Why Wilbur Ross Likes India

India's stock market has cooled down enough to suit Ross, who is buying $80 million of SpiceJet's convertible debt

By Nanette Byrnes

Two years ago, Wilbur Ross, an investor in distressed securities, set up a $300 million fund focused on India. He convinced India's Housing Development Finance Corp. (HDFC), a local giant, to partner with the fund, bringing its extensive network of local contacts and strong reputation to the venture. He staffed an office in Mumbai, run by managing director Ranjeet Nabha, a Dartmouth MBA who had been a vice-president at JPMorgan Chase (JPM) and later CEO of a software company. And then Ross proceeded to do very, very little.

Now, Ross is at last making a major move. On Aug. 11, the chairman of New York-based WL Ross & Co. announced his India fund would buy an $80 million chunk of convertible bonds issued by Indian discount airline SpiceJet (SPJT.BO). The once red-hot Indian stock market has cooled down enough to suit Ross, who made his name patching together the remnants of dying U.S. industries like textiles and steel. And several years of cutthroat competition—and more recently, record-high prices for jet fuel—have left India's nascent airline industry in particular need of help (BusinessWeek.com, 7/7/08).

More Indian investments from big-name Western investors like Ross are likely. There do still remain some industries that don't allow direct foreign investment, including retail (BusinessWeek.com, 8/13/08). However, generally over the past 15 years there has been a tremendous liberalization of such restrictions, says Deloitte consultant Ira Kalish, an expert on the Indian and Chinese markets. "Private equity and venture capital players are taking an interest in India," he says, "and I would expect to see more."

Staying Below Limits on Foreign Ownership

Like most Ross deals, this one is complicated. His firm is buying $80 million worth of SpiceJet's convertible debt, but only converting about $25 million of that into stock in order to stay below limits on foreign ownership of air carriers. At the same time, Dubai investment group Istithmar World Capital is exchanging its existing secured SpiceJet debt for $10 million in unsecured debt, freeing up cash that had been tied to that securitization. Goldman Sachs (GS) and NM Rothschild & Sons India combined to invest another $10 million.

The airline, which failed to hedge against the damaging rise in jet fuel costs and has racked up $20 million in unpaid airport fees and plane leases, needs the cash. But shoring up its day-to-day operations is just Step One for Ross, who will now join the board of directors. He sees broader promise in the chance to consolidate the industry. While Ross expects India's gross domestic product to grow at 6% to 7% a year, he thinks its large size and underdeveloped road transportation will keep demand for air travel rising at two to three times that growth rate. India's low per capita income will put discounters like SpiceJet in the best position, he says. The drop in oil prices has helped, too.

Long term, Ross is buying SpiceJet as a consolidation play, not a sole operator. "There are about a half-dozen of these low-cost carriers in India, all losing money," says Ross. "I think there's room for maybe two.