2024 India Healthcare and Lifesciences Investment Heatmap

2024 India Healthcare and Lifesciences Investment Heatmap

In 2024, the world will be as uncertain, if not more, as it was and anticipating what will happen next is an ever more challenging task for our Algorithms and our teams. Since 2013, our algorithms have been accurately predicting the investment heatmap in the healthcare and life sciences in India which were predicting with 95% accuracy on the sectoral investment cycle in India till the end of 2019. Since the Covid Pandemic in 2020 we lowered levels of prediction accuracy like we started back in 2013. The fake narratives and echo chambers that were peddled during the pandemic years of 2020-22, that vitiated our predictions during the pandemic years continues in for some other factors. 2023 was even more unpredictable in many ways. Our algos do not penetrate the terrorists, government intelligence and security networks and hence unable to consider events that playouts in the Middle East and impacting geopolitics, investments in Indian Healthcare and Life Sciences to some part of the investment flows from offshore. Hence, we have made attempts to analyse International ‘Geo Politics’ as a separate factor and bolt-on-top of our algo predictive models to adjust our heat map for 2024 to accurately predict whether the heat is on in our 2024 Heat Map.

2024: A Year of Geopolitics than Geo Economics

The biggest political event in India in 2024 will be the Lok Sabha General Elections. Hence H1 2024 will not see any major policy or budgetary directions to the sector till the new Government takes over in New Delhi by June 2024 and then presents its budget. For the first time, in the post pandemic era, almost all global funds, analysts and bankers have a unanimous consensus on India’s positive outlook for 2024, some even covering India as a separate chapter in their reports which was dedicated to China in their Asia Outlook till 2022. However, healthcare and life sciences sub sectors in India have its divergence to the overall India outlook for 2024. We have endeavored to bring out the deeper analysis and specifics out of the broad ‘India Positive’ Outlook for 2024 for the Healthcare and Life Sciences Sector in India.

The wave of optimism for 2024 in Indian healthcare and life sciences stems from the following:

  • The pace of digitization is now veering toward mainstream adoption of Generative Artificial Intelligence (AI) tools and solutions across that are being piloted.
  • New business models/incubation for investments are emerging (see out Future Bets in Healthcare) that will be cross-domain
  • The bills and laws introduced in the Parliament in the Session New Healthcare Bills 2023 Archives | Kapil Khandelwal KK are yet to shape bounce in investments.
  • Muted returns in the private markets will continue in 2024 as the winter of private investments continues in 2024. Let us understand that the best investments tend to occur during times when investment outlooks appear riskier, so the lower prices in many kinds of equity investments might well yield attractive returns over time.
  • Companies listed on the bourses have always underperformed the broader index in the last 2 general elections of 2014 and 2019 by -4.5 to -6.5%. We are expecting the elections results to be neutral this time on the Indian bourses. A few big names to IPO in 2024.
  • With one-third of India’s population now constituting Gen Alpha and Gen Z, the health and wellness aspirations of this cohort is the growing aspirational class that wants to live life post Covid-19 differently and different products and services will serve as the next growth opportunity.
  • The valuations have come back to realistic levels to the pre-covid levels for primary and secondary investments.
  • Debt and equity requirements have stabilised as the cash-crunch situation during the pandemic have ‘normalised’ and so are the return expectations. Both are negatively correlated with yields globally. In other words, investments in equity and its returns will tend to outperform the market, as yields decline.
  • As new Generative AI capabilities emerge, the investments in human capital for newer skills are emerging. Also, newer models of ‘sweat’ equity/debt are emerging.
  • Investments in newer health and wellness solutions to weather climate change are getting exciting. (see out Future Bets in Healthcare).
  • M&A and buyouts are expected to continue, but lower from the peak of 2022.
  • How India plays its geopolitics will also determine the quality and quantum of foreign investments in India in the various sub sectors.

The 2024 India Healthcare and Life Sciences Investment Heat Map is as under:

Healthcare Financing

Newer products for financing healthy lifestyle for the Gen Alpha and Gen Z are emerging. Financing ‘idleness’ and healthy entertainment lifestyle through innovative business models are the key. There is a consumer shift for spending on healthy lifestyle which is a personal investment in longevity of healthy life.

  • 2024 Outlook: Moderate
  • What’s going wrong: slower market/product innovation, right bite for the consumers, reach and penetration to New Gen consumers, financing costs
  • What’s going right: India stack digitisation, uberisation, AI solutions

Medical Education

Valuations are correcting and consolidation activity is accelerating. New regulatory regime will come into force and will require investments in managing the delivery and quality of content. New skills for the new AI tools and newer consumer’s requirements needs is accelerating but not in the curriculum.

  • Outlook: Moderate
  • What’s going wrong: Alignment to new consumers and care, increasing debt burden, new age skills certification, CME with AI-tools
  • What’s going right: Skill-mix churn, upgradation of skills, AI for frontline workers

Med Tech Innovation and Life Sciences Discovery and Clinical Development

Capacity creation and new product development continues as India is now into the China+1 club. Expect a few IPOs this year in this sector. Government grant funding will temper down. Geo polities is a key risk to create supply chain disruptions.

  • 2024 Outlook: Hot
  • What’s going wrong: IP regulation, regulatory bottlenecks on clinical development, newer skill sets for research and acceleration, PLI policy for sub sector, geo politics, supply chain disruptions
  • What’s going right: Human capital, emerging social innovation models, right products selection, market appropriate solution development, peptide based products, chronic diseases product innovation for co morbidities

Pharma and Therapeutic Solutions

Geo politics may affect supply chain and missed topline and profitability estimates. Cost competitiveness like Chinese players to compete globally is the key for growth. Expect a few IPOs, buyouts and exits via secondary sale.

  • 2024 Outlook: Moderate
  • What’s going wrong: price controls, wrong product portfolio, capacity scale up, global or China-level cost competitiveness, exit of PLI incentives, shortage of skilled workforce
  • What’s going right: distribution infrastructure, digital business models, government incentive programs

Healthcare Providers

High levels of leverage is still a concern. Private equity investments slowing down due to valuation expectations. Expect a few IPOs, buyouts and exits via secondary sale. Capacity creation is slowed down due to fund crunch.

