Foreign investment flow in India’s financial services sector more than doubles

Photo: Mint

Foreign investment in India’s financial services sector rose sharply in 2015, led by interest in retail service providers and a higher cap for foreign investment in the insurance sector.

Data compiled by VCCEdge, the financial research arm of VCCircle and Grant Thornton India Llp, show that deals worth $3.8 billion were closed in the financial services sector this year, more than twice last year’s $1.6 billion. The data includes inbound mergers and acquisitions (M&As) and purchases by foreign private equity funds.

While some deals were driven by the higher foreign investment cap in insurance allowed since March, investors also sought to get exposure to the retail financial services sector, which they expect will grow as penetration of financial products deepens.

“Financial services is an attractive investment asset class for foreign investors because it provides them an opportunity to tap the growing middle class and the high-net-worth individuals. Most deals in this sector have happened where companies are more focused towards the retail play rather than the wholesale market,” said Ajay Saraf, executive director, ICICI Securities Ltd, adding that investors are keen on wealth management service providers and retail brokerages with strong distribution networks.

One of the largest foreign investors in India’s financial services this year was billionaire Prem Watsa, whose Fairfax Financial Holdings Ltd invested in Quantum Advisors Pvt Ltd and IIFL Holdings Ltd. Earlier this deal, Fairfax invested an undisclosed amount in Quantum, which advises and manages the India allocations of foreign portfolio investors. IIFL is a diversified financial services company with a major focus retail investors. Fairfax invested $211.38 million to acquire a minority stake in IIFL in July, according to VCCEdge.

In the same month, French bank BNP Paribas SA acquired retail brokerage firm Sharekhan Ltd for nearly Rs.2,200 crore (about $345 million at the average exchange rate of Rs.63 per dollar in July). In August, it bought out its partner in BNP Paribas Sundaram Global Securities Operations Pvt. Ltd for Rs.44.30 crore, according to Grant Thornton’s deal database.

Non-banking financial companies (NBFCs) and housing finance firms have also seen strong interest from private equity funds. Deals in this segment include Apax Partners Llp’s $384.55 million investment in Shriram City Union Finance Ltd and Bain Capital’s $198.47 million deployment in L&T Finance Holdings Ltd.

SME (small and medium enterprise) finance is also a segment that is attracting a lot of foreign investment, said experts.

“We are seeing that a lot of growth capital coming in to fill in the gap where traditionally credit was lacking. Whether it is affordable housing loans, SME loans or the microfinance sector, foreign investors, particularly PEs (private equity investors) are keen to invest in these areas,” said Abizer Diwanji, partner and national leader at audit and consulting firm EY, adding that these business models have matured now, and so, risks have reduced.

Several transactions were seen in the insurance sector as well after the foreign investment limit in the sector was raised to 49% from 26%. At least Rs.10,000 crore in deals have been announced, according to data compiled by Mint. The largest such transaction saw Nippon Life Insurance Co. buying Rs.2,265 crore in Reliance Life Insurance Co. to raise its stake to 49%. At least 11 more deals have been closed.

According to a report by India Brand Equity Foundation, between April and September 2015, the life insurance industry recorded a new premium income of $8.4 billion, indicating a growth rate of 14.45%. The general insurance industry recorded a growth of 12.6% in gross direct premium underwritten in fiscal year 2016 till October, at $8.23 billion. The life insurance sector is expected to grow at a compound annual growth rate of 12-15% over the next five years, the report added.

“Most of the Indian insurance companies are dependent on their foreign partners on the product side and most of the foreign insurance firms were looking for this opportunity to up their investments,” said Kalpesh Mehta, partner at Deloitte Haskins and Sells, India.

In January-September, Total foreign direct investment (FDI) flows into India increased to $26.51 billion from $22.43 billion during the same period last year.

Many believe that investing in financial services is a good way to capture any upturn in the economy. Falling inflation and interest rates, along with strong regulation, also continue to attract investors to this sector.

“People are paying little bit higher than fair value as we expect growth in assets under management and net incomes to pick up soon,” said a fund manager who has invested in an NBFC, requesting anonymity.

Private equity investors consider the Indian financial services sector as a safe bet.

“The fact that the sector has a strong regulator and fewer corporate governance issues is an added advantage,” said Deloitte’s Mehta, adding that sectors such as real estate and infrastructure come with higher risks.

Also Read: 

Blackstone scouting for investments in India’s cement and financial services firms

India: Canadian firm Fairfax acquires 22% more in IIFL for about $200m

This article was first published on Livemint.com

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.