India Has Big Potential In The Next 5-7 Years

CDCs managing director, Robert Binyon, was in India last week as part of his mission to enhance the institutions profile and operations in what he considers a market with great potential. In an exclusive interview, Binyon spoke to A K Bhattacharya on how he envisaged CDCs growth after the change in its shareholding pattern, the importance his institution ascribed to India as its market, the impact of the south-east Asian crisis on CDC and on what he considered areas of concern as far as the new BJP government and its economic policies were concerned. Excerpts:

Q: In what way is CDC is different from other investment institutions?

 

A: CDC is a bilateral institution. It has been in business for the past 50 years and has been in India for the past ten years. There is not much difference essentially between CDC and other institutions. Both IFC and CDC, for instance, work with the private sector. But unlike IFC, CDC manages industrial and financial businesses all over the world.

Q: Do you manage industrial businesses in India as well?

A: We do not need to do it in India. But that is because the level of management expertise available with Indian industry is already very high. So, we concentrate more on countries in Africa, where industrial management skills are not that developed. But in India, we do manage financial businesses. We have two funds in India. Recently, we set up the South Asian Regional Fund. That is also a key area of difference with the IFC.

Q: How do you get funded ?

A: CDC is owned 100 per cent by the UK government. But for the past seven or eight years, CDC has been virtually on its own, despite being a 100 per cent owned institution of the British government.

Q: How long do you think this kind of an arrangement can last ?

A: We do recognise that this arrangement is not sustainable in the long run. We, therefore, have decided to go in for quasi-privatisation. We are seeking private funds, which could eventually result in the dilution of the UK governments equity from 100 per cent to 40 per cent, while private investors could acquire as much as a 60 per cent stake in CDC.

As a corollary, we have already decided to reorient our future investment strategy. We will be focusing more on investment in equity and less money will be allocated towards loans and debt. Over a period of time, we will transform our portfolio from having two-thirds debt and one- third equity to two-thirds equity and one-third debt.

Q: In shifting your business focus, have you gained or it has created some problems?

A: As a business strategy, our shift in business focus has paid off. It is true that we have been consistently profitable since 1954. But our profits have been even better after we began focusing more on our private sector businesses. The bottomline is also stronger. This is also because in our business partnership with the private sector, we can often guide and mould the private businesses and can influence their managements to toe an independent policy. This is not always possible in our public sector businesses.

Q: Coming back to your privatisation, have you finalised any time frame?

A: It is difficult to put any time-frame to our plan to privatise CDC. Frankly, it depends on the UK Parliament - when it decides to approve the legislation that will help us go ahead and offload 60 per cent of our equity in favour of private sector institutions and shareholders. Once it is cleared by Parliament, hopefully by 1999 or 2000, there would be no delay and the divestment would be completed in one installment.

Q: What kind of investors are you looking at, and are you expecting any investment from India?

A: Well, we are not just looking at private ownership. Neither are we restricting ourselves to soliciting investment from UK institutions only. A number of institutions in Commonwealth countries including India can take part in the equity of CDC. We have had a number of conversations with Indian institutions. We have reasons to believe that there are institutions in India that would be interested in acquiring such a stake.

Let me add here that we have no fixed expectations from these potential investors. We, of course, are conscious that CDC is a developmental institution with a commercial focus. We believe that development and profits are not inconsistent with each other. We, therefore, believe that those who would like to take a stake in CDC should also share this view and understand its spirit. Our distinctive trademark is an ideal mix between commercial focus and development. We would like to preserve it even after we have 60 per cent private sector shareholding.

Q: Does it make sense for you to shift your business focus to risk capital at a time when the equity market is not doing too well ?

A: Well, there may a lot more of debt around than risk capital. But we in CDC feel that it is not sensible to be competing with all other institutions for the debt market. In fact, we are not particularly competitive as a debt provider. On the other hand, there is a shortage of equity or what you call risk capital. We believe that we have an edge over others in providing such risk capital, for we can package it with our management expertise. Currently, we are providing management expertise to 36 companies.

Q: Any apprehensions from your investors ?

A: No. I would imagine that our investors would be feeling more assured because of our policy of involving ourselves with the business management of companies. You see, we are dealing with emerging markets and are essentially based in London. So, it is better to be in close touch with our business partners. This gives us and them greater confidence.

Q: What are your plans in India ?

A: We have a reasonable presence in India. We recently concluded the launch of a $110 million South Asian Regional Fund. We have set up CDC Advisors, an internal group that will help us do business in India.

Q: How has the south-east Asian crisis hit you ?

A: The south-east Asian crisis is probably overdone by the rating agencies and also the media. Basically, most markets are either in an oversold or an overbought position. In the case of most south-east Asian markets, they were oversold. They will bounce back once these countries correct their imbalances. It will take time. CDC has been relatively untouched by the crisis. We saw the problem surfacing in Thailand fairly early. We found that that in Thailand the prices of assets went up without any relation to the value of these assets. Simply put, investment in Thailand in such circumstances was not competitive. So, we decided to move out about three years ago and had not concluded any business since then. In Indonesia, we have been affected. So, we are taking prudential extra provisions in our accounts this year. Our provisions for south-east Asia this year will go up marginally.

Q: Will India be spared from a fallout?

A: India, I believe, is a different story. The stock markets here had a major correction three years ago. The markets have not really recovered from that. But the fundamentals here are strong. There is no build-up of dollar debt, for instance. There will be a slip-over effect of the south-east Asian crisis on India. But it will not be severe. And that is also why we want to enhance our presence in India.

Q: How do you assess the new BJP government in India?

A: It is too soon to judge what the new governments policies will be and how they will impact foreign investors sentiments. What you should not ignore is that India is a big economy. There will be sectors that have strong domestic flavours. But if certain sectors are open to foreign investment, we will certainly look at those areas. We are not focusing on any particular sector like insurance or banking. So, we will see the sectors in which foreign investment is allowed and then take a decision.

Q: Do we take that it that you have no concerns about the new governments move towards protectionism and curbs on foreign investment ?

A: No. What we are genuinely concerned about is the impact such a policy may have on the competitiveness of industries operating in sectors in which tariffs are raised and foreign investment is restricted. We in CDC would not like to invest or back any company that operates under the protection of high tariff walls, for we know sooner or later these tariffs will induce inefficiencies and make the companies internationally uncompetitive. So we will look at such developments very carefully. Not only in India, but anywhere in the world.

Q: What is your outlook for the Indian economy ?

A: I am aware that the Indian economy is going through a sluggish phase. For businesses, this is a tough time. But at the same time we would be careful in drawing too many conclusions on the basis of one years numbers. We strongly feel that India has big potential in the next five to seven years. Which is why we are building our portfolio in India.