Investment trends in India
India’s fund management and banking sectors have shown impressive growth, but targeted action could unleash further potential.
Rapid growth in India’s financial sector has seen mutual fund Assets under Management ("AuM") rocket five-fold over the last decade, but there is still more to go even in the face of tumultuous global economic conditions.
The country’s mutual funds industry oversaw 37.2 trillion Indian rupees as of May 2022, a massive increase from 6.99 trillion in May 2012.[1]
With rising global fears around recession and spiking inflation, there are fears about the stability of some of the world’s leading financial hubs, however, there’s undoubtedly room for optimism where India is concerned.
At a recent Apex Group client event held in Mumbai, India we discussed opportunities and trends facing sovereign wealth funds, family offices, private equity funds, development finance bodies, fund houses and institutional banks.
It was unanimous that India is a true success story in the medium-term, and is viewed as one of the top markets to invest in even during challenging times.
Attractive dynamics and human capital
This view prevailed as India was seen as a safe investment destination for various reasons, including its strong growth, responsive and progressive Government, and its receptive regulators that are willing to hear constructive criticism about enhancing the country’s business and financial frameworks.
Beyond its institutions, India boasts extremely compelling demographics, with two-thirds (65%) of the population below 35 years of age, and an expected 200 million people set to enter the workforce in the next decade.
This talent pool contrasts starkly to many western countries, which are broadly ageing and therefore will soon witness a larger unemployed, elderly cohort relying on a smaller group of economically active individuals.
The economy also has enviable breadth, with significant automobile, chemical, leather, metals, oil and gas, textiles and healthcare sectors, contributing to its more than 6,000 listed companies.[2]
It is arguably the finance and banking sectors where the most attention-grabbing developments are occurring.
Compelling initiatives
Set up in 2015,[3] the burgeoning GIFT City (Gujarat International Finance Tec-City) has almost 7,000 people located in the business district, which India hopes could rival the likes of London’s Canary Wharf. GIFT City is an attractive destination offering competitive financial services and technology-related activities.
Hundreds of additional firms have been registered in GIFT City in recent years and 35 fund licenses have been issued in the past few months alone, with fund AuM and banking assets showing signs of sustainable growth.
GIFT is an important development for India’s economy, as it helps to harness domestic capital more efficiently into vital sectors, however, the capital requirements of the country are substantial, so it must court even more Foreign Direct Investment (FDI) than it currently does now.
Evolving landscape and boosting FDI
India ranked seventh in terms of FDI globally last year, according to UNCTAD, but the volume of investment dropped to $45 billion in 2021 from $64 billion in 2020.[4]
Our distinguished panel discussed their views of Limited Partners (LPs) and General Partners (GPs) from private equity firms and revealed that LPs are de-risking their portfolios and withdrawing into their core sectors or even cash.
Simultaneously, GPs are looking to save on costs to improve returns and address management fee challenges by the LPs. This is something which is proving more pressing given the heightened level of demand from LPs around ESG, net-zero and carbon neutrality initiatives.
Indian LPs are more bullish on the country than their offshore counterparts, with interest in domestic Alternative Investment Funds (AIFs) being higher than that of international AIFs.
In spite of this, the positive view that most stakeholders have of India’s regulators, including the International Financial Services Centre Authority (IFSCA), suggest that steps could be taken to make the country more attractive from an investment perspective.
Proactive stance required
Many in the finance sector believe that a more transparent fund reporting framework would help the asset management industry to mature, which could lead to greater awareness of the AIF space.
The AIF sector spanned 956 SEBI-registered firms with 6.41 trillion Indian rupees of raised reported commitments as of March 2022, a 50% increase from the 4.4 trillion as of December 2020.[5]
Our panel strongly believed that the future potential of this sector meant that assets could grow significantly from their current levels.
Co-ordinated initiatives by regulators to ensure the consistency of rules, regulations and legal frameworks, alongside proactive enhancement of the tax system to overcome current issues and inconsistencies could help substantially to improve the end-to-end process of establishing AIFs, which at present can take more than a year to launch.
There was broad acceptance that such developments take time, andit would be important for progress to be visible in order to maintain India’s attractiveness to investors.
Building trade and industry associations
A way forward is to create a joint industry body that could enable the exchange of information and ideas between the various stakeholders, effectively ensuring there was always a forum for engagement between the various parts of the financial ecosystem.
Essentially, heightened collaboration would be the key that could unlock the potential of India’s financial system.
With oversight of $50 billion of assets globally for Indian firms and more than 2,400 employees in India, Apex Group has the expertise, product knowledge and technology to help your firm prosper in the country and beyond.
[1] https://thelawreviews.co.uk/title/the-asset-management-review/india
[2] Interestingly, Statista puts the number closer to 7,500 for FY2021 across the NSE and BSE
[3] https://www.thecityuk.com/our-work/iukfp-developing-gift-city-into-a-global-services-hub/
[4] https://www.business-standard.com/article/economy-policy/india-s-fdi-rank-rises-to-7th-position-despite-falling-inflows-unctad-122060900883_1.html
[5] https://thelawreviews.co.uk/title/the-asset-management-review/india
