FDI as Equity Should be Preferred over Debt Financing

Foreign Direct Investment (FDI) in the form of equity should always be preferred over debt financing to ensure investment rather than a liability. The review mechanism is to be implemented to ensure forex positive in terms of foreign investment inflow and outflow every quarter, says Debasish Dutta, Managing Partner & CEO of Orange Corp, which is one among the leading Venture Capital companies under the Limited Partner Category having own integrated Management Consultancy Wing with establishments in nearly 30 countries.

 

Debasish Dutta

 

Over the years, Dutta’s company has diversified from investments in Artificial Intelligence (AI) plug-ins contributing to automobiles, pharmaceuticals, FMCG, production studios to media & entertainment. Speaking to Baishali Mukherjee of Scrabbl, Dutta delves at length on wide-ranging issues- the weakening of INR- what would be its immediate impact, how INR can gain position, venture capital investments in start-ups (global Vs Indian scenario), the role of venture capital in wealth creation and so on.

Excerpts:

Scrabbl:  What is your take on Venture Capital Investments in start-ups – global Vs Indian scenario?

Dutta: As a matter of fact, investment in start-up companies have started in early 1900 and several successful companies exist tall and strong today in the US & Europe. Brands have been created across industries with technology and fashion taking the lead in the race. The main object behind all the success is the drive to create things to make life better and easier on one hand which is targeted both for mass as well as niche consumers and on the other hand harping for finesse and quality for a product which will promise a value for money for consumers having high purchasing power. These companies did quite well in capturing and creating new need and market with a target to spread organically and grow with it. The venture capital companies backing such growth did extremely well and created wealth for themselves as well as for the economy for further investment.

 

From 1992 onwards, stagnancy was felt due to lower growth in developed economies and hence both established companies as well as venture capitalists were eyeing developing countries as a potential target market to be created for growth. This is the time, mobile phones got introduced in India and growth has been splendid with the penetration level to date being very high and still there is ample scope to penetrate further. The economic policies in India were just right to motivate foreign investors to invest with long term plans. Indian entrepreneurs and budding young stars with a mind and brain to create something new started exploring possibilities and have been successful enough to show an economy much appreciated across the globe with investments pouring in their support. India has seen quite a good amount of investment by venture capitalists in projects which otherwise can never be funded by banks alone due to long gestation period and orthodox approach towards projects with new ideas or less known areas. In other words, banks can never imagine funding project i.e a delivery app which involves appetite of high investment and losses in the initial years with an urge to reach across millions of households ensuring comfort for consumers on one hand, creating job opportunities and high sales for products on the other. India will continue to be a destination with high growth opportunities due to high population and penetration level being still much low.

Scrabbl: How do you see India as an FDI destination?

Dutta: As I mentioned that India has still lots to offer for industries, new ideas to evolve and technology to take charge of things at the click and take more active part in one's daily life. Artificial Intelligence and Superconductors can also be of great opportunity for tomorrow. However, it is to be kept in mind that FDI or foreign debt has an exit route i.e. if someone has invested in a company or product, will look for its return on investment at the end of the day. So, for a country, it's like making things interesting & rewarding compared to what other countries have to offer. Even for a Venture Capital company resources are limited with specific focused areas. It will try to invest where there is a prospect and the policies are well defined to provide visibility on taxation and withdrawal of funds are easier without being suffocating at the end of the term.

Consider that an individual will always prefer an investment of his/her savings which will promise returns and at the same time provide liquidity of funds. It is required that there is not more than 1 department to look into the affairs of FDI investors from start to end and policy changes should be able to give visibility to the investor for at least 5/7 years’ horizon. Change in policy with retrospective effect or interpretation of policies otherwise not clearly defined is a nightmare for the industry as well as its investors, even applicable to banks as stakeholders. Negativity starts mounting up which kills momentum atleast for quite a few years. Single window authorization is the need of the day to boost the momentum with active implementation assistance to review the progress at every stage.

From the industry’s perspective, it is required that there is no unhealthy competition to cut prices below sustainable levels and offer quality to build brands which consumers trust for repeat sales. This will avoid erosion of funds and consumer base will keep on increasing to make this an enterprise having organic growth. Over the years the success story of start-ups in India have not been very good due to the factor that many try to copy business models of successful start-ups without understanding the market and the time gap between the two or lack of innovation. New ideas and enthusiasm to do new things should be the driving force rather than the notion of quick success and quick money.

Scrabbl: What do you think should be the role of Venture Capital in wealth creation?

Dutta: Venture Capital (VC) companies are great wealth creators both for themselves as well as for the economy. They show the trust on a budding entrepreneur or new / growing businessby investing on “dream projects” which most of the times are merely on paper or on a presentation format. What interests the VC is the potential consumer reach and the job prospect which the project can promise to make. This has the effect of introducing better technology, better lifestyle, increasing consumer spend levels and growth for the economy.

Challenges are thrown in front of the startups to dream even bigger and try to go all out to achieve something moving out of the comfort zone. Today it's seen that successful entrepreneurs exist within age bracket of mid or late twenties which earlier was unimaginable.

Scrabbl: What do you think has contributed to the weakening of INR?

Dutta: According to me there are a couple of factors. India has always been an import positive country and hence the demand of forex always remains high. Like an industry, any country is like a “going concern”. So, there is always inflow and outflow of funds for the country. What is important is to ensure that inflow should always be more than outflow. It’s quite likely that foreign investors may call back their money from the country and hence it’s important that new investors come in with more funds to make this forex positive. The oil imports are increasing due to increase in industrial consumption with increase in vehicle movements as well as due to increase in ownership of two/four wheelers resulting in higher pay out of forex. Infrastructure creation requiring high import of machineries and equipment pushes the demand for forex further. Export emphasis is not adequate enough to boost export which is very much needed from the SME sector being the backbone of the economy. Last but not the least, I don’t agree with what is called “sentiment” of downfall of another currency not much related to India, which can make such an impact on a currency of such a strong nation like India.

Scrabbl: How can INR gain position and what according to you would be immediate impact of the weakening INR?

Dutta: FDI in the form of equity should always be preferred over debt financing to ensure investment rather than a liability. Review mechanism is to be implemented to ensure forex positive in terms of foreign investment inflow and outflow every quarter. Policies need to be aligned accordingly to keep the investment momentum alive. Evaluate whether export policies are understood in details by SME having export potential and whether they are able to avail export benefits being provided specific to the industry. Banking system in India is robust and one of the best in the world and hence banks need to be aggressive enough to provide competitive rates for export finance to SME in line with other countries to make them cost competitive. Travel & tourism should be seen as a key option to generate forex since there is ample scope to draw foreign tourists to India with so many diverse things to offer. Indian Banks having foreign branches should be asked to provide funds either on temporary or long term basis to their principals in India for funding home projects.