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The Diminishing Corporate Investment into the Economy – Is it to do with Corporate Governance!

The Diminishing Corporate Investment into the Economy – Is it to do with Corporate Governance!

The Narendra Modi led Union Government is just a month away from presenting its fourth Union Budget. Riding on the reformatory waves it laid last year, the government is again expected to unleash more such policy amendments this year as well. However, one of the biggest challenge for the Union Government, currently, is the decreasing corporate investments into the economy.

In the last quarter of the calendar year 2017, the corporate investment in Asia’s third-largest economy slipped to its lowest level in nearly 13 years. Considering the fact that India’s core sector growth is at a 13-month peak and the country’s GDP has also un-shadowed five quarters of decline, a negative growth in private investment will pinch the government.

As per the data released on January 2nd this year from the Centre for Monitoring Indian Economy, new private projects sank to around Rs77,000 crore, just one-third of what it was a year ago. Only 1,721 projects with investments worth Rs4 lakh crore were flagged off in April to December 2017, less than half of what it was a year earlier.

India Ratings and Research, a credit rating arm of Fitch Ratings, during the last quarter of calendar year 2017 downgraded many infrastructure firms and placed them under Rating Watch Negative (RWN). The RWN, according to the Rating Agency, indicates that the ratings may be downgraded during the next scheduled review. Mr. Vivek Jain, Associate Director at India Ratings and Research explains, “Power, telecom, steel, and oil and gas are the largest contributors to capital expenditure growth. Out of this, capex growth in power and steel sectors has been affected and that is possibly dragging down the investment growth”.

The lack of corporate governance and Board of Directors mismanagement are also few of the reasons leading to this downfall. One of the best examples to explain this phenomenon is the case with Usha Martin Limited (UML).

Kolkata headquartered steel company Usha Martin Ltd (UML) seems to be heading from bad days to worse. India Ratings and Research downgraded the company’s Long-Term Issuer Rating to ‘IND BB+’ and placed it on Rating Watch Negative (RWN). At best UML may hope to retain the RWN rating given now. In sum the Outlook was Negative.

The downgrade reflects UML’s inability to improve it’s standalone, as well as consolidated EBITDA margins in the first half of the year 2018, indicating further stress on liquidity with interest cover remaining below 1x UML’s consolidated EBITDA margin, was sustained at 10.7% in the first half of the current year. It was 13.64% in the comparable period last financial year. Evidently, the management’s expectation of an improvement remained unfulfilled. UML’s cash flow remains insufficient to meet interest expenses. According to the Rating Agency, the company had been able to meet debt obligations through other non-operational cash flows and stretching creditors during 1HFY18, which includes the sale of the non-core asset as envisaged.

UML intended to sell its wire and wire rope business including subsidiaries and JVs. The company has appointed a consultant to speed up the process. India Rating, however, remained unconvinced regarding the implications of the sale on UML’s liquidity and credit profile. ‘’UML’s already tight liquidity may worsen, if the transaction is not concluded by December 2017, which will be negative for its ratings’’, noted the credit rating agency. But the same is unlikely with little information available on the progress of finding a buyer.

As the budget draft process is underway, there is a possibility that the limelight will shift to this diminishing private investments into the economy. And the Union Government, therefore, may shift its focus again on its disinvestment plans. The disinvestment policy, initiated since July 1991 in India, is referred to as an action of an organization selling or liquidating an asset or subsidiary. It basically refers to sale from the government, partly or fully, of a government-owned enterprise.

The Finance Ministry, during his last budget speech, had raised the disinvestment target to Rs 72,500 crore for fiscal 2017-18. Though the government still lags in achieving the set target, experts believe it performed better than the last fiscal.

According to data from DIPAM (Department of Investment and Public Asset Management), current fiscal year’s disinvestment performance is better compared to previous fiscal. For FY18, the total of disinvestment target was divided into three parts – CPSEs disinvestment, strategic disinvestment, and the listing of insurance companies. Under CPSEs, the government targeted Rs 46,500 crore and dis-invested Rs 32, 322 crores as on January 02, 2018. Similarly, under Strategic disinvestment and listing of insurance companies, the government had targeted Rs 15,000 crore and Rs 11,000 crore respectively where it achieved Rs 4,153 crore and 17,357 crores respectively.

Thus, Indian government has thus raised about Rs 53,833.05 crore – which would be over 74% of the total disinvestment target.

As the government has shown better commitment on achieving its targets so far, it would be, therefore, interesting how it tackles the problem of decreasing private investment. There is no doubt that the Budget draft must have outlined the issue and we would see some stringent policies to boost corporate investment into the economy.

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