What a difference a decade can make! Since the publication of our first report, "Navigating India: Lessons for Foreign Investors," in 2013, India has undergone a remarkable transformation. The country’s population grew by 100 million. Fuelled by improved connectivity and digital infrastructure, the number of internet users has soared, with more than half of its citizens now connected to the internet—a significant increase from the mere 12 per cent recorded in 2013. India’s GDP has more than doubled, rising from US$1.8 trillion in 2013 to US$3.7 trillion in 2023, underscoring the nation’s robust growth trajectory. Per capita income has also improved, reaching US$2,450 in 2023 compared to US$1,400 in 2013.
The Indian government’s ambitious programme of regulatory reforms, aimed at making the country an attractive option for international investors, is clearly bearing fruit. In the World Bank's 2020 "Ease of Doing Business" report, India rose to the 63rd position out of 190 countries, marking a significant improvement from its 134th place in 2013. In this compendium, we highlight opportunities for foreign investors and discuss some of challenges India faces today.
India is committed to achieving net-zero by 2070 and is pressing ahead with legislative reforms and investment into energy transition on an unprecedented scale, with renewables at the heart of this drive. India has the potential to increase its renewable energy production vastly—whether in solar, wind, hydro, hydrogen, or other forms of renewables—and it is making various incentives available in order to accelerate that process. Legislation and new schemes should make the country even more attractive to investors, and the efforts are already paying off with a significant number of large investments already being committed.
Technology is another growth sector. Several multibillion-dollar deals by companies such as Amazon and Apple emphasise the potential of the technology economy. Meanwhile, in infrastructure the introduction of products such as infrastructure investment trusts and real estate investment trusts make investment by foreign companies more attractive.
However successful an investment, there will come a time when an investor wishes to exit. In this issue, we examine two ways of exiting Indian investments: through general partner-led secondary transactions, and through the public market. Investors wishing to exit need to plan ahead and put the necessary protections in their documentation at an early stage to avoid potential pitfalls down the track.
India has also made significant strides in reforming its alternative dispute resolution (ADR) framework, aiming to position itself as a global hub for international arbitration. The 2021 Mediation Bill is another progressive step in making commercial disputes easier to handle, and the supportive stance of Indian courts has amplified positive effects of the legislative reforms.
Investing in India has never been more attractive for foreign investors, and we hope you will find this issue an insightful read.
Against a challenging macro-economic environment worldwide, India has proven resilient and demonstrated its huge potential for growth. With an increasingly favourable regulatory regime and greater avenues of investment, India’s attractiveness as a global market for investors will only continue.
India stands out globally as a market with strong growth in IPO volume, thanks to its dynamic regulatory framework, robust domestic capital market and a large retail investor base. IPOs are also gaining popularity among foreign investors as one of the available exit options from their investments.
The Indian government is pressing ahead with legislative reforms and investments on an unprecedented scale in the energy transition.
The market for private equity-led secondary transactions is growing, and India is steadily catching up with the global trend in embracing these innovative exit strategies.
In the past decade, India has made significant strides in reforming its alternative dispute resolution (ADR) framework, aiming to position itself as a global hub for international arbitration. The supportive stance of Indian courts towards arbitration has amplified the positive effects of these reforms.
Against a challenging macro-economic environment worldwide, India has proven resilient and demonstrated its huge potential for growth. With an increasingly favourable regulatory regime and greater avenues of investment, India’s attractiveness as a global market for investors will only continue.
US$148 billion
The M&A market in India reached an all-time high of US$148 billion in the first nine months of 2022
Despite the COVID-19 pandemic, attractive market opportunities, favourable regulatory reforms and increased avenues for investment have resulted in a spike in deal activity and foreign investment in India
Despite the COVID-19 pandemic, attractive market opportunities, favourable regulatory reforms and increased avenues for investment have resulted in a spike in deal activity and foreign investment in India.
The M&A market in India reached an all-time high of US$148 billion in the first nine months of 2022 alone. Foreign direct investment inflows into India reached a record US$84.8 billion in 2021/22, a significant increase from US$34.3 billion in 2012/13. While markets globally have cooled in 2023, it is undeniable that India has enjoyed considerable success in attracting at least its fair share of cross-border investments since the turn of the decade.
A number of India-specific factors have drawn the eye of international investors to the Indian market since 2020. A fall in interest rates during the COVID-19 pandemic, coupled with the Indian government's initiatives to encourage the growth and development of certain key sectors, has resulted in a notable uptick in investments in India, particularly in the infrastructure, energy and technology sectors.
The Reserve Bank of India's central bank policy rate fell to an all-time low of 4 per cent at the height of the COVID-19 pandemic, reducing borrowing costs and increasing the attractiveness of debt as a means of financing M&A transactions. Notably, US$32 billion was raised for acquisition finance in India in 2022, compared to US$10.9 billion in 2021, and approximately US$6.9 billion in 2020.
