The Netherlands, Singapore and Mauritius have emerged as leading destinations for outbound Indian FDI. The attractions are benign tax laws, ease of doing business, easy access to international markets and robust regulatory frameworks.
The two top destinations for outward foreign direct investments (FDI) from India are Mauritius and Singapore. Three more tax havens - Jersey, Switzerland and British Virgin Islands - also figure in the list of Top 10 outward destinations. These jurisdictions are obviously bases from which the investments are routed to their ultimate destinations where actual physical assets and IPRs are located.
The other five countries in the Top 10 list of outward FDI destinations are the US, the Netherlands, United Arab Emirates, the United Kingdom and Russia.
Indian companies buying large, medium and small companies in the UK and the US is now old news. The public sector ONGC Videsh has led the surge of investments in Russia, mainly in its oil and gas sector. And Indian businessmen setting up bases in the UAE is also nothing new.
But the Netherlands That came as a surprise. Outward FDI data reveals several large and medium acquisitions made by Indian companies in non-traditional destinations, indicating that Indian businesses are coming of age and moving beyond their comfort zones to acquire companies and assets in markets which don't necessarily use English and with which they are not very familiar.
An emerging trend
This is a relatively new emerging trend. Indian money is, thus, following the trajectory of funds in the West, Japan and China and chasing opportunities regardless of location, language or culture. This development - let's call in Globalisation 2.0 - is expected to drive the next phase of globalisation of Indian companies.
The IBEF website, which lists several recent overseas takeovers by Indian companies, has several interesting items:
- Motherson Sumi Systems, one of India's leading automobile components makers, has bought Finland-based truck wire maker PKC Group Pic for $620.36 million.
- Sun Pharmaceutical, India′s largest drug maker, is buying Switzerland-based Novartis AG's branded cancer drug Odomzo for around $175 million.
- Aurobindo Pharma has bought Portugal based Generis Farmaceutica SA, a generic drug company, for $146.67 million.
- Cipla, a leading pharmaceutical company, plans to invest around $89 million to set up a biosimilar manufacturing facility in South Africa for making affordable cancer drugs and growing its presence in the market.
None of these companies are based in countries where Indian companies have traditionally operated.
The Netherlands is fast emerging as a rival to the UK in terms of receiving FDI from India. Indian companies have traditionally favoured the UK as the hub of their European and even global operations. Familiarity and comfort with the language, culture and legal systems as well as family ties have mostly driven these investments.
Much before Brexit and the uncertainty over future access to the large and lucrative European, many Indian companies had started hedging their bets and zeroed in on the Netherlands.
In 2014, that country received $2.9 billion, or almost 29 per cent of all Indian outbound FDI, a CARE Ratings study shows. It has now fallen behind the UK but retains its position as one of the most sought after global destinations for Indian businesses. The reasons for this are a no-brainer.
The Netherlands has among the most benign tax laws in Europe - additionally, it has signed almost a hundred double taxation avoidance treaties with as many countries - which makes it an ideal base for international operations. Then, its business-friendly laws and environment and its large domestic market - it is the European Union's seventh largest economy - and the easy access it provides to the rest of Europe make it ideal for Indian companies looking to expand globally.
The largest share of Indian exports to Europe are also routed through the Netherlands taking advantage of the easy business norms prevailing in that country as well as the access its air and sea ports provide to the rest of Europe.
Indian tyre maker Apollo Tyres has a global research and development (R&D) hub in that country, India's third largest IT services company Wipro has a large set-up there, and Dr Reddy's laboratories has taken over a local life sciences company.
Singapore is now India's gateway to the world
Singapore and Mauritius have long been bases from which Indian companies expanded their global operations, acquired foreign targets and ran businesses in other countries. In 2013-14, the share of outbound FDI to these two countries was about 20 per cent. This shot up to about 30 per cent over the next two years and soared to 58 per cent last year.
Why Like London, Indians are more comfortable in Singapore than in rival destinations such as Hong Kong. Its large Indian diaspora, familiar culture - Tamil is a national language in the city state - and easy connectivity - about 200 flights per week from various Indian cities - make it a new favourite.
Then, Singapore ranks among the top countries in the World Bank's Ease of Doing Business Index. One can open a company with a paid-up capital of just $1 within one day, provided it has a director resident in Singapore. Its robust legal and financial systems, strict, transparent and fair regulatory systems and open society are huge draws.
"We have stability, security and we are neutral. We know we cannot prosper without them," ä senior Singapore government official told an Indian media house.
Mauritius, too, enjoys many of the advantages of Singapore, especially in terms of culture and benign tax laws and so, continues to attract outbound FDI from India.
Encouraged by the government
Outbound FDI, especially by Tier II and Tier III Indian companies, have the full blessings of the Indian government. With over $400 billion in foreign exchange reserves, the Reserve Bank of India has eased overseas investment norms for Indian companies and scrapped the upper limit for raising money via pledged shares or pledged assets.
It has also raised the limit on the amount of money individual Indians can invest abroad to $225,000 per year. This means a family of five can take more than a million dollars abroad every year.
The government is also facilitating fund raising by unlisted Indian companies by allowing them to list abroad without necessarily having to list on Indian stock exchanges.
And in his outreach to Africa, Indian Prime Minister Narendra Modi announced a concessional line of credit worth $10 billion over five years. This will almost certainly spur larger Indian investments in Africa in the near future.
The Indian economy is expected to return to the high growth path as it shakes off its recent sluggishness and emerges stronger from the structural reforms undertaken by the Modi government. And as the growth rate creeps up to and beyond the 8 per cent mark in the coming quarters, India inc's need and appetite for foreign acquisitions will also rise.
As its ambitions soar, so will the volume of outbound FDI. The UK, the US, the Netherlands, Singapore and Mauritius are expected to retain their positions at the top of the list of destinations to and through which the bulk of this investment flows will pass.
But newer centres, such as South Africa, Nigeria, Australia and Brazil are also expected to make giant strides up that list as Indian companies widen their horizons and set forth to conquer newer, uncharted territories, which could well set the stage for Indian business's Globalisation 3.0.
But that will be a story for another report in the future.
