up, we’re finding opportunities to put capital into good businesses at good prices and de-leverage those companies,” Patel said.

It is very, very hard to get a good deal in India because people won't dilute their equity. In this environment, where leverage has gone up, we're finding opportunities to put capital into good businesses at good prices

Sanjay Patel, managing partner and head of international private equity, Apollo Global Management

Companies in India are facing a combined $45 billion worth of foreign currency debt maturities between 2013 and 2015, according to research from Kotak Institutional Equities. Moreover during 2012, $15.8 billion of debt has been restructured through India’s Corporate Debt Restructuring institution, which acts as a proxy for bankruptcies. This figure is a 222 percent increase on the $4.9 billion worth of cases referred during 2011, according to CDR data. 

Foreign direct investment is also essential to India overcoming its current account deficit that is second only to the US, said fellow panelist, Rajesh Shah, chairman and chief executive of the Edelweiss Group. India’s current account deficit hit a record high in Q4 2012 of over $30 billion, up from about $22.5 billion during the previous quarter. 

Shah said, “We need to fund this current account gap and usually a lot of this comes from foreign direct investment and foreign institutional investment.”

The Indian government has responded and is increasingly encouraging foreign investors to provide funding to businesses in the country, panelists agreed. Sam Gupta, chief executive and chief investment officer at Grand Trunk Capital Management, said the firm is once again considering investment in India after it had halted its activity there. 

“On the ground, things have started to change,” he said. “[The] Indian government since last September, when they had a new finance minister come in and take charge, they’ve actually instituted a significant amount of reforms.” Gupta referenced the FDI restrictions the government partially lifted in the retail and media sector last year. 

More recently, the ministry of finance, as of 1 April 2013, allowed all qualified foreign investors, including private equity firms, to invest up to an overall limit of $51 billion in the form of corporate debt in India. The number was increased from just $1 billion and is expected to encourage private equity to invest in the country using more debt-related structures, Private Equity International reported earlier.

Previously, only foreign institutional investors could make substantial investments in debt instruments in India, restricting GPs from overseas.