Doing Business In India - Virtus Global Partners

Doing Business in India Strategic and Practical Considerations September 24th, 2008 Presented by Anil Kumar, Managing Director; email: akumar@virtusglobal.com 420 Lexington Avenue . Suite 300 . New York, NY 10170 . 212-297-6107 . www.virtusglobal.com

Strategic Framework • Sustainable Advantages Do I need to leverage India? • Changing Global Economy • Future Growth of India • Organization Design How can I create an India Entry • Finding Partners Strategy? • Implementation • Statutory Compliance • Due Diligence How do I manage risks in India? • Legal Aspects • Risk Management • Culture & Communication How do I grow my operations in India? • Creating Incentives • Monitoring Investment Page 1

Creating an India Entry Roadmap Stage 1: Create Stage 2: Design Stage 3: Strategy Phase Implement • Market Study/ • Operating Model • Business Setup Industry Assessment • Organization Design • Statutory and Legal • Competitive Requirements • Partner Selection Landscape Analysis • Risk Management • Preparing Key • Feasibility Stakeholders • People Assessment • Legal & Regulatory • Infrastructure • Market Positioning Setup • Employer Value • Investment • Investment Proposition Strategy Structuring • Funding • Location • Partner Due Assessment Diligence Page 2

Why India? Educated, English-speaking populace of young workers Democratic and business-friendly government Low cost structure Eager and savvy consumer market with growing buying potential Page 4

India is One of the World’s Top Investment Destinations 2007 Global Services Location Index 2007 Global Retail Development Index (GRDI) 100 … India is the top India 3.2 2.3 1.4 destination in the 80 AT Kearney Global China 2.9 2.3 1.4 Retail Development GRDI Score Index (2007) 60 Malaysia 2.8 1.3 2 Thailand 3.2 1.2 1.6 40 Brazil 2.6 1.8 1.5 Services sector 20 attracted interest of Indonesia 3.3 1.5 1.1 major global players 0 Financial structure People and skill availablity and large India Russia Vietnam Ukraine China Chile Latvia Business environment investments are pumped in it Projected GDP Growth Rates for Select Upcoming Economies 8 AT Kearney has placed India as the most GDP Growth Rate (%) 6 preferable destination for Services sector 4 (2007)… India is expected to 2 outperform its rivals in the BRIC, in terms of GDP growth rate, from 2015 0 onwards… 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50 Brazil China India Russia Source: Goldman Sachs, “Dreaming with the BRICs” Page 5

Foreign Direct Investments have increased rapidly FDI Inflow - India: 2001-08 18,000 15,730 185 percent 12,699 Increase 13,500 India is ranked USD Million second in AT 9,000 Kearney’s FDI 5,546 confidence index 4,222 3,755 3,134 4,500 2,634 (2007) 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 (till December) Net FII into India: 2001-07 18 16.1 16 FDI inflow for the 14 149 percent Increase 12 USD Billion period 2006-07 10.2 10.0 9.4 10 witnessed a growth 8 6.7 of 185 percent over 6 the same period last 4 1.8 2 year 0.6 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 * FII growth momentum was restricted because of Sub Prime Crisis in 2007-08 Page 6

Consumer spending and household savings have grown.. 35.9 36 34.8 34 Gross Domestic Savings 32 Gross Domestic Investment % of GDP 30 28 26 24 22 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Page 7

..fuelled by several factors India is the 4th largest economy in the world as measured by purchasing power India has a consumer base of 1.2 billion people The youngest population of the world – hence sustainable, long term growth is assured Modern (organized) retail converging with the consumption boom will open up many opportunities for small and mid-size consumer companies Rapid growth in the number of middle class consumers Page 8

The Indian Demographic Dividend Page 9

By Year 2050, India will be World’s 3rd Largest Economy 50,000 45,000 40,000 US 2003 $ billions 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - na n a y ce a il ly S K an pa az di si U U Ita an hi In us Br m Ja C Fr R er G Source: Goldman Sachs, “Dreaming with the BRICs” Page 10

Many large companies have invested into India POSCO to invest in building steel manufacturing USD 12 billion plants and facilities in India by 2016 USD 11 billion Vodafone buys Hutch Plans to establish three manufacturing plants to USD 2 billion produce photo-voltaic units Plans to spend on its development operations in USD 1.7 billion India over the next four years Page 11

