FDI investment doubled in April-May, but secondary investments dominate inflows: RBI data

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India continued to attract strong foreign direct investment inflows in the first two months of the current fiscal. April-May inflows doubled over the previous year’s levels. But a third of the inflows have been due to acquisition of shares through secondary transactions rather than investments by companies in plants, helping the country amass durable foreign exchange reserves in the process.

Gross FDI inflows more than doubled to $18.3 billion in April-May this year compared to $8.5 billion in the same period a year ago, according to the latest Reserve Bank of India data.

But nearly a third of the inflows – $6.3 billion- are in the form of acquisition of shares rather than investment in new projects. Nonetheless, it is helping the country’s foreign exchange kitty. Acquisition of shares, unlike portfolio investments are not stock exchange deals. They could be typically private equity investments or pre-IPO equity investments or block purchases of over 10 per cent of a company’s diluted equity which are through M&A deals

“I think it’s a continuation from last year with several startups looking to raise capital, either publicly or privately to prepare for a pick-up in demand later in the year” said Rahul Bajoria, chief India economist at Barclays Capital. Market analysts attribute the May spike to investment preparation for the big-ticket IPOs planned for Food delivery services App Zomato and other tech IPOs lined up during the year.

Economists see it as a part of a broader trend. In eight of the eleven months between July’20 and May’21, inflows through the acquisition route has been a minimum of half a billion-dollar or more an analysis of RBI’s foreign investment data shows. This in turn is helping the economy attract durable foreign exchange reserves. In the month of May alone, such inflows amounted to $ 6 billion.

” RBI clearly has identified this to be a general FDI trend within which share purchase deals tend to dominate. It has stepped up market intervention, which is also showing up in its foreign exchange reserves” Bajoria said.

In April-May, India’s foreign exchange reserves rose $19 billion despite foreign portfolio investors pulling out $1.5 billion from India and dollar demand picking up due to rise imports.

India has emerged as a stable destination for FDI according to a recent United Nations Conference on Trade and Development and was among the top five nations to attract FDI in the pandemic year.

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