  • 2024 Outlook: Moderate
  • What’s going wrong: margin pressures, price controls, execution of programs on the ground, supply and demand mismatch in micromarkets, debt financing costs, gun powder churn, operating cash runway, liquidity and working capital crunch, not exploring newer formats
  • What’s going right: asset-lite models, medical tourism

Healthcare Insurance

Loss ratios and profitability is slowing improving as pricing and products are rationalized. Expect two IPOs of two major players. New products innovation for newer consumer’s requirements is lagging.

  • 2024 Outlook: Hot
  • What’s going wrong: product fit to consumer needs, product approvals, IPOs pricing and valuation
  • What’s going right: Consumer demand, reduced loss ratios

Health Retail

The Pharmacy Bill 2023 brings its own set of challenges. AI pilots once mainstream will reduce costs and margin pressure albeit very slowly. The valuation is still a challenge for raising fund and buy-outs, secondary exits. Expect an IPO.

  • 2024 Outlook: Hot
  • What’s going wrong: regulation, operating margins, spurious social media channels affecting consumer confidence, health UPI, time to scale
  • What’s going right: consolidation, newer cross-vertical innovative business models, profitability focus, AI adoption and models

Wellness

2021 was the highest growth year in the last 10 years on the back of discretionary consumer spending on wellness. Digital business model innovation is still lagging. Medical wellness tourism will be recover in Q3 of 2022. M&A activity and consolidation to continue in 2022 but at a slower pace. Corporate Wellness spends to continue to fuel growth in 2022

  • 2024 Outlook: Very Hot
  • What’s going wrong: regulation, maturity to scale, new mass market business models, repeat sales, spurious social media channels, fake outcome/claims
  • What’s going right: newer cross-vertical innovative business models, corporate wellness spending

Alternative Therapies

New Gen consumers are seeking unique experiences and combing with mental health and rejuvenation as their discretionary spends are increasing.      

  • 2024 Outlook: Very Hot
  • What’s going wrong: maturity to scale, consumer education and confidence, clinical research, new product development, inflated valuation, new mass market business models, repeat sales, spurious social media channels, fake outcome/claims
  • What’s going right: discretionary consumer spending, newer cross-vertical innovative business models, mainstream complementary treatment

Moving Forward

As one iconic smart investor said that one should be investing in healthcare and life sciences because you believe smart investing will yield results that are beneficial for society, not just to enrich oneself.

Happy investing and stay strong!

Also Published in Express Pharma February 2024

https://www.expresspharma.in/express-pharma-february-2024/

2023 India Healthcare and Lifesciences Investment Outlook

2023 India Healthcare and Lifesciences Investment Outlook

Since 2013 our algos have been accurately predicting the investment heatmap in the healthcare and life sciences in India which were predicting with 95% accuracy on the sectoral investment cycle in India till the end of 2019. Since the Covid Pandemic in 2020 we lowered levels of prediction accuracy like we started back in 2013. Covid-19 pandemic killed over 23 million people globally. 2022 has brought new headwinds, some we haven’t seen in over 40 years. Healthcare spending will fall in 2023 in real terms, given high inflation and slow economic growth, forcing difficult decisions on how to provide care. Digitalisation of the healthcare system will continue, but the use of health data will come under stricter regulation. A New world order under the current geo politics fragmentation and multilateral world is bringing India to the forefront. It’s vaccine diplomacy, effective and cost-effective therapeutic solutions is a game changer for India.   

2023: A Year of Newer Normal

Since the Great Chinese famine of 1959, for the first-time life expectancy as per UN, Covid-19 had been cut by 1.7 years off global life expectancy, reducing it to 71.1 years. While a recovery probably began in 2022, the UN calculates that 2023 will be the year when life expectancy first exceeds 2019 levels. The investment thesis with most of the investment managers in the current scenario is more of a long view on healthcare infra which are less tied to economic cycles and an imminent slow down globally. Some of the investment risks the healthcare and lifesciences sector faces include rising real interest rates, increasing price inflation for healthcare products and services in the face of weakening in consumer spending, reshoring the supply chains and the wars, both trade and terriotorial. Digital businesses are equally going to be impacted. ESG and impact funding is waiting for deployment.

2023 India Healthcare and Lifesciences Investment Outlook
2023 India Healthcare and Lifesciences Investment Outlook

Let’s relook at the board trends for 2023 in terms investment activity and trends.

Healthcare Financing

2021 was an all time-high for healthcare financing sector due to emergency and non-discretionary spend on healthcare. Health Tourism related funding is only going to take off in Q3 after the current wave tides down. Consolidation activity to slow down.

2023 Outlook: Moderate

  • What’s going wrong: right bite for the consumers, reach and penetration, higher debt financing costs, slower non-discretionary and elective healthcare spend, delaying of healthcare spend and health tourism, new wave restrictions, shortage of digital workforce
  • What’s going right: India stack digitisation, agetech, consumer borrowing to spend on electives

Medical Education

Skilled manpower shortages is the key driver for growth. All the students who have returned back from Ukraine need to be accommodate in our current system Regulatory reforms are urgently required to push digitization and newer business models for upskilling existing workforce. Churn in ownership of assets due to consolidation activity will continues at a faster pace.

2023 Outlook: Moderate

  • What’s going wrong: regulation, corruption, no vision, skill shortages, alignment to new age care, increasing debt burden
  • What’s going right: skill demand, digitisation, manpower-led business models creating their own content or tying up with larger established players, cross-border students coming to India, export of clinical manpower to the West     

Med Tech Innovation and Life Sciences Discovery and Clinical Development

India has proven to be the vaccine supplier to the world in 2022 with over forty percent of the world’s pre-qualified vaccine products are made in India. Capacity creation and new product development need to be accelerated particularly in infectious diseases and some niche segments. Reshoring and government policies for that need to be accelerated. Global investment and partnerships is on the rise in 2023. Patent expiry of some of the blockbusters in the US are a huge opportunity.

2023 Outlook: Moderate

  • What’s going wrong: Innovation pipeline, IP regulation, regulatory bottlenecks on clinical development, newer skill sets for research and acceleration, global collaboration and partnerships
  • What’s going right: Human capital, cost advantage, reshoring the supply chain, Make in India

Pharma and Therapeutic Solutions

Several players are going to go for the IPOs in 2023. Reshoring the supply chain is moving slowly. The Government production linked incentive is not moving as intended in the medtech, intermediates, APIs. The capital expenditure in creating world-class green infra is still to take off.

