Sunil Jain: Domino effect

PERSPECTIVES

Just how badly will the latest wave of the US financial crisis hit India? Apart from the obvious impact on exports of both conventional goods as well as IT/ITeS, there is the bigger impact on the cost of funds and their availability. As long as US banks/investment banks need to shore up their flagship firms, FIIs will continue to withdraw funds from India, dragging the sensex lower and making it more difficult for firms to raise funds to finance investments.

Just a little over 42 per cent of funds invested by India Inc came from internal accruals last year — this will clearly fall as this year’s profits growth falls. Foreign loans through ECBs and FCCBs were over 18 per cent of total cash raised while foreign equity issues accounted for another tenth — both are likely to get impacted severely now. Private placements in India offer a ray of hope, though private equity will obviously be asking for higher performance standards now, given the risk premium has suddenly shot up significantly. Add to this the fact that a lot of investment made for global markets may not look so attractive for the time being, and the impact on India is likely to be quite severe.
 

Funding India Inc’s Investments
(in Rs crore)	2006-07	2007-08
Foreign currency loans	92,075	139,289
Overseas Issues	64,101	74,050
Public Issues	24,993	53,219
Right Issues	3,704	32,519
Private Placements	93,855	115,206
Qualified Institutional Investors	4,963	25,770
Cash Profit	261,008	320,718
Total	544,698	760,770
Data for cash profit for 1,693 companies Source: RBI, Prime Database, Business Standard Research Bureau