PRIVATE Equity (PE) flows, which stood at $17 billion in 2007, should be treated as portfolio investment, feels the government’s key economic policy think-tank, the Prime Minister’s Economic Advisory Council (EAC). The panel has highlighted the lack of clarity in on this count and called for simplification.
“Inflows of PE investments have also been quite large. Since, in most cases PE flows constitute less than 10% of the capital of the company being invested they should ideally be reported under portfolio capital, and not under FDI,” the EAC said the review of economy for 2007-08.
While the EAC assumes that PE funds act like portfolio investors, ground realities point to a different scenario. In such cases, the investment is more like FDI rather than a portfolio investor. There are cases of PE funds taking management control of companies in a bid to improve financial performance, even in case they do not have a majority stake. Blackstone, for example, took over Gokaldas Exports –– a large player in the readymade garments segment. Actis, similarly, runs Punjab Tractors and Phenix Lamps, while ICICI Ventures manages RFCL. India Value Fund, another PE, holds the reins at Shringar Cinema.
The EAC review points out that in the first quarter of 2007-08, there was a difference of about $2.5 billion between the sum of net purchases by foreign institutional investors and overeas equity issuance by Indian companies though ADRs and GDRs. It feels that the this differences could be on account of PE investments since many PE investors are registered under common ownership of registered FIIs.
With the overall capital inflows being pegged at $103 billion, much higher that the Council’s own July ‘07 projection of $58 billion, the think-tank has recommended continued use of sterilisation to counter the excess flows in remaining part of the 2007-08.
The EAC had suggested a threepronged approach to deal with large inflows in the economic outlook released in July — allowing rupee to appreciate, absorbing capital and sterlising, imposing policy restrictions and facilitating outflows. The total foreign investment is estimated at $27.8 billion, a little more than first half of the current fiscal. However, the total surplus on capital account is estimated at over $103 billion or 8.7% of the GDP in 2007-08, significantly higher than the $58 billion projected in the July ‘07 outlook.
Since this would put pressure on the rupee to rise, the Council has advised the government to give clear signals to the industry to make adjustments alongwith a transitional package.
“Clear signals should be given to Indian industry to make adjustments through productivity increases and to tap the booming domestic market. However, some transitional package targeted specifically at labour intensive industries may be called for,” it said.
EAC chairman C Rangarajan also pointed that the capital flows may see some tempering in the next fiscal in the backdrop of developed economies witnessing recessionary trends due to subprime crisis.
The government has taken various steps to counter flows including tightening external commercial borrowings, clamping down on investments through participatory notes and liberalising remittances.