2023 Outlook: Hot

  • What’s going wrong: price controls, policy log jam, innovation and scale up, cost competitiveness, exit of PLI incentives, scale of capex, Margins pressure, IPO valuation
  • What’s going right: cost advantage, distribution infrastructure, Government incentive programs, blockbuster going off patent in the US, ESG funding entry

Healthcare Providers

2022 was a negative year for almost all the listed stocks. With higher interest rates, funding costs for have increased. Inputs such as steel, cement, etc, have also shot up increasing the capex per bed. Newer sources of funding green healthcare infra as a long-term bet which are less tied to economic cycles is emerging. Digitalisation will slow down even further as consumers go back to the old ways. Costs and profitability pressure will increase to maintain the investor interest. PE valuations will continue to get right adjusted to market valuation.  

2023 Outlook: Moderate

  • What’s going wrong: margin pressures, price controls, execution of programs on the ground, PPP in healthcare, supply and demand mismatch in micromarkets, debt financing costs, gun powder churn, operating cash runway, liquidity and working capital crunch
  • What’s going right: Asset-lite models, demographics

Healthcare Insurance

The IPOs in 2021 in the sector have created uncertainty in valuation and investor sentiment. The sector will continue to grow as it did in 2022. New products and customer segmentation is going to be the growth drivers

2023 Outlook: Hot

  • What’s going wrong: product fit to consumer needs, product approvals, loss ratios, operating cash runway, human capital reduction, consumer offtake and demand, IPOs pricing and valuation
  • What’s going right: Consumer demand, digitisation, new products

Health Retail

Spends on healthcare are slowing down and so is the discretionary spend. Falling service levels and consumer trusts is at an all-time high. Costs and margin pressures is going to be more acute. Only one major IPO expected in 2023. Many of the late stage start-up are going to scale down or not raise the capital at the expected valuations.

2023 Outlook: Moderate

  • What’s going wrong: regulation, consolidation, slower consumer spending, funding drying up, operating cash runway,
  • What’s going right: Consolidation, newer cross-vertical innovative business models, profitability focus and valuation being right adjusted

Wellness

Growth which tapered down in 2022 is still going to be sluggish in 2023 as consumers cut back their spends. Digital business model innovation is still lagging behind. Medical wellness tourism will be recover in Q3 of 2023. Corporate Wellness spends which also scale down even further. PE funding is going to slow down even further as valuations squeeze even downwards with margin pressure. Expect one major IPO here.

2023 Outlook: Hot

  • What’s going wrong: regulation, maturity to scale, down round valuations, slowing of wellness spends, manpower and cost pressures
  • What’s going right: newer cross-vertical innovative business models,

Alternative Therapies

Growth and new customer acquisition is the new mantra in 2023 as consumer spending decelerates further. New products and therapies that have accessed funding in 2021are going to find it difficult to raise at the expected valuation. Large MNCs are also entering in this space to fight for the consumer’s mindshare. Funding crunch is going affect growth. Expect an IPO. Some of the players may scale down or shut down due to funding. Consolidation activity will increase.

2023 Outlook: Hot

  • What’s going wrong: maturity to scale, consumer education and confidence, clinical research, new product development, growth, funding crunch,
  • What’s going right: discretionary consumer spending, newer cross-vertical innovative business models, mainstream complementary treatment.

Let’s wish that we focus on building trust in healthcare for the consumers in 2023 and there is peace across for the world to come out of recessionary trend that would boost the investor confidence across.

Happy investing and stay safe!

Also Listen:

 

Budget 2022: When is Healthcare’s Amrit Kaal Coming?

Budget 2022

Preamble

On 1 February 2022, our Hon. Finance Minister presented her fourth budget in the Parliament and introduced the “Amrit Kaal” in Point 4 of her speech, “we are marking Azadi ka Amrit Mahotsav, and have entered into Amrit Kaal, the 25-year-long leadup to India@100. Hon’ble Prime Minister in his Independence Day address had set-out the vision for India@100.”

Point 5 of the Budget Speech outlined the vision for Amrit Kaal, “By achieving certain goals during the Amrit Kaal, the government aims to attain the vision. They are:

  • Complementing the macro-economic level growth focus with a micro-economic level all-inclusive welfare focus,
  • Promoting digital economy & fintech, technology enabled development, energy transition, and climate action, and
  • Relying on virtuous cycle starting from private investment with public capital investment helping to crowd-in private investment.

The Finance Minister has envisioned to develop ‘sunrise opportunities’ such as artificial intelligence, genomics, and pharmaceuticals to assist sustainable development and modernise the country. However, this is more on the supply side industrial development. But the core issue of healthcare infrastructure is not addressed. Envisioning the Indian population which we would like to be a healthy one by 2047 when we enter India@100. I believe that Budget 2022 missed out a huge opportunity in envisioning Healthcare 2047! Here are my reasons.

Current Undergoing Transformation in Healthcare

The country has undergone a tough time during the pandemic. The Government has played its enabling role in ensuring the supply chain disruptions with China does not lead into a health crisis of sorts. On the other hand, the funding of Covid-Vaccine and immunization has ensured that the country emerges quickly into an endemic phase of Covid pandemic. While this was going on, there was strengthening and upgrade of the digital health infrastructure. The pandemic has also taught lessons to the private healthcare delivery ecosystem to restructure their business models and ensure that there is a push toward lower costs healthcare delivery models. These transformations have demonstrated India’s resilience in its healthcare systems to face emergency situations like the current pandemic.  

India’s Amrit Kaal’s Population Demographics

As the chart below demonstrates that India’s population by 2047 will be shifting towards middle age bulge. Over 300 million (~19% of the total population) will be senior citizens by 2047. Our dependency ratio will be around 40%. These 40% will be in the tax paying bracket which will provide the then Finance Minister in 2047 the revenues to spend for different welfare programs including healthcare.

