LP Connect

Ajay, welcome to India; you have very recently moved to Mumbai from Washington to head up DFC here in India. Let me start by asking you for a quick macro overview of DFC presence in India/ South Asia and your top three priorities in terms of investing into the region.

Thank you, I am very happy to be here. DFC has been investing in India for several decades. Since 1974 DFC (under its predecessor agency, Overseas Private Investment Corporation) has provided support to over 200 projects in India in the form of loans, investment funds, and political risk insurance. As of September 2020 DFC’s current outstanding portfolio in India comprises more than $2.6 billion, across 50 projects. These commitments are concentrated in renewable energy, financial services (including microfinance), and impact investments that include agribusiness and healthcare. The Better Utilization of Investments Leading to Development (BUILD) Act of 2018, that created the DFC, not only doubled available funding worldwide to $60 billion, but also created new capabilities that could expand opportunities for investment, such as equity investments, grants, feasibility studies, and technical assistance for proposed projects. We’re currently in discussions with partners about what is needed to make these potential new investments possible. As for top three priorities, DFC is interested in expanding to lower-income states, especially in the Northeast, investing in infrastructure and supporting Indian private sector investment in the greater South Asia region.

We would love to hear about your new global initiative PI2 or Portfolio for Impact and Innovation ? How is this relevant for the region, and particularly for a country like India?

The Portfolio for Impact & Innovation (“PI2”) provides financing for innovative, early stage social enterprises and financial intermediaries with high social and development impact potential. Under PI2 DFC can provide loans up to $10 million for a max of 10 years to companies that meet the initial threshold requirements of $1 million in assets or revenues and have shareholding from impact oriented investors. India is a social impact engine. With the potential to start and scale innovative companies, India’s social enterprises have the potential to develop solutions for similar development challenges in other emerging and frontier markets.

In June this year, the DFC Board approved $1 billion of investments to advance development in Africa, Latin America, the Indo-Pacific, and emerging markets across the globe. Media sources reported that the Bank is looking to invest ~$300Mn out of the above commitment in India alone? Could you share some details about the investment strategy, plans and focus sectors?

We topped our expectations. In FY 2020 alone, DFC invested $500 million across 11 projects. These included transactions in renewable energy, agriculture and specialized Non-Bank Finance Company’s focused on lending for women’s economic empowerment, WASH and to small-holder farmers, farmer producing organizations.

We have also seen substantial interest from DFC on growth-debt support side in recent months ? can you share some perspective on your interest in the debt financing for India’s impact enterprises ?

DFC provides financing for impact enterprises where we see the potential to scale and increase developmental impact. Financial institutions may have certain restrictions on perceived riskier transactions. We see companies that have raised multiple rounds of equity and do not wish to further dilute shareholder positions. If a company has good governance, a solid investor base and growing fundamentals, DFC can provide debt at substantial levels to allow the company to scale for the medium and long-term with 5-10 year tenors.

What would you identify as key factors which make India a lucrative market to invest compared to other emerging markets, and what should India learn to do better from other emerging economies?

Foremost, India has driven human capital. There is a plethora of highly-educated talent in this country eager and excited to be entrepreneurial. In addition, this talent wants to make a difference in solving critical issues in the country’s development. The sheer size of the population allows ideas to come to scale quickly and put large investments of capital to work. I also see a growing consciousness on governance and integrity as DFC invests in companies that are independently governed and professionally managed. Other emerging markets have put less bureaucratic restrictions on foreign direct investment for both debt and equity. From the lender’s perspective, other emerging markets have decreased the time it takes to recover funds from an insolvent business.

From an international investor perspective, what do you see as key friction points as far as investing in India is concerned?

Any requirement for government approval of investment, such as the restrictions in the External Commercial Borrowing requirements, whether for equity or debt restricts the flow of capital for Indian businesses. Some specific friction points include limited access to the Indian market for certain U.S. goods and services, high tariffs, restrictions on the free flow of data, and an unpredictable regulatory environment for investors. We would like to see a regulatory climate in India that is more predictable, more stable, and with a lighter touch on regulation. However, we were pleased to see the liberalization of the External Commercial Borrowing requirements, including the speed of approval, but would support further easing restrictions on all-in cost and minimum average maturity requirements. Lastly, the DFC requires India to conclude the updated Investment Incentive Agreement in order to make equity investments directly in the country.

DFC’s ‘Roadmap for Impact’ lists greater ‘women economic empowerment’ as an important development agenda. Could you tell us more about DFC’s 2X Women’s Initiative and how you incorporate a gender lens throughout the investment process? Any India specific nuances?

Investing in women is a strategic priority for us. DFC’s 2X Women’s Initiative is committed to addressing the unique challenges women face globally and unlocking the multi-trillion dollar opportunity they represent. Through 2X, DFC has catalyzed more than $3 billion of investment in projects that are owned by women, led by women, or provide a product or service that empowers women. In India we are investing in financial institutions with strong female management such as Northern Arc, Kinara Capital and Aviom. With INI Farms, a fruit distribution company the DFC supports a company with a female CEO and who employs a primarily female workforce in rural India. With Sitara (SEWA Grih Rin), DFC supports an Indian housing finance company that provides micro-housing loans to low-income women borrowers. In DFC’s support to Chennai based Be Well Hospitals, we have provided long-term debt financing to a hospital network with significant-level of female management and staff.

DFC uses a unique performance measurement tool ‘IQ – Impact Quotient’ to measure, monitor and evaluate a project’s development impact. Could you shed some light on DFC’s rating framework to track impact performance? What parameters should an investee meet to fall under the ‘highly developmental’ category?

DFC is committed to supporting projects that deliver impactful benefits to people across developing countries. To better evaluate the development potential of a project, the agency designed Impact Quotient (IQ), a modernized tool that measures impact throughout the life of the project. Projects are scored based on their impacts across three key themes: growth, inclusion and innovation. IQ scores are adjusted to account for potential negative environmental, social, or development risks. DFC conducts a combination of borrower-self reporting along parameters chosen by our team of economists to evaluate the developmental impacts specific to the borrower and the project. DFC teams monitor projects’ progress to achieving their development objectives and conduct evaluations to glean lessons to be learned.