Global crisis clogs FDI inflows in 2009

The global financial crisis that spilled over into its second year choked flow of foreign direct investment (FDI) into India in 2009

The global financial crisis that spilled over into its second year choked flow of foreign direct investment (FDI) into India in 2009, forcing the government to loosen rules for investments. However, the government kept multi-brand retail off-limits to foreigners, reports PTI.

In the first nine months of 2009, FDI dipped by 26% to $21.40 billion from $29 billion a year ago. The total FDI inflow into India since 2001 crossed the $100 billion mark.

Although fund inflow was constrained, FDI became the cause of confusion over the issue of ownership patterns of seven Indian lending institutions, including ICICI Bank Ltd and HDFC Ltd.

But these institutions have maintained that they are Indian as they are controlled by Indian banking regulations, and have Indian Boards and management.

While the Union government simplified norms aimed at attracting more FDI, it has yet to get the Insurance Bill approved by Parliament. The Bill seeks to raise the FDI cap in the insurance sector to 49% from 26%.

The year also saw the Organisation of Economic Cooperation and Development (OECD) and global firms including retail giants like Wal-Mart asking India to open the lucrative multi-brand retail sector for FDI. However, opening up of the retail sector does not appear likely in the near future.

On a global scale, OECD estimates suggest that total FDI into the 30 OECD countries will fall to $600 billion in 2009 from the 2008 total of $1.02 trillion.

Since the epicentre of the crisis was in the US, India was one of the few nations which remained relatively stable.

Economists say that foreign investment in India was good and remained buoyant as the domestic demand was good and the economy exhibited robust growth, despite the global downturn.

"Capital is chasing opportunities," CRISIL chief economist DK Joshi said, adding that capital coming to India is not a surprise.

The OECD wanted India to liberalise its FDI, especially in the retail, banking and insurance sectors—the key areas of interest for global investors.

“India’s policy on multi-brand retail acts as a social security net for millions of small retail traders in the country," commerce and industry minister Anand Sharma said recently. A Parliamentary panel has already suggested a blanket ban on FDI in the retail sector.

The year 2009 also saw intensive efforts like road shows in Europe by different ministries—including those for textiles and roads—to attract FDI.

OECD secretary general Angel Gurria recently said, "India’s FDI performance and progress in the past year has been particularly strong, even in a very tough global environment."


Sensex zooms 539 points, ends at 17,231

Positive comments from the finance minister helped the Indian bourses to gain momentum

Indian markets bounced back to positive trends on the back of positive comments from the finance minister on economic growth, along with strong global markets and high advance tax payment by India Inc. The Sensex shot up 539 points from the previous day’s close, ending the day at 17,231, while the Nifty closed at 5,145, up 159 points.

Adhunik Metaliks has signed definitive agreements with India Infrastructure Fund (IIF), managed by IDFC Project Equity Company Ltd, for an investment of Rs2,500 million in its power subsidiary Adhunik Power & Natural Resources Ltd towards part-financing the equity of its ongoing 540MW
coal-based merchant power project at Jamshedpur, Jharkhand. The project cost of Rs26,500 million is being funded through a debt-equity mix of 3:1. The stock zoomed 11%.

During the day, the government has asked market regulator SEBI for more details of a probe into a case of alleged routing of funds by Reliance Industries to dummy companies for buying its own shares in 2000. However, the stock was up 5%.

Adani Power rose 2% on reports that the company’s subsidiary Adani Power Maharashtra had secured a contract for supply of 1,200MW of power from the Maharashtra State Electricity Distribution Company.

Hotel Leela Venture rose 3% on reports that the promoters were increasing their stake through creeping acquisition and plan to take their stake to 55% from the current 52.5%. Shriram EPC won orders worth Rs156 crore. The stock remained flat.

Finance minister Pranab Mukherjee said that the government will wait until the February 2010 budget to consider withdrawing some of the fiscal stimulus measures. He said that inflation and fiscal consolidation are major challenges in the short- to medium-term. Growth outlook for the second half of FY 2010 looks better, he added. The finance minister also said that farm output must grow 4% for the economy to expand 9%-10% annually. He said that industrial production has started picking up.
Mr Mukherjee said that sustaining higher growth remains a priority for the government and the Centre is open to making changes in the draft direct tax code. The draft code has proposed various reform measures, including cutting corporate tax rate to 25% and streamlining tax laws.

During the day, Asia’s key benchmark indices in Indonesia, South Korea, Singapore, Taiwan, China and Hong Kong rose by between 0.35%-1.12%. Japanese markets were closed on account of the emperor’s birthday.

The People’s Bank of China said that the economy’s recovery is still insufficient and that correcting structural problems for the nation’s growth is urgent. The bank also added that it will seek to keep policy flexible and will focus on decreasing economic volatility and manage the pace of loan growth.

On Tuesday, 22 December 2009, the Dow Jones Industrial Average was up 51 points while the S&P 500 and the Nasdaq Composite were up 4 points and 15 points respectively.

As per reports, USA’s third quarter GDP increased at a slower-than-expected annualised rate of 2.2%, lower than consensus prediction. The housing data provided some relief. It showed that existing home sales climbed at a stronger-than-expected jump of 7.4% to 6.54 million units in November 2009. US treasury secretary Timothy Geithner expressed confidence by saying that the US economy was on a solid recovery path, but said that tight lending practices by banks still poses a risk.

In premarket trading, the Dow was trading 30 points higher.


Fund-raising by realty-focused PEs dips 70% in 2009

During 2009, a total of 93 funds reached a final close receiving commitments of $40.50 billion, while last year, 228 funds raised an aggregate $134.30 billion

Funds raised by realty-focussed private equity (PE) firms declined significantly by 70% so far this year as investors exercised caution over making fresh investment commitments, reports PTI.

A total of 93 funds reached a final close in 2009, receiving commitments of $40.50 billion. Last year, 228 funds raised an aggregate $134.30 billion, according to global research firm Preqin.

As the credit crunch sent property prices into a downward spiral throughout 2009, many investors turned extremely cautious about committing money in the asset class. Also, declining returns of many real-estate funds made it difficult for managers to raise funds in 2009.

"Fund-raising to date in 2009 has reached its lowest point in recent history. 2009 has also seen an increasing number of funds closing below original target, with a number of them closing with less than half the capital they were initially targeting," Preqin said.

Of all the funds that have closed during 2009, around 77% have closed below their original target size. While in the corresponding period in 2008, the figure was 46% and in 2007 just 21% of the funds fell short of their fund-raising goals.

The report said that in contrast to 2008 when fund-raising never dropped below $20 billion in a single quarter, no quarter in 2009 to date has raised this amount.

According to Preqin, the second and third quarters of 2009 saw fund-raising levels continuing to fall, with only $6.80 billion being raised in the third quarter, representing the lowest fund-raising total since the same quarter in 2004. To date, during the fourth quarter of 2009, 15 funds have raised $6.80 billion.

"2009 has been a challenging year for the private equity real-estate industry. After years of uninterrupted success, the industry has hit difficult times; fund-raising is down and fund managers have struggled to raise capital," the report said.

However, the report noted that despite the declining trend in investment in 2009, the outlook for 2010 remains brighter.

The report said that despite declining returns over 2009, many investors did not lose confidence in the long-term benefit of investing in private equity real estate.

In fact, many PE real-estate investors, including some rather prominent institutions, decided to delay investing in the asset class until the markets had settled. Some delayed until Q4 2009, whilst others suspended programmes until 2010 or later.

"Despite (and in many ways because of) the global recession, real-estate enters into the New Year with a significant amount of funds on the road seeking large amounts of capital,” said the report.


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