India's Population Pyramid Shifts to 2047
India’s Population Pyramid Shifts to 2047

Lessons from Elsewhere in the World

In early 2000, I was involved in restructuring the healthcare systems of Saudi Aramco. Being the largest oil producer in the world, the company had been underfunding the pension and healthcare benefits of their employees who were going to be retiring in the future. The financing of these healthcare benefits created a financial crisis of sorts which have to be funded.

USA has also being facing such challenges when its baby boomers have now become unproductive senior citizens and their total healthcare bill is currently 18% of their GDP.

Vision for India’s Amrit Kaal Healthcare Delivery to Avoid Maha Kaal

As per current estimates, our country requires USD 400 billion of investments in healthcare infrastructure on our current demography to meet the global norms. There are no allocation in the current National Infrastructure Pipeline (NIP) funding for healthcare. Therefore much of the investment will be private sector driven in the future for healthcare infrastructure.

Such experiences elsewhere in the world remind me that our Amrit Kaal in 2047 does not end up as Maha Kaal of our Amrit Kaal where we would have to look up to Indian Gods who were invoked to end the situation. There have been several demands in the last few budget to accord infrastructure status to the healthcare industry. The current budgetary allocations to healthcare all though increasing has not been sufficient to build capital formation for healthcare infrastructure in the country. From the current 2.5% of GDP, there needs to broaden the spend on healthcare. We need the real picture of the input and outputs in healthcare. With the current GST regime of zero tax on healthcare services, we are not able to gather the real value of healthcare in the country and healthcare should be under minimum GST slab so that there is pass through benefits of the inputs that are set off. This will lead to a lot of transparency and provide real hard estimates of healthcare spend of the country.

Assuming by 2047 our dependency ratio will be lower than today. Which means that the total taxpaying population in 2047 may be same as today or even lower. There needs to be a plan to ensure that current taxes from the current population who will become senior citizens by 2047 will be underfunded like in the examples that I have mentioned below, leading into a budgetary crisis.

In all earnest, given the current constraints the current budget 2022 could do so much for healthcare. But now that the Amrit Kaal is out of the bag, there needs adequate focus to healthcare to avoid healthcare Maha Kaal in 2047 when we enter India@100.

2022: Healthcare and Life Sciences Investment Outlook

2022: Healthcare and Life Sciences Investment Outlook

Since 2013 our algos have been accurately predicting the investment heatmap in the healthcare and life sciences in India which were predicting with 95% accuracy on the sectoral investment cycle in India till the end of 2019. Since the Covid Pandemic in 2020 we lowered levels of prediction accuracy like we started back in 2013. While we worked on the Heat Map for 2022, we realized that every new wave of Covid is like a black swan event and raises the uncertainty and reduces the accuracy of the predictions with a reset. For 2021, we released two sets of heat maps, one for the healthcare and life sciences sub sectors and another for the States. Since the Central Government took the mantle of immunization, the need for updating state-wise heat map for 2022 is not relevant and not much data is being updated except for the electioneering noise and promises by political parties and immunization achieved.

2022: A Year of Consolidation and Tempering Expectations

2021 was the record year since 2013 when we started tracking the healthcare and lifesciences investments. The investments across the board was the highest, with the maximum number of IPOs and M&A activity, with over USD 2.2 Bn in funding across all the sectors in 2021. Some of the investment activity we predicted for 2022 preponed to 2021 due to positive investor and market sentiments and uncertainty of the future waves of Covid. Therefore, 2022 is a year of consolidation and tempering the tempo of investments.  

2022 Outlook
2022 India Healthcare and Life Sciences Investment Heat Map

 Let’s relook at the board trends for 2022 in terms investment activity and trends.

Healthcare Financing

2021 was an all time-high for healthcare financing sector. However, recent clamp down of Chinese funded consumer financing fintechs is going to temper down the healthcare financing sector. Health Tourism related funding is only going to take off in Q3. Consolidation activity to slow down.

  • 2022 Outlook: Hot
  • What’s going wrong: regulation clamp down, right bite for the consumers, reach and penetration, higher debt financing costs, slower non-discretionary and elective healthcare spend, delaying of healthcare spend and health tourism, new wave restrictions, shortage of digital workforce
  • What’s going right: India stack digitisation, consumer borrowing to spend on non-electives, immediate gratification, reduced household savings supplemented by borrowings

Medical Education

Key shortages of healthcare frontline workers was very apparent during 2021 Covid Crisis. The need for regulatory regime to upskills is still being reworked. Healthcare could be the key job creator. Regulatory reforms are urgently required to push digitization and newer business models for upskilling existing workforce. Churn in ownership of assets due to consolidation activity will continue albeit at a slower pace.

  • 2022 Outlook: Hot
  • What’s going wrong: regulation, corruption, no vision, skill shortages, alignment to new age care, increasing debt burden, new age skills certification, funding dry up
  • What’s going right: skill demand, digitisation   

Med Tech Innovation and Life Sciences Discovery and Clinical Development

India has proven to be the vaccine supplier to the world in 2022. Capacity creation and new product development will continue. Dependence on Chinese supply chain will reduce further as alternatives are developed indigenously. Expect a few IPOs this year in this sector. Government grant funding will temper down.

  • 2022 Outlook: Hot
  • What’s going wrong: innovation pipeline, IP regulation, regulatory bottlenecks on clinical development, newer skill sets for research and acceleration, Government grants and funding slow down
  • What’s going right: Human capital, cost advantage, emerging social innovation models, lower dependence on Chinese supply chain

Pharma and Therapeutic Solutions

M&A and consolidation activity was at a record high since 2016. Shortage of digital workers will slow down the digital transformation activity. As China substitution and supply chain threats mitigate, the Government will temper down their PLI support as well

  • 2022 Outlook: Hot
  • What’s going wrong: price controls, policy log jam, wrong product portfolio, innovation and scale up, global or China-level cost competitiveness, exit of PLI incentives, shortage of skilled digital workforce
  • What’s going right: cost advantage, distribution infrastructure, digital business models, Government incentive programs

Healthcare Providers

Funding costs will zoom up and will make access to long-term capital dearer. Huge churn in asset ownership and consolidation activity will continue. Digital transformation activity will slow down due to skill shortages

  • 2022 Outlook: Moderate
  • What’s going wrong: margin pressures, price controls, GST slabs rationalization on inputs, execution of programs on the ground, PPP in healthcare, supply and demand mismatch in micromarkets, debt financing costs, gun powder churn, operating cash runway, liquidity and working capital crunch
  • What’s going right: Digital business models augmentation, asset-lite models

Healthcare Insurance

The IPOs in 2021 in the sector have created uncertainty in valuation and investor sentiment. The sector will continue to grow as it did in 2021. Digital push and intermediation will be the key to growth.