The energy sector has been particularly buoyant when it comes to international investment. Notably, India's renewable energy sector has benefitted markedly in recent years from the global shift towards clean energy. The National Green Hydrogen Mission, introduced by India's Ministry of New and Renewable Energy in January 2023, aims to make India a global hub for the production, usage and export of green hydrogen and its derivatives, opening numerous business opportunities and encouraging investment in renewables by conglomerates and traditional energy companies.
In response to these positive developments, there has been significant inbound M&A activity by multinational corporations and investments from Indian corporations in India's renewable energy sector. The sheer size of recent deals, such as Brookfield's US$1.07 billion investment to support Avaada Group's green hydrogen and green ammonia projects in India in April 2023, and Adani Green Energy's US$3.5 billion acquisition of SB Energy India to boost its renewables portfolio, demonstrates the increasing interest in this sector from both domestic and international players.
On the technology side, there is a mounting need for further digital investment in India as its digital population continues to grow: In 2022, India had 759 million internet users, and this is projected to reach 900 million in 2025. The Indian government's Digital India initiative aims to support India's digital transformation by, among other things, improving India's digital infrastructure and promoting electronic manufacturing in India.
Multinational corporations clearly see the potential in India's digital economy. Amazon Web Services has announced its intention to invest US$12.7 billion in cloud infrastructure in India by 2030, while Apple may shift more than 18 per cent of its iPhone production to India by the 2025 financial year, up from seven per cent in the 2023 financial year.
Infrastructure is also a focus for the Indian government, as it seeks to increase asset monetisation, making limited offers of public infrastructure to investors and other private sector investors to generate greater value from public infrastructure assets. For example, a primary aim of the Indian government's National Infrastructure Pipeline is the attraction of foreign capital investment into capital projects in India.
The development of infrastructure-specific investment products such as infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) has been successful in encouraging investment by foreign investors in infrastructure projects in India. Non-banking financial companies and international finance corporations have overtaken commercial banks as the largest source of funds for infrastructure projects in India, contributing more than 60 per cent of infrastructure funding.
US$32 billion
was raised towards acquisition finance in India in 2022
India-specific factors aside, the jurisdiction has benefitted from wider difficulties in other Asia-Pacific economies and a series of geopolitical influences, which have nudged international investors towards the Indian market.
Global investment banks looked to India for M&A opportunities during the COVID-19 pandemic as neighbouring economies implemented extended periods of lockdown and shifted their focus to domestic markets. Evidence of this can be seen in the location of M&A fee revenue in a pointed reversal of a market norm, where foreign investment banks earned more in M&A fees from India than from China for the first time in 2022.
India has also looked to capitalise on the broader shift by western finance to find opportunities and growth in new markets across Asia-Pacific.
The global supply shock from the COVID-19 pandemic and resulting lockdowns worldwide encouraged global manufacturers to diversify their supply chains and reduce their reliance on a single manufacturing hub. A young labour force, together with the Indian government's push to encourage the shift of manufacturing operations to India through the introduction of tax incentives and production-linked incentive schemes, positioned India as an attractive alternative to existing manufacturing hubs.
This trend has been coupled with India's efforts to strengthen trade ties and deepen its international economic relations in a bid to boost its economy and encourage inbound investment. In June 2023, India and the US announced a series of technology, manufacturing and defence deals aimed at improving military and economic ties between the two countries. The deals come at an opportune time as India seeks to expand its capabilities in these sectors while the US adopts its 'friend-shoring' strategy of diversifying existing supply chain networks and exploring the potential of a number of Asia-Pacific countries.
India's participation in I2U2, a mini-lateral grouping comprising India, Israel, the US and the United Arab Emirates which is aimed at deepening technological and private sector collaboration in the region, has created new investment opportunities in India, such as the establishment of a US$300 million wind and solar energy storage project.
The level of market activity in India during the COVID-19 pandemic and continued efforts of the Indian government to encourage investment in India are positive indicators of India's robustness and potential for further growth.
US$24 billion
Alternative investment funds (AIFs) have been growing rapidly, receiving close to US$24 billion in 2022
An essential element of growth is the availability of capital, but diversification of the sources of that capital is also key to service investment opportunities.
The availability of new pools and providers of credit has been instrumental in contributing to the rapid growth of the Indian market, driven by growing international interest in India from foreign investors and demand from Indian companies for additional funding sources as they seek to expand.
The introduction of alternative investment products has created greater opportunities for foreign investors in India. Regulatory innovations have allowed global private equity funds to invest in India through structures such as alternative investment funds (AIFs) and Infrastructure Investment Trusts (InvITs). AIFs are funds established or incorporated in India which pool money from sophisticated investors and invest on their behalf. InvITs are investment vehicles which invest in infrastructure projects, with investor returns generated from the InvIT's
net distributable cash flows. The Securities and Exchange Board of India (SEBI) oversees the regulation and management of both structures.
AIFs have been growing rapidly, receiving close to US$22 billion in 2021 and US$24 billion in commitments from investors in 2022. A targeted investor pool and series of regulatory reforms have significantly contributed to the growth of AIFs. The minimum investment threshold of INR 1 crore (approximately US$120,000) and introduction of the accredited investor framework, which imposes lighter regulations for a class of investors with good understanding of the risks and returns of financial products and the ability to make informed investment decisions, has encouraged investment in AIFs by sophisticated investors.
