Luxembourg is the third-largest source of foreign portfolio investment into India and growing European investor appetite will only increase that, said speakers at Luxembourg for Finance’s Building Bridges with India event on Wednesday 20 October. However, sources cautioned that the grand duchy needs to help India overcome international misperceptions about its governance and green credentials.
“A recent Spanish newspaper article illustrated India’s growth with an image of a growth chart coming out of a snake charmer’s pipe,” said Nilesh Shah of Kotak Mahindra Asset Management.
“We need help from Luxembourg to educate investors about India--we are not a country of snake charmers.”
Not only the world’s fifth largest economy, India is pouring significant capital into the green investment area--in part through collaborations with the Luxembourg Green Exchange.
We need help from Luxembourg to educate investors about India--we are not a country of snake charmers
In June this year, the Luxembourg Stock Exchange admitted a €300m green bond issued by Indian company Power Finance Corporation to the Luxembourg Green Exchange. It plans to mobilise $10trn with a significant part from international investors in order to reach net zero by 2070.
“It’s only possible if we can raise enough money to meet the climate change goals. We need the partnership with the Luxembourg Stock Exchange. A lot of Indian issuers are looking to raise capital for sustainable and green projects by tapping European investors,” said Venkataramani Balasubramaniam, of the Indian stock exchange India (INX).
Investor perception on green and governance
Yet investor perception has not yet caught up to India’s green credentials. Balasubramaniam acknowledges why. “Although India culturally and traditionally preserved its ecology, the West over the past 50-60 years outsourced climate-damaging industries to this part of the world. But India is no longer succumbing to these pressures,” he underlined.
“In 2020 [the INX] created the ‘Green GSM’ for green, social and sustainable bonds, with the goal of being early adaptors and to push the market in a green direction. [Since this time], total ESG issuance has been $7.34bn [which is] 10% of the total listing, but ratio will change to 70-80% in next years.”
Indeed, India has developed strong green governance driven by its stock exchange the INX.
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“The Indian financial regulator has signed a number of international memorandums of understanding and recently tied up with the Luxembourg regulator--CSSF. One of the goals of this is to create a green taxonomy on a par with Europe,” Balasubramaniam said.
The rationalisation of labour laws in India and the implementation of insolvency and bankruptcy codes will help with the governance perception, said Shah.
“It’s the three G’s,” he said. “Growth, governance and green.”
According to the speakers, India’s governance standards are now better than those of most emerging markets with a strong political will to improve them further.
Growth of alternative investment
There is little doubt of India’s growth story on the global stage. However less known is its growth in alternative investments, specifically venture capital and private equity. According to Avinash Satwalekar at asset manager Franklin Templeton, approximately $77bn in 2021 was invested into PE and VC funds in India, a 62% increase from the previous year.
On top if this, there is a strong political will in India to increase PE and VC capital.
“Luxembourg can play a very important role in attracting [this alternative] investment into India,” he said.
And, according to Alessandro Silvestro of asset manager Lemanik Asset Management, Luxembourg’s specialised structure is perfect for directing investment to Asia.
There’s an opportunity for global investors to participate in a growth story that rivals that of Japan in the 1960s and 1980s and China in the early part of this century
“The Luxembourg value proposition can be articulated as this: the gateway to go global. Indian managers need the Undertakings for the Collective Investment in Transferable Securities(UCITS), they need the Alternative Investment Fund, because these Luxembourg-based fund structures are sold all over the world.”
Luxembourg has already gone some way to position as a channel to Indian funds. According to Satwalekar, the number of Luxembourg-based foreign portfolio investment firms registered with the Securities and Exchange Board of India(SEBI) has risen from 100 in 2012 to 1143 in March 2020--an increase of almost 10 times.
Silvestro said that the growth of alternative investments in India was a particular opportunity.
“There are so many unicorns (start-up companies with a value of over $1bn) in India, so many PE and VC opportunities. To channel investments into India, I suggest to Indian clients to leverage the Alternative Investment Fund Managers’ Directive.”
He explains that Luxembourg’s specialist Reserved Alternative Investment Fund can be set up in four to six weeks enabling Indian fund managers to raise money in Europe.
“European investors have big appetite for Asian PE,” said Silvestro.
Luxembourg’s role in India
As well as it’s supportive fund regime, Luxembourg is known internationally for its investor protection, said Silvestro. Investing through Luxembourg-based vehicles, as much as anything, will help grow investor confidence in India.
According to Satwalekar, India plans to issue $2bn of sovereign green funds in the current fiscal year, dual listing on international stock exchanges.
“Dual listing will provide international investor access to Indian green corporates,” he said.
Anand Pattabiraman, an asset management industry adviser based in Luxembourg, pointed out that India’s mutual funds industry alone has grown fivefold in the last 10 years, while Luxembourg is the second-largest investment fund centre with 57% share of global cross-border funds that can channel investment into India.
“There’s an opportunity for global investors to participate in a growth story that rivals that of Japan in the 1960s and 1980s and China in the early part of this century,” said Shah.