  • 2022 Outlook: Hot
  • What’s going wrong: product fit to consumer needs, product approvals, loss ratios, operating cash runway, human capital reduction, consumer offtake and demand, IPOs pricing and valuation
  • What’s going right: Consumer demand, digitisation 

Health Retail

The major consolidation of the health retail after hectic M&A activity of 2021 will slow down the decibel levels of consumer discounts and offers to focus on generating healthy bottom lines. Only one major IPO expected in 2022.

  • 2022 Outlook: Moderate
  • What’s going wrong: regulation, consolidation, slower consumer spending, excess funding for GMV and operating cash runway
  • What’s going right: Consolidation, newer cross-vertical innovative business models, profitability focus

Wellness

2021 was the highest growth year in the last 10 years on the back of discretionary consumer spending on wellness. Digital business model innovation is still lagging behind. Medical wellness tourism will be recover in Q3 of 2022. M&A activity and consolidation to continue in 2022 but at a slower pace. Corporate Wellness spends to continue to fuel growth in 2022

  • 2022 Outlook: Very hot
  • What’s going wrong: regulation, maturity to scale, new mass market business models
  • What’s going right: newer cross-vertical innovative business models, corporate wellness spending

Alternative Therapies

Newer products and therapies that have accessed funding in 2021 will continue to fuel growth and investments. Adoption of alternative therapies into mainstream allopathic as complementary treatment is going to accelerate. Newer product development and business models is the key to sustained growth and success in 2022

  • 2022 Outlook: Hot
  • What’s going wrong: maturity to scale, consumer education and confidence, clinical research, new product development, inflated valuation,  over capitalization and cash burn to gain market share
  • What’s going right: discretionary consumer spending, newer cross-vertical innovative business models, mainstream complementary treatment.

Let’s wish that there are no further variants and waves in 2022 for any black swarm events for affecting investor sentiments.

Happy investing and stay safe!

Kapil Khandelwal is Managing Partner of Toro Finserve LLP, India’s First Healthcare Infrastructure Fund and Director EquNev Capital Pvt Ltd.

Our Recommendations on the Working Group Report on Inclusive Regulatory Framework for Social Stock Exchange (SSE) in India

Cover Letter to SEBI Social Stock Exchange Working Group

Shri Ishaat Hussain

Chairman, SEBI Social Stock Exchange Working Group

Plot No. C 4-A , G Block, SEBI Bhavan, Bandra Kurla Complex, Bandra East,

Mumbai – 400051

Dear Sir,

Re: Our Recommendations on the Working Group Report on Social Stock Exchange (SSE)

At the outset we would like to congratulate you and the working group and the SEBI team along with the external agencies that have worked on drafting the regulations for the SSE for the nation. We believe that a SSE would lead to widening the investor base and also bring to fore the impact investments into this country. We had been involved in discussions with SEBI even before the formation of the working group and provided inputs on what should be the nature of the regulations to guide the investments in the healthcare industry in India.

We are India’s first healthcare infrastructure fund under SEBI AIF-II regulations. We propose to list our fund as a Healthcare REIT. We have therefore focused our note on the issues with respect to healthcare only. As healthcare is a social infrastructure, we and our limited partner and investors believe that a regulation from the SSE and its inclusive definition would go a long way in bringing to the fold of the investment ambit healthcare infrastructure which is being operated under trusts and societies. In addition, we believe that the measurement of impact for healthcare is not only primary but also secondary level. As part of our note we have outlined our recommendations which would be inclusive in nature and would appreciate be considered into the working draft recommendations.

Our review and recommendations for the draft regulations are under the following heads:

  1. All encompassing definitions of operators/players in the social sector
  2. Increased definition of scope of impact which are acceptable by ESG and impact investors
  3. Sustainability and limitations of grants and aids for social projects
  4. Wider inclusion of Alternative Investment Funds (AIF) and relaxations of various limitations under SEBI AIF Regulations
  5. GST waivers and set offs for the social sector like healthcare infra
  6. Regulations for social sector ventures for social credit rating
  7. Sale and lease back for infrastructure under the trusts and societies for asset monetization
  8. Listing and trading norms for wider market participation on the SSE including market making
  9. Participation of CSR funds into healthcare infra
  10. Special purpose vehicles (SPVs) listing of healthcare PPPs with community and social impact
  11. Regulations for pivoting from for profit to not for profit and vice versa and exit for failed ventures
  12. Other regulatory issues

Further, this note may not have been possible during the times of Covid, with inputs and efforts put in by our limited partner who are multilateral agencies, impact and ESG funds, sovereign

funds and several family office investors from India and abroad. We would like to also mention the efforts of our legal counsels Khaitan & Co, Mr. Siddharth Shah, Mr. Divaspati Singh and Mr. Anindya Roy who have worked in compiling the recommendations together into this note. Along the way, I had spoken with several institutions and industry bodies, both in impact and healthcare, in the country for their views. I thank them for their candid views and observations in framing the guidance to this note.

Once again, thank you all for your time and contributions to giving this nation a strong and robust social investment regulations, guiding path and the way forward. I would appreciate if we can be given a chance to discuss the various points outlined in our note.

Awaiting your response.

Stay Safe

With Warm Regards,

Kapil Khandelwal

Toro Finserve LLP

Managing Partner

Preamble

The establishing of the Social Stock Exchange in India (SSE) is a positive step in the creation of a vibrant capital markets for the social sector. The Working Group Report published by SEBI for the public consumption and response has been reviewed by us and we offer our feedback which we have taken from our investors (some of them are impact and global multilateral funding agencies). We would like to offer our recommendations and inputs for consideration.

Healthcare in India with focus on the Charities and Impact Organisations      

India lags behind on several parameters on SGD-3. One of the reasons is the lagging investments in healthcare infrastructure and spending. On the issue of donor led spending, the participation by donors and external agencies in healthcare has increased from 0.01% of GDP in 2009 to 0.03% of GDP in 2016. The overall healthcare investments through PE/VCs in India is around USD 5.3 bn till June 2018 making it the third largest sector after ICT and BFSI sectors.

