With the slowdown in foreign fund inflows as a result of the crisis in the sub-prime market in the US, India Inc's ability to raise resources at competitive rates is bound to be affected. The sudden change in market dynamics has upset the plans of many companies planning public issues after the success of the ICICI Bank and DLF issues.
“Indian corporates may find it difficult to raise resources through debt or equity,” said Bharat Banka, group head (finance), AV Birla Group. With the sub-prime virus spreading across the world, fund managers would look for quality assets--debt and equity--and even be prepared to pay a premium, but would be reluctant to buy stakes in second-rung companies, he added.
Nimesh Kampani, chairman of JM Financial, feels companies should focus on the domestic market instead of depending on foreign money. “India is a $1 trillion market and even if the foreign funds have invested around $200 billion, local investors have put in $800 billion, which is big enough to fund the growth of Indian companies,” he said.
On the issue of fund outflow, Kampani said it was too early to predict. “It is too volatile a market and it will take some time to stabilise,” he added. However, he said given the role of hedge funds in the Indian market, there seemed to be some degree of caution, particularly about second-rung companies, even if they were fundamentally strong.
To a large extent the liquidity in the system depends on the flow of foreign money. In fact, a slowdown of funds flowing into the equity market would affect liquidity in the debt market, which could harden interest rates.
Bankers feel that going forward, the cost of leverage buyouts will also increase significantly as global lenders are not only asking for higher margins but also higher rates. The combination of the two would make many potential deals a tough proposition.