Japanese M&A interest to return strongly in 2024

Japan’s top conglomerates and investment firms are pouring money into India, putting the bad events of the past behind them. While Japan’s SoftBank has been investing in Indian startups for years, some of its biggest recent entrants have been in financial services and new-age companies, several investment bankers said.

Leading companies such as Yes Bank, Avendus Capital Financial Services and HDB Financial Services have attracted bids from major Japanese banks. Earlier this year, Mitsubishi UFJ Financial Group (MUFG), Japan’s largest financial firm, approached HDFC Bank to acquire a $2 billion stake in its subsidiary HDB Financial Services. While Mint reported on September 4 that the HDFC Bank board had decided to skip the deal, Moneycontrol reported on Monday that talks had resumed. Meanwhile, Mitsubishi UFJ Financial Group (MUFG) added an additional $334 million to its $400 million investment in digital lending company DMI Finance in August and led a $47 million funding round in wealth management firm Neo Group.

Separately, Japanese trading house Sumitomo Corp. outlined plans to invest $710 million to build renewable energy projects in India with Delhi-based Ampin Energy Transition, while its peer Marubeni Corp. ) plans to invest US$300 million in an industrial park in Uttar Pradesh. Japanese brewer Kirin Holdings has stepped up investment in craft beer maker Bira91 this year, while Japanese car companies have also stepped up investment in electric vehicles. In 2024, the government-backed India-Japan Fund (IJF) invested $Mahindra Last Mile Mobility Ltd, a subsidiary of Mahindra & Mahindra Ltd, invested Rs 400 crore.

Interest development

“This interest has grown over the past few years, with the top three Japanese banks (SMBC, MUFG and Mizuho) now making strategic investments in India through Fullerton, DMI Finance and Credit Saisson India. Additionally, both MUFG and SMBC are actively involved in Indian startups Minority investments in the corporate ecosystem, as are most large Japanese trading companies,” said Klaas Oskam, chief executive of DC Advisory, an investment bank affiliated with Japan’s Daiwa Securities.

Oskarm added that Japanese companies have shown greater interest and intent in Indian deals this year, although some of these deals have yet to materialize. Like other countries, Oskam explained that several Japanese companies are also interested in increasing their production base and entering other high-growth markets in Asia, such as India, which is increasingly becoming a strategic focus for many large multinationals given its size. and growth trajectory. For example, Toyota said in August it would build an electric car factory in India.

“These investments usually come from the balance sheet, so they are long-term investments in nature,” said Bhavik Hathi, managing director at Alvarez and Marsal, adding that India has also become Japan after China became less attractive The destination of the business. Other experts say it also reduces risks from China.

Additionally, domestic M&A in Japan also hit a record high in 2024 due to increased demand for shareholder returns and returns on equity, DC Advisory’s Oskam said. He added that Japanese companies prefer to divest non-core assets to private equity firms, dismantle the cross-shareholdings Japan is historically known for and strengthen market segments considered core.

Alvarez’s Harty added: “There is plenty of money waiting to be invested in Japan, and companies are looking abroad for investment opportunities given the low return on capital there.”

In addition to SoftBank Holdings’ continued interest in Indian technology companies over the past few years, both countries also have government-backed sovereign funds keen to invest further in India.

scars from past battles

Much of Japan’s recent interest has come from large trading companies and banks, while smaller businesses remain cautious.

Rishabh Shroff, partner at Cyril Amarchand Mangaldas, noted that there has been an increase in disputes between Indian partners and foreign investors, especially Japanese companies. Many Japanese companies now opt for arbitration, particularly through neutral institutions such as the Singapore International Arbitration Center (SIAC). “Whatever the reality of the timeline, the perception abroad remains that Indian courts are backlogged and slow,” he said.

Ashish Kabra, head of Nishith Desai Associates’ Singapore office, noted that a number of high-profile cases may have contributed to the shift in foreign investment strategies. One example is the financial fraud case at Ricoh India, where the company was found to have falsified its accounts. The scandal prompted the Securities and Exchange Board of India (Sebi) to conduct a forensic audit. Japanese parent company Ricoh Ltd eventually severed the partnership and sold its stake to a third party.

Another case mentioned by Kabra related to Tata-Docomo, which started in 2009 when NTT Docomo bought a stake in Tata Telecom Services Ltd. Docomo sought to withdraw in 2014, leading to arbitration. A London arbitration court ordered Tata Sons to pay $1.17 billion for breaching the agreement, which the company paid in 2017.

The most high-profile legal case is Daiichi Sankyo’s fraud charges against the former owners of Ranbaxy Laboratories after they bought the drugmaker in 2008 for $4.6 billion. In 2016, two years after Daiichi Sankyo sold Ranbaxy to Sun Pharma, the Japanese pharmaceutical group won a $525 million claim in a Singapore arbitration tribunal against Ranbaxy’s founder. This also scuppered subsequent deals involving other assets of the Ranbaxy Singh brothers, such as the sale of Fortis Healthcare to IHH Healthcare.

Focus on the wider existence

However, Vipin Singhal, associate director at Anand Rathi Investment Bank, said some Japanese companies and investors may still want to expand their business in areas such as semiconductors, artificial intelligence, and green and sustainable energy. He added that GIFT City also provides an attractive opportunity for Japanese companies looking to enter the Indian financial sector.

Japanese investor SoftBank Holdings’ recent exit from Indian investments such as Swiggy and First Cry may also spur follow-on investment in Japan.

There are approximately 4,000 Japanese companies in India, involved in transportation, automobiles, telecommunications and services, with plans to invest 5 trillion yen by 2027. Japan encourages many companies to set up manufacturing plants in Asian markets, especially India, and Singhal said it is one of the most lucrative options due to factors such as performance-linked incentive schemes and low wages.