Many large companies have invested into India Plans investment in private equity in Indian USD 1 billion markets Plans investment in private equity, real estate, USD 1 billion and private wealth management Aditya Birla Group increased its stake in Idea USD 0.98 billion Cellular by acquiring 48.14-percent stake Mylan Laboratories acquired a majority stake in Matrix Laboratories USD 0.74 billion Page 12

India has consistently improved over the last 17 years •Opportunities to enter new sectors as the reforms process opens Progressive Reforms Process them up for foreign direct investment (FDI). For example, Single Brand Retail, Life and General Insurance •Growing GDP and FDI, falling rates of interest and maturing capital markets creates private equity investment opportunity in Strong Economic Environment infrastructure, telecom, cement, toll roads, bridges, manufacturing, technology, and pharmaceuticals •Growing consumer population expands markets across sectors •Opportunities to use India as a test market for clinical trials and Large Domestic Market developing products for the global market •Growing through acquisitions of strong Indian companies across sectors •Availability of raw material and highly skilled workforce •Opportunities to set up manufacturing bases in India, both for fulfilling local demand, as well as for developing a global sourcing hub Availability of Resources •Opportunities to set up R&D, software development and engineering centers that cater to their global operations •Opportunities to set up centers for business process outsourcing Leveraging India as a source of high quality managerial talent Page 13

It has become easier to invest into India More sectors opened ; Equity caps raised in many other sectors Procedures 2000 on simplified Up to 100% under Automatic Route in all sectors except 2000 a small negative list Up to 74/51/50% in 112 sectors under the 1997 Automatic Route 100% in some sectors FDI up to 51% allowed under the 1991 Automatic route in 35 Priority sectors Pre 1991 Allowed selectively up to 40% FDI Policy Liberalization Page 14

Potential Investment Opportunities Information Technology Software and Services - $50 billion by 2008 IT-enabled Services - $17 billion by 2008 E-Commerce - $8.9 billion Power Transmission Roads & Generation $40 billion Distribution $143 billion $ 116 billion Biotechnology $4.5 billion by 2010 Investment Refineries Coal Retail $ 22 billion Requirement $ 26 billion in Energy $300 billion by 2010 up to 2012 and other Healthcare Cross-Country Oil & Gas Infrastructure Pipelines $ 100 billion $ 116 billion $ 16 billion potential Areas Energy Railways Ports LNG Terminals $ 15 Billion $ 20 Billion $ 10 billion Page 15

Markets with Significant Export Potential Airport and Ground Handling Mining and Mineral Processing Equipment Equipment Computers and Peripherals Oil and Gas Field Machinery Education Services Pollution Control Equipment Electric Power Generation, Safety and Security Equipment Distribution and Transmission Equipment Telecommunications Equipment Food Processing & Cold Storage Equipment Textile Machinery Machine Tools Water Treatment Medical Equipment Page 16

Market Potential – Retail Potential The high growth projected in domestic retail demand will be fuelled by: The migration of population to higher income segments with increasing per capita incomes Increasing urbanization Changing consumer attitudes, especially the increasing use of credit cards Growth of the population in the 20 to 49 years age band There are retail opportunities in most product categories and for all types of formats: Food and Grocery: The largest category but largely unorganized Home Improvement and Consumer Durables: Over 20% p.a. CAGR estimated in the next 10 years Apparel and Dining: 13% p.a. CAGR projected over 10 years Opportunities exist for investment in supply chain infrastructure, cold chain, and logistics India also has significant potential to emerge as a sourcing base for a wide variety of goods for international retail companies Many international retailers including Wal-Mart, GAP, JC Penney etc. are already procuring from India Page 17

Market Potential – Retail Policy 100% FDI is allowed in Cash and Carry Wholesale formats. Franchisee arrangements are also permitted in retail trade. 51% FDI is allowed in single brand retailing. The government is examining further liberalization of FDI in retail trade. Page 18