Of the total hospital beds in India, 40% of the hospital beds in India are provided by Government (and allied organisations), approximately 5% of the beds are charitable and or subsidized in medical colleges teaching hospitals. A large proportion of these charitable beds are in urban areas which are provided by for profit sector in lieu of concessional land. A recent press report stated that in Mumbai around 89% of the charitable beds earmarked for not-for-profit remained unoccupied during Covid-19.

An article publish in VC Circle by Toro Finserve LLP estimated the healthcare spend on the BoP in India which could translate through the social ventures servicing this population is estimated to be around $1 trillion by 2025 across all products and services for healthcare. The expected healthcare investments to be around $275-350 billion in infrastructure gap funding. The addressable social ventures that would qualify to be listed on the SSE would potentially deliver an annual turnover to be around $5 billion on a conservative basis.

The above estimates would remain elusive unless an inclusive regulatory framework is adopted for the social stock exchange in India and is an attractive proposition for our impact and ESG investors from abroad which is attractive for them to participate.

Over and above, the impact to SGDs and incremental social healthcare capacity creation in India, an inclusive regulation will also lead to:

  • Direct and indirect employment in the healthcare and allied infrastructure creation sector
  • Provision of long-term, perpetual capital to the healthcare infrastructure development
  • Economies of scale of many operators platforms to take them to IPOs and provide investor liquidity
  • Increased investment in newer innovation and clinical solutions to provide healthcare cheaper, better and faster
  • Adequate investment in technology to provide digital health and create smart hospitals
  • Reduced costs and improved quality of healthcare delivery to the masses without any burden on the healthcare operators to repay bank and NBFC debts
  • Creating of Healthcare REIT/InvIT as a separate investment asset class for channelising domestic and foreign investment which has been lagging for the last 4 years despite positive policy initiatives

Inclusive Regulatory Framework for Social Stock Exchange

Our review and recommendations for the draft regulations are under the following heads:

  1. All encompassing definitions of operators/players in the social sector
  2. Increased definition of scope of impact which are acceptable by ESG and impact investors
  3. Sustainability and limitations of grants and aids for social projects
  4. Wider inclusion of Alternative Investment Funds (AIF) and relaxations of various limitations under SEBI AIF Regulations
  5. GST waivers and set offs for the social sector like healthcare infra
  6. Regulations for social sector ventures for social credit rating
  7. Sale and lease back for infrastructure under the trusts and societies for asset monetization
  8. Listing and trading norms for wider market participation on the SSE including market making
  9. Participation of CSR funds into healthcare infra
  10. Special purpose vehicles (SPVs) listing of healthcare PPPs with community and social impact
  11. Regulations for pivoting from for profit to not for profit and vice versa and exit for failed ventures
  12. Other regulatory issues

All encompassing definitions of operators/players in the social sector

The current definitions as given in the report delineates between not for profit and for profit. There are no shades of grey (hybrid models of business) in the draft regulations.

We would like to submit that the definition of a social enterprise should ideally, seek to select a class or category of enterprises that are engaging in the business of “creating positive social impact”. It is our belief that the definitions should be all-encompassing requiring all social enterprises, whether they are FPEs or NPOs, to state an intent to create positive social impact, to describe the nature of the impact they wish to create, and to report the impact that they have created; and the differentiation should not be solely on the criteria of muted returns. There can be various hybrid models created by combining characteristics of both an FPE and an NPO. In our view, the current distinction as provided in the report does not afford enough flexibility to encompass all such possible models. The parameters of what constitutes a ‘positive social impact’ should be inclusive in nature and only by taking such a holistic view of the SSE could we hope to address the issue of the funding gap that this mechanism is expected to resolve. Given the ambiguity around the definitions, the SSE regulations must provide standard definitions to determine whether the model will predominantly provide space for non-profits or for-profit organisations or other hybrid structures.

For example, even schedule VII of the Companies Act uses the words “activities which may be included by companies in their Corporate Social Responsibility Policies” to indicate a list of exhaustive items which may be consider within the ambit of CSR activities by companies. In comparison, both the SASIX in South Africa and Singapore’s Impact Investment Exchange – prescribe social impact to be measured by the outcome in the community and not on muted returns.

In our view, the SSE should have a clear definition of what constitutes a ‘social cause’ and a ‘socially responsible’ act. The definition should also be dynamic to accommodate events that may emerge, such as Covid-19, or cyclone, that would require area-specific funds. We would further submit that the SSE should allow the listing of various assets encompassing a wide array of sectors such as healthcare, education, food, healthcare assets, colleges, schools, minimum development goals etc. This would inject a much needed impetus to overall social development by providing additional fund raising options in these sectors. It would also allow existing investors to offload their assets by listing on the SSE and utilise the money for other viable purposes ensuring a wholistic growth in the economy. Therefore, it is our submission that the ambit of social impact should be kept as broad as possible delineating between FPEs and NPOs, in order to truly enable holistic social development.

Increased definition of scope of impact which are acceptable by ESG and impact investors

Investment into healthcare social infrastructure not only creates bed capacity for population health management and impacting SGDs, but creates various axis of social impact for the Indian economy. These include the following when considering the direct and indirect impact of investment in healthcare infrastructure development that have been accepted by many of our ESG and impact investors as benchmarks:

Table deleted from here due to confidentiality reasons

We therefore submit that the scope of primary and secondary impact to the community needs to be defined into the draft report

Sustainability and limitations of grants and aids for social projects

During my work with the health and ICT Ministers’ Panel for Africa, one of the key fundamental drawback felt by the Governments was that 95% of the projects initiated by donors through grants and aid failed to sustain themselves through the self-funding by the communities once the donor’s grants and aids completed their tenure. The issues project completion and impact post grants and continued funding became very critical. Another issue was the measurement of the impact post exit of the donors. Social healthcare infrastructure project need sustainable upfront funding which need to be closed else projects would not complete

Hence, the scope of grants and aids should be tied to the overall project costs and operations till viability is establish. The regulations need to provide tighter norms for projects funded through grants and aid and not be allowed to kick off till funding closure is announced.

