(Photo via TheGlobalPanorama/Flickr)
In May, a record voter turnout in India made Bharatiya Janata Party candidate Narendra Modi the country’s new prime minister and cast aside the Congress Party’s Manmohan Singh, who was blamed for an ailing economy and a spate of corruption scandals.
For the Indian electorate, the election results produced a collective sigh of relief. To law firms, it was a chance to see a long-awaited uptick in business.
“The optimism and confidence levels are undeniable and as good as they have ever been,” says Shreya Lal Damodaran, a London-based senior India consultant at Cleary Gottlieb Steen & Hamilton.
Modi also captured a clear majority in the lower house of parliament, making it the biggest electoral victory in 30 years. As a result, investors, who had been steadily buying Indian stocks in the run-up to the election when it became obvious that he would win, bought even more. The Sensex Index climbed 8 percent from the May low just a week before election results were announced. It’s risen another 7 percent since then.
Capital markets work has picked up accordingly, as lawyers at a range of firms report seeing a surge in Indian deals.
Jones Day Singapore partner Manoj Bhargava has advised on four equity deals since May, including advising the underwriters on Indian telecommunications company Reliance Communications Ltd.’s $999 million share sale. He says the firm has another 12 deals in the pipeline.
Allen & Overy Hong Kong partner Amit Singh acted for the underwriters on Yes Bank Ltd.’s $488 million share placement in late June—a deal he said couldn’t happen until the Modi win.
The Yes Bank deal “was in the pipeline for a while, then Modi got elected and the stock price was where they wanted it to be, so the company pulled the trigger,” he says, adding that debt capital markets deals have picked up as well. He advised Indian telecommunications giant Bharti Airtel Ltd. on a $2 billion dual-currency bond offering in late May, as well as a $2.2 billion note issuance by Indian oil and gas company ONGC Videsh Ltd. last month.
Some believe that this spike in deals is only the beginning of a larger increase. Baker & McKenzie Singapore partner Ashok Lalwani expects to see more dealmaking in nine months to a year, after Modi has had the chance to enact the pro-business policies that got him elected.
“Once those policies are in place, and people have more confidence in the system, I think you’ll see a true uptick and consistent uptick in activity,” he says.
The elation over Modi’s move into power follows widespread disillusionment with his predecessor. Former Prime Minister Manmohan Singh oversaw a sharp fall in gross domestic product growth to 4.7 percent in 2012 and 5 percent in 2013, from 10.3 percent in 2010, according to World Bank figures. His administration was also alleged to have lost billions of dollars of revenue for the country when coal mining and telecommunications licenses were handed out for far less than they were worth in exchange for bribes. Former telecom minister A Raja allegedly is currently on trial for his alleged involvement in the scam.
Modi ran hard against these lapses, promising achche din, or “good days,” ahead, and positioning himself as a pro-business candidate.
Since taking over, Modi’s administration has bumped up the foreign investment caps in the defense industry to 49 percent from 26 percent and has submitted legislation to make the same change to the insurance sector. Modi has also signaled that infrastructure and mining are primed for a reboot. And a new law will allow the creation of real estate and infrastructure investment trusts, a move that should further boost India’s capital markets. The initial public offerings of these trusts had fled to Singapore and other markets under the previous ban.
Many lawyers see these initial changes as signs that soon mergers and acquisitions and private equity deals will join the pipeline as well.
“India [had] almost come to a grinding halt,” says London-based Jones Day partner Sumesh Sawhney. “There’s so much opportunity now, and this government will tap into that. This government will let India grow, and that means more business, more jobs, more growth.”
Still, Modi’s start out of the gate has managed to prompt some criticism from analysts and foreign investors. His first budget, announced July 10, left in place food and fuel subsidies that have weighed on India’s national budget, while also failing to kill a retroactive tax on cross-merger mergers and acquisitions. The latter decision stung some investors in particular: British mobile phone company Vodafone Group Plc. currently faces a $2.6 billion tax bill on its $11 billion purchase of Indian mobile business Hutchison Essar Ltd. from Hong Kong-based Hutchison Whampoa in 2007. Vodafone is currently trying to bring India to an international arbitration court in order to settle the case.
Some lawyers express more tempered optimism.
“As with everything in India, it pays to be cautious,” says Freshfields Bruckhaus Deringer Singapore partner Arun Balasubramanian.
Balasubramanian points to the opposition to Modi’s attempt to further open the insurance sector to investment. “Given the majority they hold, everyone thought this would go through quite easily, but already they’re facing a significant amount of opposition,” he says. “So it remains to be seen whether this will go through or not.”
Modi also derailed a much-anticipated World Trade Organization trade facilitation agreement late last month when member counties failed to also agree to allow India to continue its food subsidy programs. The WTO agreement puts a cap on these kinds of subsidies, and Modi refused to acquiesce.
Lawyers note, however, that Modi has only been in office for 60 days.
“We should resist the temptation to draw monthly progress reports,” Jones Day’s Sawhney says. “The frustration of the last 10 years, coupled with the expectations of the Modi campaign, has people rushing to judge too quickly. I think we need to give them a bit more time than that.”