Market Potential – Power Sector Potential Large demand-supply gap - All India average energy shortfall of 9% and peak demand shortfall of 14% The implementation of key reforms is likely to foster growth in all segments Unbundling of vertically integrated SEBs “Open Access” to Transmission and Distribution networks Select distribution circles to be franchised/privatized Tariff reforms by regulatory authorities Opportunities in Generation for: Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each Coal-based plants at pithead or coastal locations (imported coal) Natural gas/CNG-based turbines at load centers or near gas terminals Hydel power potential of 150,000 MW is untapped as assessed by the Government of India Renovation, modernization, up-rating and life extension of old thermal and hydro power plants Opportunities in Transmission network ventures - additional 60,000 circuit km of Transmission network expected by 2012 Private sector participation possible through JV and 100% equity mode Total investment opportunity of about US$ 150 billion over a 5 year horizon Page 19

Market Potential – Power Sector Policy 100% FDI permitted in Generation, Transmission & Distribution - the Government is keen to draw private investment into the sector. Policy framework: Electricity Act 2003 and National Electricity Policy 2005. Incentives: Income tax holiday for a block of 10 years in the first 15 years of operation; waiver of capital goods import duties on mega power projects (above 1,000 MW generation capacity). Independent Regulators: Central Electricity Regulatory Commission for central PSUs and inter-state issues. Each state has its own Electricity Regulatory Commission. Page 20

Market Potential – Real Estate and Construction Potential Several factors are expected to contribute to the rapid growth in real estate Large demand-supply gap in affordable housing, with demand being fuelled by tax incentives and a growing middle class with higher savings Increasing demand for commercial and office space especially from the rapidly growing retail, IT/ITeS, and hospitality sectors The recently announced JNNURM expected to provide further impetus Investment opportunities exist in almost every segment of the business Housing: about 25 million new units expected to be built in 7 years Office space for IT/ITES: 150 million sq. ft. across urban India by 2010 Commercial space for organized retailing: 220 million sq. ft. by 2010 Hotels and Hospitality: Over 100,000 new rooms in the next 5 years Investment opportunity of over US$75 billion in the next 5 years Page 21

Market Potential – Real Estate and Construction Policy 100% FDI is allowed in real estate development subject to minimum scale norms of either: 25 acres in case of serviced plots or integrated townships; or 50,000 square meters of built-up area for construction development projects Initial investment is locked-in for a 3 year period Page 22

Market Potential – Banking and Financial Sector Potential Several factors favor high growth Demographic profile favors higher retail offtake - 54% of the population is in the 15-35 years age group Capital expenditure by the government and private industry expected to grow at a high rate Economic growth of about 14% p.a. in nominal terms SME lending, a largely untapped market, presents a significant opportunity SMEs account for 40% of the industrial output and 35% of direct exports Regulatory and technological enablers leading to high growth The banking system is technologically enabled with RTGS and check truncation in place Improved asset management practices - Gross NPAs to Advances ratio reduced from 24-25% in 1993 to 2.5% in 2006-07 Investment opportunity across all segments in the banking and financial services sector Low penetration in the pension market makes it a lucrative business segment Foreign banks likely to be allowed to acquire local banks after March 2009 when the next stage of banking reforms is proposed Page 23

Market Potential – Banking and Financial Sector Policy Reserve Bank of India (RBI), India’s central bank, is the regulator for the banking and financial services industry RBI approval is required for all foreign investment in this sector Foreign banks can do business in India either by setting up branches or through a wholly owned subsidiary, after approval by RBI Indian private banks can be 74% foreign owned, with a 5% cap on ownership by any one entity Page 24

Market Potential – Auto Components Potential India amongst the most competitive manufacturers of auto components, especially: Metal intensive components: forgings, stampings, castings Skilled labor-intensive components: machining, wiring-harness, other electrical components Hi-tech components: electronic fuel injectors Opportunity to address the global auto components market while leveraging India’s large and growing domestic market Opportunity to set up R&D centers in India Indian technical skills acknowledged as among the best in the world High level of sourcing of auto components from low cost countries (LCC’s) to act as a driver for growth Potential of over US$5 billion for investment in India Policy 100% FDI allowed through the automatic route Page 25