Wider inclusion of Alternative Investment Funds (AIF) under SEBI Regulations

The current draft talks about the AIF -1 Social Venture Capital. As India’s first healthcare infrastructure fund, we are registered under AIF- 2 regulations. We propose to exit the investments we make in for profit and not for profit and select hybrid models with impact in hospital infrastructure, we would like to understand the split between and investment criterial for listing of Social Healthcare REITs on SSE and for profit healthcare REITs on the NSE. We have evaluated the Singapore model. It creates flexibility on price discovery and is not so water tight.

It is submitted that even Category II AIFs may invest in social sectors and cause overall social impact and therefore even such AIFs should be allowed to be listed on the SSE. Here it is our submission that the regulators should consider either designing a general framework of pooling for this purpose which will apply across all regulations, whether AIFs (Cat1, 2 or REITs), or in the alternative create a special class of AIFs for social impact. from a regulatory point of view, that a new category of AIF structured similar to a ‘social venture fund’ may be introduced – the criteria for determination of which would correlate with its positive spillover effects on the economy. Such new class of AIFs should have the benefits of pooling coupled with the flexibility of investing in an identified asset and should be free from the limitations of diversification norms otherwise applicable to other AIFs.

AIFs have the potential to become the best source of additional capital to undertake the desired projects in the social sector given the overwhelming need for additional capital in such sectors in India. To reiterate, under the SEBI AIF regulations, Category I and II Alternative Investment Funds are prohibited from investing more than twenty five percent of their investible funds in one Investee Company. Which is restrictive in itself in the context of social upheaval as it does not provide the flexibility to invest more capital in a single project as may be required. We would humbly request for this restriction to be relaxed in case of a Cat I or Cat II AIF which is eligible to be listed on SSE or provide an exemption from the aforementioned 25% limit to the new category of AIFs specifically designed for this purpose.  

GST waivers and set offs for the social healthcare infra

The current draft has discussed on tax holidays and waivers for social ventures and their investors under the Income Tax Act. Social healthcare infrastructure also attracts GST across the value chain which is being incurred by the social healthcare ventures. However there is zero GST on healthcare for the final services being delivered to the community and is currently not offsetable. As a result the entire burden falls on the social healthcare venture operator and its donors if the final services to the community is fully subsidized.

From the social healthcare infra creation, in the current Goods and Services Tax (GST) regime of charging non-offsetable tax on rent from social healthcare operators makes the cost of funding prohibitive and reduces the net fund in hands of hospital operators to create incremental bed capacity by almost 20% in the country. GST on rent is virtually not offsetable because healthcare operators are exempt from charging GST to its patients / customers and that therefore, is a major roadblock for hospital operators to raise long-term affordable finance to create additional bed capacity in the country. Adequate policy measures need to be introduced to streamline the GST regime for financing healthcare infrastructure through sale and lease back transactions in India in line with bank and NBFC debt which do not attract any GST tax on financing healthcare infrastructure.

We submit that GST offset on the healthcare and allied services increases the burden to the operator and donors and needs to be removed as part of the tax recommendations in addition to the direct taxes recommendations provided by the draft regulations.

Regulations for social sector ventures for social credit rating

Banks and NBFCs do not consider the social and community impacts while providing debt finance to social sector healthcare operators. Our Healthcare REIT/InvIT model considers and ensures these impacts while investing into social sector healthcare operators through the sale and lease back modus of financing healthcare infrastructure. A change in the rating methodology for social sector infrastructure like healthcare is required to be considered for social healthcare ventures.

We therefore submit that the draft should recommend setting of separate rating guidelines for social ventures in India by the credit rating agencies for various instruments being used by the social ventures

Sale and lease back for infrastructure under the trusts and societies for asset monetization

As per our industry estimates around INR 75,000 crs of healthcare infrastructure is the dry gun powder that needs upgrade and expansion funding is residing on the trusts and charitable societies in India. These healthcare operators are currently financing their growth by using funds raised via:

  • Loan Against Property (Hospitals) from Banks (cheaper, limited amount, short tenure, not for debt averse operators)
  • Land Acquisition / Development finance from a Financial Investor (expensive and limited)

A new model of financing growth for such operators has opened up since SEBI announced the REIT / InvIT regulations (cheaper, cleaner and control neutral). This enables the hospital operators to monetize its “dead” hospital infrastructure assets and raise perpetual capital to fund its future growth opportunities. This is done via sale-lease back model where the operator sells the hospital infrastructure to a professional property investor while also signing a long-term lease to ensure business continuity. This enables the property investor to earn rental income while it provides the Hospital Operator with perpetual and affordable source of capital and becoming asset-lite – a win-win situation for all parties concerned.

REITs also have certain listing limitations under the current regulatory regime – which should be relaxed in the event they become eligible to be listed on the SSE. The SSE should also enable debt, equity or perpetual debt instruments to be listed through SPV structures.

Listing and trading norms for wider market participation on the SSE including market making

Under the current AIF regime, units of close ended AIFs are allowed to be listed on stock exchanges subject to a minimum tradable lot of one crore rupees. In light of our recommendation for a separate category of AIFs, the listing for such category of AIFs should be allowed with the minimum tradeable lot for such AIFs being made smaller, in region of 10 – 15 lakhs instead of the more cumbersome 1 crore requirement. The AIF may also hold assets directly, i.e. hospital assets through a single AIF and units of such AIF will get listed. It is humbly submitted that an SPV created for such purposes is listed then in additional to equity listing, perpetual bond listing should also be allowed at the SPV level.

Participation of CSR funds into healthcare infra

Please note that the same asset that engages in ‘for profit’ ventures to initiate social impact may also consider raising CSR money at a ‘for profit’ bond / equity interest.  It is submitted that clear guidelines should be introduced on how CSR funds can be deployed via SSE.

Under the current CSR regime (as per the Companies Act) there is no provision for one company’s CSR monies to be combined with and added to monies of other companies CSR, i.e. there is no concept of pooling and/ or co-participation under the current regime. For example, if the resources of various companies could be pooled together in partnership with the government and other creditable NGOs, the impact could be manifold. Where NGOs and corporates can bring in quality, but scaling is possible only with the involvement of the government. This co-participation may be in the form of cash or in the form of valuable knowledge sharing / experience or personnel that one company may benefit from others. Smaller companies may benefit greatly from such overall changes to the regime given the 5 percent limit on overheads stipulated by the government. Smaller CSR spenders can only deploy a limited amount in the form of administration expenses and hence the sample size of projects they can invest in are much lesser in number and quantity. This often leads to sub-optimal allocation of funds, with a disconnect between capital deployment and on-ground realities.

