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Poor foreign interest casts shadow on selloffs

Gaurav Raghuvanshi

Foreign direct investment through divestment of government companies continues to elude India, accounting for an insignificant 1 per cent of the total realisation till date.

This is in sharp contrast with the findings of a McKinsey study last year, which said a major chunk of divestment proceeds in most countries come in as FDI.

While investment bankers say that foreign companies are still wary of dealing with the Indian government, the divestment ministry feels that the situation is set to change soon.

Of the total realisation of Rs 71.647 billion from divestment till date, only Rs 762.2 million came in as FDI, in the sale of the Lodhi Hotel of India Tourism Development Corporation, which was bagged by Singapore-based Silverlink Holdings.

For all the other 23 companies, including 12 demerged hotels of ITDC and Hotel Corporation of India in which government equity was sold, Indian players emerged as the top bidders.

An expert at a leading consulting firm says the little interest among foreign players has a lot to do with the perception about the Indian government and its inability to carry out a clear and transparent deal.

"Foreign investors are still wary about participating in the divestment process because they are not sure about the consistency of government policy. They are also not sure if the deals would be transparent. Lastly, they also have concerns about the business environment in the country," an expert, not wishing to be identified, said.

Divestment secretary Pradip Baijal said the government had sought to address these very concerns of foreign investors.

"Why blame foreign investors? You will recall that initially even Indian companies did not show much interest because there was a perception that the government lacked the capacity to carry out a deal. But in the recent sale of government equity, we have shown that we have the will and ability to do so. Confidence is building, and soon you will see a lot of foreign interest in the divestment effort," Baijal said.

The secretary pointed out that when the ITDC property at Manali was first put up for sale, the three bidders who had submitted expressions of interest did not turn up when the final bidding took place.

For the same property, the government has now received 27 EoIs, despite asking for a fee of Rs 40,000 to keep away non-serious bidders.

According to the head of a leading investment bank, a foreign entity first looks at the viability of taking up a company through divestment and compares it with the cost of setting up a greenfield venture.

The sector in which the company is operating, and its location have to fit in with the overall plans of the investor.

The investment banker said it did not matter whether a foreign or domestic investor finally owned the company as long as the government got a good price for it.

He, however, said one public sector company picking up another government company could not be termed as divestment in the strict sense of the term.

The divestment ministry said private entities were now bidding as aggressively as their public sector counterparts, and foreigners would now get increasingly bullish while participating in the sale of government equity.

Baijal said that FDI could also come into the companies that have already been sold because the divestment policy allowed induction of a new partner after sale.

The government has also done away with the need for approaching the Foreign Investment Promotion Board for such investments, he said.

"We had made that provision keeping in mind that initially FDI would not come in. But investors like Sterlite, who have their associates abroad, will be able make these ventures profitable and convince foreigners to come piggy-back with them to invest in companies already acquired," he said.

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