Market Potential – IT and IT Enabled Services Potential India’s inherent IT capabilities - talented workforce and world-class companies Availability of technically skilled and English-speaking labor force at a fraction of the cost compared to US and Europe Quality orientation, project and process management expertise Enhanced global service delivery capabilities of Indian companies through a combination of greenfield initiatives, M&A, alliances and partnerships with local players International recognition of India’s strengths Increasing awareness among global companies about India’s capabilities in higher, value- added activities and in the global delivery model Leading international companies have identified custom application development and maintenance as priority areas due to a high offshoreable component High growth of domestic IT & ITeS market due to several regulatory and technological factors: Increased investments by enterprises in IT infrastructure, applications and IT outsourcing Demand for domestic BPOs has been largely driven by faster GDP growth and by sectors such as telecom, banking, insurance, retail, healthcare, tourism and automobiles. Opportunity to supply to the global market in addition to serving the growing domestic demand Page 26

Market Potential – IT and IT Enabled Services Policy 100% FDI is permitted in this sector under the automatic route SEZs, EOUs and Software Technology Parks have been set up across India – income tax exemptions are available for units in these designated areas/zones IT Act, 2000 legalizes the acceptance of electronic records and digital signatures providing a legal backbone to e-commerce Page 27

Market Potential – Healthcare Potential High-growth in the domestic market arising from: Increasing health awareness: share in total private consumption expected to increase by 10% Increasing penetration of health insurance Rapid growth in private sector companies owning and managing hospitals High-growth in medical tourism Cost of comparable treatment is on average 1/8th to 1/5th of those in western countries. Opportunities exist in multiple segments along the value chain Service providers: curative and preventive in primary, secondary and tertiary care Diagnostics services: imaging and pathology labs Infrastructure: hospitals, diagnostic centers Health insurance: less than 10% of the population is covered by health insurance. The medical insurance premium income is expected to grow to US$3.8 billion by 2012 44% growth in health insurance during 2006-2007 Healthcare BPO: medical billing, disease coding, forms processing and claims adjudication Training: large opportunity for training doctors, managers, nurses and technicians Investment opportunity of over US$25 billion by 2010 Page 28

Market Potential – Healthcare Policy 100% FDI is permitted for all health-related services under the automatic route Infrastructure status has been accorded to hospitals Lower tariffs and higher depreciation on medical equipment Income tax exemption for 5 years to hospitals in rural areas, Tier II and Tier III cities Page 29

Special Economic Zones (SEZ’s) SEZ Act and the rules framed hereunder have been notified with effect from February 2006. An SEZ is an export oriented duty free enclave, which is deemed to be outside the customs territory of India. 22 operational SEZ’s in India and over 200 SEZ’s are in various stages of approval and development. 100% tax deduction for 10 years for SEZ developer. Exemption from dividend distribution tax for SEZ developer. Exemption of Sales Tax on purchases from Domestic Tariff Area for both developer and a SEZ unit. Exemption from Service Tax for both developer and a SEZ unit. No minimum export obligation. A 100% permitted under the automatic route for SEZ development. 15 year corporate tax exemption on export profits to a SEZ unit. Branches of foreign companies in SEZ’s are eligible to undertake manufacturing activities. Page 30

Creating an India Entry Roadmap Stage 1: Create Stage 2: Design Stage 3: Strategy Phase Implement • Market Study/ • Operating Model • Business Setup Industry Assessment • Organization Design • Statutory and Legal • Competitive Requirements • Partner Selection Landscape Analysis • Risk Management • Preparing Key • Feasibility Stakeholders • People Assessment • Legal & Regulatory • Infrastructure • Market Positioning Setup • Employer Value • Investment • Investment Proposition Strategy Structuring • Funding • Location • Partner Due Assessment Diligence Page 32

Keys to Success in India Good local partners knowledgeable regarding the local market and procedural issues. Study the Market & Competition. Good planning. Aggressive due diligence and follow up. Patience and commitment. Hire good advisors Understand the rules, standards and regulations. Page 33

Creating Strategy • Market study/ Industry Assessment Market organization • Current market size • Expected growth rate • Industry trends • Drivers of value • Export component • Affect of currency fluctuation and relationship to the global markets • • Competitive Landscape Analysis Barriers to entry • Degree of maturity • Number of competitors • Performance and profitability • Products and brands • Financing and flexibility • Areas of vulnerability • First-Mover advantage • Page 34

