Scrutiny of old M&A deals unfortunate: HDFC's Deepak Parekh

Below is the transcript of the exclusive interview.

Q: You recently told that you were beginning to see confidence return in the economy. Now we have this news of some preliminary enquires against the Vedanta Group for a deal done 12 years ago when they bought a stake in Hindustan Zinc on a government divestment. Perhaps we will also see power companies under investigation by the new government in Delhi. Are you getting a sense that the economic green shoots will grow or do you think all this could postpone capex?

A: I think these developments are certainly not good for the Indian industry and for getting fresh investments be it from domestic or foreign [companies].

Even the Karnataka court case nullifying the Diageo acquisition of United Spirits or Etihad getting into trouble -- regulatory bodies cleared these proposals after looking at them.

I am a bit conflicted over commenting on Hindustan Zinc case because I have just joined the Vedanta board as an independent director. I don't know what had happened at that time but this is not good for the Indian industry, if old cases where approvals were received are reopened.

I can understand if approvals were not received but everyone has looked at these cases be it the Foreign Investment Promotion Board or Competition Commission of India or Securities and Exchange Board of India. Reopening such cases just shatters confidence. No one will invest in India.

Q: We are about to step into the New Year. What do you see if you have to do some crystal ball-gazing?

A: I think the worst is over. We are all hopeful of a better 2014. You will see bumper agricultural growth, which will kick-start the economy.

But our systems and procedure must improve. Doing business in India is extremely tough. Ease of doing business must improve, approvals have to be given in entirety rather than individually.

People are losing patience and investors definitely don't have patience to wait for years to start a project. But I see the worst is over, we can probably inch up to 5.5-6 percent GDP growth rate in the next year driven by agriculture.

The service industry, which has slowed down a bit has again picked up. The financial sector, the IT, the back office, these industries are doing well. Tourism may have been impacted a bit because of the global slowdown but services sector will deliver 8 percent growth rate in the current year.

Q: [On the HDFC MF buyout] what was the thinking behind buying Morgan Stanley funds?

A: It was a small fund. We were approached by Morgan Stanley. It was the first MF after UTI in 1994 and there are 44 mutual funds India with AuM of Rs 500 crore to Rs 1.2 lakh crore running hundreds of schemes in India. I don't think we need so many mutual funds.

There has to be consolidation in this space and Morgan Stanley being such a large global corporation managing a Rs 3,300 crore fund did not make sense. So they approached us directly and we concluded the transaction in a very short time.

Q: We have seen a couple of other foreign funds also move out: Daiwa sold off to SBI MF, Fidelity got bought by L&T AMC. What is disappointing the foreign MFs in India, you think they are losing patience?

A: Their brands are not that well-known in India. The same foreign funds whether it is Fidelity or Morgan Stanley or Daiwa, they manage billions of dollars outside India and they also have global India funds, global emerging market funds but their Indian operations haven't grown because the Indian brand names like UTI, ICICI, HDFC are much more popular and well known to the Indian public particularly in tier II, tier III cities where we do get some money from.

So this is one of the main reasons why I think the foreign firms are deciding that it doesn’t make sense for them to run very tiny operations.

Q: You expect them to return if the markets were to get robust?

A: They will have global funds investing in India, but I don't think they can start local funds. Over 50 percent assets in the Rs 8 lakh crore industry is managed by five companies and they are all Indian brands like Birla, UTI, Reliance, HDFC, ICICI.

So the scope for foreign funds to grow in India is very limited. They all have tried -- massive advertising, distribution network is required and it is far better for them [to wind up] instead of running small unviable unprofitable operations. I believe Morgan Stanley never made any money in India.

Q: You said consolidation is the way to go in the MF industry. Have you been approached by few other MFs for you to go ahead and buy them?

A: No. This is the one which we got a month ago. That is it.