Therefore, while the CSR regime currently encourages collaboration between companies to help avoid duplication of managerial efforts, infrastructure, personnel amongst other factors, it does not explicitly mention / allow ‘pooling of funds’. We humbly submit that a minor modification in the act could address this aspect. We believe that pooling CSR spends of companies can unlock a myriad number of opportunities in addressing India’s most pressing challenges in the social sector.

SPVs listing of healthcare PPPs with community and social impact

As member of the Planning Commissions’s PPP Committee for Healthcare Infra under UPA -1 chaired by Dr. Hamied and Haldea, several recommendations were given to fast track PPP in Healthcare. However, the issue of concessioning and operating costs of providing community healthcare to the masses has been the bone of contention. The recent Orissa PPP bids front ended by IFC has failed to elicit bidders due to the same reasons.

There is an approximately $45 billion of healthcare infra assets which are sitting on the books of Central and State Governments and Private and Social Sectors. Many of these require funding for upgrading and expanding their infra. Various archaic regulations and other operations bottlenecks are preventing investments flows into these existing healthcare infra from Indian and foreign LP investors as the PPP policies have failed to garner interest.

The current National Infrastructure Pipleline published in Dec 2019, shows a committed pipeline of $2.5 billion which is only through Center and State Governments. A gap of 99% of what needs to be invested for India to meet global norms for healthcare infra supply. Unlike roads which is hogging over 80% of NIP’s committed investments, healthcare infra is gestational. Therefore, there is a weak and lagging healthcare infra investment in India leading to demand gaps. Many of our multilateral funding agencies who are also LPs in our fund would like to participate in the social healthcare.

Innovative SPV structures need to be created where the concessions can be funded by the multi lateral agencies and ESGs for the impact to the communities while the Central and State Governments exit their assets to private operators. These SPVs can be listed on the SSE and actively traded or subscribed to by these LPs.

The government should consider creation of such hybrid impact models involving private-sector partnerships to provide critically-needed health infrastructure.  For profit models may be considered even in this sector which is lagging behind for want of funding from interested LPs. The bid evaluation process in PPP / concession agreements may be relooked at in order to require more concrete bids showing higher levels of commitment from lenders and to eliminate bids that are not in line with commercial projections. An alternative may be for governmental bodies to exit foible projects and letting the operator / agencies pool / fund the concessions through SPV structures. Such SPV structures with underlying PPP projects may be listed on the SSE platform for turnaround and subscribed to by willing investors thereby achieving a turnaround of otherwise stagnant developmental projects.

Regulations for pivoting from for profit to not for profit and vice versa and exit for failed ventures

There have been many instances in the past where social healthcare ventures in trusts which could not be sustained by the promoters and settlers of the trust/societies (see case study) to for profit business models due to various business models, strategic and sustainability issues. The current regulations are fairly prohibitive and do not consider pivoting from not for profit to for profit business models as a going concern. The current draft does not consider these scenarios nor make any recommendations on these exits.

We request that the draft regulations look into provisions for pivoting the business models from for profit to not for profit and vice versa and frictionless exit regulations need to be drafted for a going concern scenarios.

We would like to further submit that LPs should be allowed to exit in the event social ventures are not sustainable for their businesses. Otherwise such models become less lucrative and newer LPs may not participate in such models given the inflexibility around it. Therefore, there is a need to provide a flexible mechanism to allow LPs to exit, be it from a ‘non-profit’ to a ‘for profit’ model or vice versa.

Other regulatory issues

Thin capitalization rules

SPVs / acquisition companies are set up in India to raise money (through debt or equity) for the purposes of financing the said acquisition. While restrictions on debt financing of acquisitions still exist, India has seen a steady increase in the use of innovative financial instruments to fund such acquisitions. Thin capitalisation refers to the situation in which a company is financed / leveraged through a relatively high level of debt compared to equity.

Current IT Act provisions restrict the payment of interest by an entity to its ‘Associated Enterprise’ to the extent of 30% of its earnings before interest, taxes, depreciation and amortization (EBITDA) or interest paid or payable to associated enterprise, whichever is less.

In view of the non-deductibility of the interest expense beyond the de minimis threshold as stated above, investors investing through perpetuity debt instruments, do not have access to such an exemption. It is our humble submission that this exemption be allowed for SPVs with a higher debt component, which are eligible to be listed on the SSE satisfying all relevant criteria.

Flexibility in order to get CSR funding

In the event an FPE is converted into a NPO, such organization should be allowed access to CSR funding and this should be expressly mentioned under the SSE regulations.

Relaxation on listing requirements of REITs

We request that the current considerations which are otherwise applicable around listing of REITs be relaxed to an extent in the event of such REIT being eligible to be listed on the SSE. Such considerations include restrictions on minimum subscription amounts (INR 50,000), minimum tradable lots (200), minimum value of such REIT assets (i.e INR 500 cr) etc. The restrictions for example, may disallow listing of REITs focussed on the hospital sector on the SSE in the event such minimum criteria are not met. Relaxation of these norms would allow for a more holistic growth of the sector by allowing much wider participation and garnering more interest from investors. Similar to our recommendation in relation to AIFs, the regulator may also consider carving out a separate type of REIT for this purpose.

Case Studies for Consideration

Deleted from here for confidentiality reasons

 

Conclusion

Fostering widespread engagement among investors will be vital to raise adequate capital to fund projects in social sectors. Some of the suggested incentives will be important for both market participants willing to invest and social purpose organisations which are willing to get listed. The wide-reaching economic impact of COVID-19 has resulted in a surge of areas where investments can be made. As envisaged, in order for SSE to be a platform to facilitate raising of capital in such sectors for them to recover and turn-around from the crisis, these measures would only assist in driving more engagement from the relevant market players and ensure that the objectives behind formulation of SSE is met. We therefore request your kind consideration around the suggested recommendations outlined in this note.