While some challenges remain surrounding the lack of uniform practice and clarity in the tax treatment of AIFs, investors appear to be finding comfort in the SEBI's proactiveness in updating the AIF regulations to clarify the regulatory regime. The speculation that AIFs have the potential to exceed US$500 billion in investments by 2030 with an 18 to 25 per cent year-on-year growth in assets under management in the same period is a positive indicator of continued investment interest in AIFs.
Meanwhile, InvITs are particularly attractive due to their predictable cash flows: They are required to distribute at least 90 per cent of their net distributable cash flows to their unitholders at least once every six months (if listed) or once a year (if unlisted). Stringent requirements as to the assets that may be acquired and the key stakeholders of an InvIT provide additional comfort to investors.
Following profitable returns provided by InvITs in 2021, there has been an increased interest in InvITs from sophisticated global infrastructure investors such as the Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan. This alignment of policy support and investor appetite looks positive over the long term for India's infrastructure sector.
US$500 billion
Alternative investment funds (AIFs) are expected to exceed US$500 billion in investments by 2030
New structures aside, the Indian government has introduced a series of investor-friendly reforms to encourage foreign credit investment into India. The expansion of India's 'automatic route' permits greater flows of credit into the economy without the need for regulatory approval and has lifted caps on foreign investments in the insurance, defence and telecommunication sectors. This enables foreign players to make larger investments in these sectors without requiring governmental approval under Indian foreign exchange laws.
A relaxation of rules surrounding external commercial borrowings (ECBs)—commercial loans that eligible entities in India can raise from foreign investors—has positioned ECBs as an increasingly attractive option for Indian entities seeking funding from foreign investors. Expanded end-use provisions for ECBs from recognised lenders allow Indian borrowers to raise funds from a wider pool of investors, diversifying their investor base via greater access to global markets.
The establishment of the Gujarat International Finance Tec-City (GIFT City) as India's first international financial services hub seeks to provide Indian corporations with easier access to global financial markets and open the Indian economy further to foreign capital. The imposition of a favourable tax regime, a flexible regulatory framework aimed at encouraging the relocation of funds from overseas jurisdictions to GIFT City, and a simplified registration regime for the setting up of new funds have resulted in GIFT City's growing prominence as a competitive financial hub globally.
GIFT City's attractiveness has been demonstrated by the Abu Dhabi Investment Authority's recent decision to establish a billion-dollar base there. This will likely encourage other sovereign wealth funds, banks and institutional investors to follow suit, deepening the pool of capital and expertise available onshore to Indian transactions.
View full image: Private credit 2022 deal value (US$ billion) by investment route/vehicle used (PDF)
Increasing interest from foreign institutional investors in the Indian market and corresponding demand from Indian companies to access wider pools of capital have driven two further significant developments in the Indian credit markets.
The first of these is term loan Bs (TLBs). Since 2021, several Indian technology companies have looked to TLBs as an avenue to raise capital from institutional investors globally to support business growth, encouraged by low interest rates and high amounts of liquidity held by such investors. Increasing comfort with the Indian regulatory regime and a push from investors to deploy capital into new markets combined to open the gates to closing such transactions.
The oversubscription of these deals clearly demonstrated keen interest from such institutional investors to tap into the Indian market: Indian online hotel booking business Oyo's TLB was oversubscribed by 1.7 times, receiving commitments of close to US$1 billion from leading institutional investors; while taxi booking service Ola's TLB received interest worth US$1.5 billion from institutional investors for their proposed loan issuance.
Private credit is also a booming source of finance. Demand for private credit in India as an alternative source of funding is evidenced by the recent surge in transaction volumes, with more than US$5.3 billion in private credit deals closed in India in 2022.
Indian companies have looked to private credit as an attractive alternative to traditional sources of funding, such as equity raises and bank lending, in light of volatile equity markets, sub-optimal valuation levels and an overall slowdown in bank lending globally. Additionally, the flexibility in structures and repayment schedules offered by private credit providers is particularly appealing to companies with positive EBITDA seeking to serve their short- term liquidity needs.
Recognising the potential of India's private credit market, global funds headquartered outside India or with a multi- country presence transacted more than half of the private credit deals in India in 2022. With significant numbers of global players looking to enter India's private credit market, it is a fair assumption that this sector of the market will continue to grow.
Although the macro-economic environment has been challenging of late, India has proven resilient and demonstrated huge potential for growth, particularly against the backdrop of the global pandemic and Asia-Pacific's emergence from it.
The Indian government's focus on developing policies and initiatives to further India's growth, an increasingly favourable regulatory regime and greater avenues of investment will only continue to improve India's attractiveness as a global market for investors in the years to come.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2023 White & Case LLP
View full image: India foreign direct investment has surged since 2000 (US$ billion) (PDF)
View full image: India's central bank keeps rates unchanged (PDF)
View full image: Active internet users: All India (PDF)
