Indian companies are investing around the globe to buy assets and set up manufacturing

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facilities, oil exploration rigs, coal mines, hotels and restaurants as valuations of assets in Europe and Southeast Asia have dropped to attractive levels. Though the trend of Indian companies investing overseas is not new, the frenetic pace at which it continues to happen is proof of the capital reserves that parent companies hold in India and their ability to raise loans and guarantees on their balance sheets to exploit opportunities and expand footprints overseas.

Notwithstanding exchange rate volatility, which is depreciating the rupee and making overseas acquisitions expensive, Indian companies say valuation of asset is more important than 10 per cent variations that can happen through the depreciating rupee.

Over the past one year (since October 2010), Reliance Industries (RIL) has emerged the largest overseas investor, as per the Reserve Bank of India (RBI) data. The company invested over $1.6 billion worth of guarantees for oil exploration in Mauritius, Cyprus, the UAE and the Netherlands. Tata Steel group companies have also been routing over $1 billion investments through its wholly-owned subsidiary Tata Steel Asia Holdings in Singapore to invest across geographies, especially in Europe, say bankers who have funded the company in these acquisitions.

But companies have not only availed loans to invest overseas, they have also channelled the company’s equity for overseas investment. For instance, Tata Steel used over $600 million of company’s equity to invest overseas through subsidiary companies.

Tata Steel bought Corus, Europe’s second largest steel maker, in 2007 for $13 billion in the biggest overseas acquisition made by an Indian company. At the end of the first quarter, the company had a gross debt of $13.6 billion and a net debt of $9.1 billion. Some of the debt is for overseas acquisitions and also meant for refinances, according to bankers.

Many of these outward FDI investments happen through Mauritius, Singapore and the Netherlands to save tax, after which it gets diverted to various destinations through wholly-owned subsidiaries and joint ventures.

Companies, especially those in the infrastructure and energy sectors, such as GMR Group, one of the big investors overseas over the past one year, say there have been a lot of development that the group participates in.

GMR group chief financial officer A Subbarao said, “We are taking out outward FDI to buy Indonesian coal mines and establish critical coal-linkages for our power plants. GMR is also participating in the development of the Maldives Airport and has invested in an independent power project in Singapore.”

The company defeated a construction consortia from France to bag the Maldives project. In Singapore, it has set up its first independent power project at a development cost of $1 billion, the single largest investment made by an Indian company in Singapore.

The State Bank of India (SBI) has been at the biggest help in Indian companies acquiring assets abroad. Hemant Contractor, SBI’s managing director in charge of international banking, said domestic companies have continued to pace up acquisitions overseas, especially in Europe, as assets are available at attractive prices.

“Exchange rate volatility is making acquisitions more expensive, but that is not going to last for a long time and companies take a one-year view in these acquisitions. Most of the acquisitions are for coal mines, steel and iron ore assets and oil exploration,” he said.

There are many companies in the process of investing overseas. Grasim Industries, through its joint venture Birla Lao Pulp and Plantation Company, invested $2 million in Laos. The company said it is involved in a business activity in Africa.

KK Maheshwari, business director for pulp & fibre business and director of Aditya Birla Management Corporation, said in an email response that its investment related to plantations and setting up of the pulp mill. “We wish to reaffirm that this categorisation (fishing, hunting and agriculture) does not in any way reflect the nature of our engagement. We announced this project in 2006. We have secured 50,000 hectares of land from the government of Laos on lease for 75 years. Eucalyptus plantations are being raised on the land. It will provide the feed for the pulp plant of 200,000 tonnes per annum capacity, which will come up later.”

He said the project, which entails a total investment of $350 million, will be implemented in two phases — first the plantation phase and second the setting up of the Dissolving Pulp Plant, given that Eucalyptus plantations normally have a growth cycle of 7 years. “The commissioning of the pulp plant would coincide with the harvest of first plantation, that is in the seventh year. Pulp produced in Laos would be exported to the group’s Rayon Fibre manufacturing units in India, Thailand and Indonesia, as well as newer locations,” the company said.