You've went abroad without proper planning, RBI deputy guv tells India Inc

Mumbai: Stating that he is “chastened” by the massive jump in foreign investments by India Inc, Reserve Bank deputy governor HR Khan today chided corporations for not doing enough research before taking their decisions, as
many had to exit such investments in distress.

“You’ve gone without proper research, due-diligence and adequate planning. So you now see a large-scale disinvestments of such assets happening,” Khan told the gathering of chief financial officers of leading corporations at a CII-held meeting here.

Reeling out data pointing to a rise in outward FDI (foreign direct investment) in the last four years, Khan said he was a “champion” of the phenomenon, but is now “slightly chastened” by the experience.

Khan said the outward FDI has jumped manifold from USD 21 billion in FY10 to USD 52 billion in FY14.

He said corporates went out of the country at the wrong time and have also struggled with the funding aspect, which has complicated the whole situation.

“Because you’ve gone out at wrong time, when the global demand was small you’ve gone to expand, then you were not hedged and you thought that you would get funds but you’re not able to get funds because the banks overseas were not lending, domestic banks were not lending because you were already over leveraged and your product pick up was not there,” he said.

“People only see the inward FDI, they don’t see the outward FDI,” he said, acknowledging that the Tata group is the biggest employer in British manufacturing side today, having invested in assets like Corus and JLR.

While the USD 2.8-billion purchase of the British marquee car brand JLR has turned out to be a huge success, the near USD 13-billion Corus buyout has been a big drag on the group.

He said companies go out for a variety of reasons like gathering technological know-hows or for the market.

“People have gone for technology seeking, resources-seeking, market seeking, brand building, forward and backward integration and there are unofficial reasons,” he said.

There was a loud laugh from the audience for Khan not elaborating on the last aspect.

It can be noted that for a good period during the last four years, the RBI and the government fought a very hard battle to prop a battered rupee, which had touched an all-time low of 68.85 to the dollar in 30 August, 2013.

Meanwhile, addressing the CFOs, Khan flagged high leverage, lack of transparency in debt and equity, hedging and roles of corporate treasury departments as some other areas of concern.

“Debt equity of domestic corporates is high. But the promoters’ equity itself is suspect. One has to be careful,” he said.

The corporates also need to follow a proper hedging policy even though they might get a sense that the rupee has stabilised, Khan said, adding, he is not advocating a 100 per cent hedging, but wants them to follow a “sound hedging policy.”

It can be noted that following many instances of large corporates not hedging their debt, the RBI had in June asked banks to make 10 per cent provision for the unhedged loans to safeguard the lenders.

On the treasury operations conducted by large corporates, he said, “Intra-day trading by corporates if not properly done could have impact not only for the corporate but for the system.”

It can be noted that the oil and gas major Reliance Industries has been netting more than a third of its net income from treasury operations for the past many years and
could well be the largest player in the market as the company sits over cash pile of over Rs 82,000 crore.

PTI