Scuttling of the $2.8 billion power project in India's Maharashtra state - which would have been the largest foreign investment in India so far - was a blow to companies and funds considering direct investments in India. But for the stock market, it apparently blew through quickly, like a fast-moving thunderstorm.
The cancellation of the power plant - which was to be built by a consortium of Enron Corp., Houston; Bechtel Enterprises Inc., San Francisco; and General Electric Capital Corp., Stamford, Conn. - "is already making it more difficult for us to raise money (for India) in that when the government of India backtracks on commitments to a multinational investor, other investors are going to be more hesitant," acknowledged Philip Stephenson, president of International Equity Partners L.P., Washington. The firm is seeking investors for its private equity fund for India.
Mr. Stephenson said that although the fund has already landed some $38 million of commitments - including money from the IFC and the government of Singapore - "some investors have already called back asking questions" about the cancellation of the plant and potential investors are now more reticent.
HSBC Private Equity Management Mauritius Ltd. recently began marketing its private equity fund for India and South Asia. Alex Hambly, deputy representative in the firm's New Dehli liaison office, concedes "we would be foolish to think that there wouldn't be any" fallout from the power plan cancellation. "Of course there have got to be questions about this in the market. But no one is going to make us change our mind about, or attitude toward, raising this fund" for between $50 million and $100 million, said Mr. Hambly.
"From our perspective, we carry the Hongkong Bank name; we have been here since 1853 and survived crises worse than Enron's," said Mr. Hambly. What's more, HSBC's investment style will differ from Enron's in that "we will be making low-profile investments in the commercial sector - instead of government -and striking deals with smaller companies with a .*.*. family who owns a business, not with the governmental sector where people come and go," he added.
International Equity Partners' Mr. Stephenson acknowledges the power plant cancellation "is bad for India and will hurt the inflow of foreign investments. But it won't stop them. And there are still good opportunities to be had in Indian business that are not so capital intensive or as highly regulated" as Enron's would have been, he said.
He said his firm's expected $50 million India fund will continue as planned. "Our fund is designed to make $1 million to $5 million investments in existing, profit-making businesses, privately held companies that are a couple of years away from going public. It won't be investing in billion-dollar projects like Enron's, where the public bears the brunt of rate costs."
But to some portfolio investors, the power plant fiasco wasn't as much of a stock market issue as are concerns about local interest rates, the extent of the monsoon, and next year's national elections. These issues more directly affect local Indian companies.
Adrian Mowat, a director of Martin Currie Investment Management in Edinburgh, Scotland, said that firm has been in the process of increasing its weighting to India.
"We were somewhat disappointed that the (power plant cancellation) didn't generate more of a buying opportunity," he said.
On prospective earnings, "the market is trading at (a price-earnings ratio) of 12 to 13, making it one of the cheapest markets in the world," he explains.
Jeff Chowdhry, manager of the Indian Investment Co., a fund sponsored by Foreign & Colonial Emerging Markets Ltd. London, is attracted to the India market. "Liquidity in the market has started to improve, and we expect interest rates to fall in the fourth quarter." He said the power plant cancellation had limited impact on the local stock market, where prices "had been improving."
Manish Modi, Indian equities analyst with the Pioneer Group in Boston, said the firm's open-ended Pioneer India Fund seized the opportunity to buy some India stocks - including those of The Indian Hotels Co. and Calcutta Electric and Supply Co. - which fell on news about the power project.
Of course, everyone isn't bullish on India's market. In fact, it has been among the poorer performers among emerging markets, dragged down by earlier surging interest rates. For this year, through July 28 - before news broke about the canceled power project - India's stock market in dollar terms fell 16.8%, compared with a 4.2% gain in the Asia index and a 5.5% decline in the composite index of the International Finance Corp.'s investible price index series.
The emerging markets funds of State Street Global Advisors, Boston, have no exposure to India. Joshua Feuerman, vice president, said India's market is not only difficult to penetrate but also expensive on the basis of its price-to-book ratio of about 3.2. - which is higher than 18 other emerging markets, he says.
Harsh Bansal, director of pension investments for the $7.2 billion fund of United Technologies Corp., Hartford, Conn., views the power plant fiasco as a politically driven setback. In his opinion, the project may still be revived by another Indian state or that federal government.
Mr. Bansal doubts India is again discouraging foreign investment.
All the same, his fund doesn't invest in single-country private equity vehicles for emerging markets. If it did, the Enron matter "would give us pause. It would be an additional issue to think about," Mr. Bansal concedes.