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M&A, Venture Capital, and Private Equity: A Thriving Investment Climate
Beginnings of a Bubble
Fiscal 2007–08 set a record for funds raised through initial public offerings (IPOs), follow-on
public offerings (FPOs) and foreign currency convertible bonds (FCCBs), with more than $13
billion raised by 91 issues, according to research firm Prime Database. That amount was more
than double the total $6.2 billion raised by 76 issues in 2006-07 (but was still less than half of the
total IPO value in China). Major issues included real estate firm DLF’s $2.26 billion IPO and
ICICI Bank’s record $4.68 billion FPO, along with India’s largest IPO to date, from Ambani
Group’s Reliance Power, in January 2008. That offering was 10 times oversubscribed at the end
of its first trading day and raised $3 billion within a minute of opening.
In October 2007, the Securities and Exchange Board of India (SEBI) barred foreign institutional
investors from holding more than 40% of their assets in participatory notes (PNs)—derivative
instruments that enable hedge funds and other overseas investors to invest indirectly in Indian
stock markets through foreign institutional investors (FIIs). It ordered FIIs to unwind their PN
holdings above the 40% threshold over 18 months, and prohibited them from renewing or issuing
new PNs. SEBI’s action reflected Reserve Bank of India concerns that massive capital inflows
were driving up the rupee and costing tens of thousands of export-related jobs, particularly
in textiles. The government was also troubled by the lack of transparency into large hedge fund
positions because of PNs.
Foreign investors purchased a record $17.4 billion worth of Indian stocks in calendar year
2007—more than half of that ($9 billion) in the last four months of the year. Fears of a bubble
were confirmed in part by the Reliance IPO: Reliance Power, 50% owned by Reliance Energy,
was an entity created to issue stock and raise funds for power plant development across India; at
the time of the IPO, valuation was next to impossible because it had no operational power
assets, faced uncertain land acquisition and other costs, and would likely not make a profit for at
least another four years.
Over 2008, the Sensex as a whole lost more than 52% of its value, or 10,640 points, according to
the Business Standard. Overseas investors dumping emerging market shares sold $13.4 billion in
Indian shares on net by year-end—a net loss of nearly $31 billion from the 2007 record sales.
Three large private IPOs were withdrawn in 2008 due to slowing interest, and planned IPOs relating
to privatization of state-owned energy firms were also delayed. Since then, however, stock
markets have rebounded as investors have poured $12.7 billion into Indian stocks in the first
nine months of 2009, more than making up for the $12 billion withdrawn in 2008. Private equity
and venture investment has also rebounded, though deals are generally smaller and the appetite
for risk lower. Through July 2009, $16.6 billion in foreign direct investment flowed into India.
Conflicting Signals
Wherever the Indian government has moved to relax investment rules sector by sector—raising
ownership caps, easing lock-in requirements, reducing or eliminating tariffs on related inputs and
equipment, cutting taxes—foreign investment has risen sharply.
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