India shopping

But the swadeshi-videshi tangle remains extant in one critical dimension. This is where the target company is closely held, typically the family run industrial empires. The promoter stake is so heavy in these companies that a hostile takeover is almost impossible. This means for most M038;A activities involving the promoter is essential. This is a key differentiator of the Indian market from that of European and American markets.

Of course, it is more in sync with the holding pattern in South Korea as well as many Japanese companies. This also means that for a raider from abroad, picking up the relatively unknown asset at a reasonable valuation is certainly a no-no. The involvement of the promoter, usually holding the largest single block of shares, would certainly push up the valuation of the company.

This is one of the key reasons why the M038;A story in India has developed an interesting twist. Compared to the scale of outright buyouts, activity has been more sharp in the private equity PE space. For instance, in 2006, compared to the 3.5 billion of total M038;A activities into India, PE deals accounted for 7.5 billion. In 2005, where the scale of inbound M038;A was less than 1billion, the PE volume in the period was 2.4 billion. The action is especially widespread for unlisted companies.

Conservatively, the PE shopping basket is expected to be around 10 billion in 2007. Since a private equity investor is usually more comfortable with the present management of the company, the route allows the target companies to generate value for their shareholders, while retaining control. But the jury is still out on whether such deals yield more value for shareholders than an open takeover. By definition, a PE deal would be far less transparent. In any case this explains why in the media, PE investments in companies acquire almost the same colour as that of M038;A activity. There8217;s also a constraint: PEs are barred from raising equity in India, neither can they take the external commercial borrowing route to raise capital.

The most interesting constraint that may be emerging to thwart inward M038;A into India is the high GDP growth rate being logged. Just as the economy had started attracting the attention of global business, the fortunes of every possible sector have brightened. As a result, there is hardly any sector where valuations have not shot up. Indian companies8217; price earning multiples are looking costly.

In the telecom space, for instance, it is impossible to expect low prices. But there is no choice, analysts say. Each of the GSM companies in the Indian telecom sector has a valuation per subscriber of at least Rs 17,000. In a market with a swiftly growing subscriber base, the multiplier effect is immediately apparent.

Typically, in economies where the growth rate takes a dip, sectors would emerge where companies would see their valuations dipping, prompting a takeover. But for the rest of the world keen to shop in India, the figures indicate that it is not the right time to open their purses now.

The regulatory story, as mentioned earlier, has become quite favourable. Sebi rules for takeovers are quite transparent. Whenever anyone acquires shares or voting rights of a listed company that would entitle him to more than 5, 10 or 14 per cent shares or voting rights of that company, he is required to disclose at every stage the aggregate of his shareholding to the target company as well as the stock exchanges. Similarly, the rules also specify that anyone buying 15 per cent or more voting rights in a listed company can acquire such additional shares only after making a public announcement to acquire at least additional 20 per cent of the voting capital of the target company from the shareholders, through an open offer.

Yet this being an India story, there are policy constraints. And this is where primal fears of videshi takeover cloud discussion on sectors like retail. The sub-100 per cent FDI limit for sectors like telecom, banking and insurance means new players must play an order matching game with the existing majority shareholders.

Throwing open the FDI gate has been the talk in ministries, but policy confusion 8212; like the recent letter from Congress President Sonia Gandhi on retail 8212; is likely to hold up further progress in this regard. It is possible that the answer to the FDI question for the insurance sector, being debated by a group of ministers, could also be postponed.

The writer is editor, economic affairs, 8216;The Financial Express8217;