Creating Strategy • Feasibility Assessment Price Point • Unit economics • Cost benefit Analysis • Change in consumer tastes, preferences • • Market Positioning • Branding/ Positioning • Impact on P&L • Investment Strategy and Structure • Investment timeframe • Step by step analysis • Return on Investment calculations • Location Assessment Access to ports/ highways • Tax incentives • Special Economic Zones • Proximity to industry clusters • Page 35

Design Phase • Operating Model • Form of enterprise • Corporate structure • Partnership structure • Organization Design • Number of employees • Mix of local and global staff • Partner Selection • Value Proposition • Key Advantages • Risk Assessment • Due Diligence Page 36

Design Phase • Preparing Key Stakeholders • Business plan presentation • Financial analysis • Legal & Regulatory Setup • Choosing the right legal and tax structure • Investment Structuring Page 37

Implementation • Business Setup • Registration of company • RBI approvals • Statutory and Legal Requirements • Risk Management • People • Hiring key personnel • Infrastructure • Employer Value Proposition • Recruitment strategy • Long term / Short term incentive programs (ESOP’s / variable pay / incentives) • Funding Page 38

Key Indian Cities Page 39

Structuring Investments Liaison Office Branch Office Operate as a Foreign Company Project Office Strategic Investor (FDI) Joint Ventures Operate as an Indian Company Private Wholly owned Subsidiary Public Investing in India Invest in a U.S. company with a services fulfillment subsidiary in India Invest in a Caymans or Mauritius company with a services fulfillment sub in India Financial Investor (FII or FVCI) Direct investment in an India company from outside India (Mauritius/Cyprus subs) Direct investment in an India company from outside India through a venture capital fund registered with the SEBI Page 40

Strategic Investors seeking India presence commonly use the automatic route Automatic Prior FDI in select Negative List Route Approval sectors IT •100% FDI permitted in most Generally, applicable in FDI not allowed in certain ITES sectors following cases: sensitive sectors e.g.: • Certain cases where FDI is Textiles • Agriculture •No prior approval necessary; Pharma • Atomic energy regulated Only post-facto filings Oil & Gas • Investor has existing joint • Railway Transport AMC •FDI should be brought venture / collaboration in • Real Estate (except NBFC through normal banking same field existing prior to townships/ industrial Integrated township channels 13 Jan 2005 parks, etc) development • Acquisition of existing •Investment represented by Industrial parks shares in financial services fresh issue of shares Industrial model towns sector Hotels and tourism Applications processed by SEZ’s Foreign Investment Promotion Atomic energy Board [FIPB] Decision generally Railway transport within 4-6 weeks Lottery business, gambling and betting Page 41

FDI limits Petroleum Sector • Drug and Pharmaceuticals • Construction Development Project • Software Development • B2B e-commerce • • Electronic hardware Tea Sector, including tea plantation • • Hospitals ISP FDI up to 100% • • Venture capital funds/companies Domestic Airlines • • Roads and highways Hotel and Tourism • • Development of Airports • Telecommunication services • ISP with Gateways, radio-paging, • Mining of precious stones end-to-end bandwidth • Atomic minerals FDI up to 74% • Establishment and operation of • Exploration and mining of coal and facilities ignite for captive consumption • Private sector banks • Investing companies in • Broadcasting infrastructure/services FDI up to 49% • Domestic airlines • FM Broadcasting • Defense Industries FDI up to 26% • Print Media • Insurance • Retail Trading • Gambling and betting • Atomic Energy • Lottery business FDI Prohibited • Arms and ammunition • Railway transport • Coal and ignite Page 42

In order for a foreign investment to be eligible for the automatic route, certain conditions must be met The investment should be by way of subscription of a fresh issue of shares and not by way of purchase of existing shares from existing shareholders of the company. The investment should be within the sectoral equity caps prescribed, where applicable. The investment should not be in sectors where industrial license is required to be obtained or where foreign investment has been expressly prohibited. FDI Regulations prescribe a minimum price for foreign investment which is arrived at on the basis of a prescribed formula, unless made by Foreign Venture Capital Investors registered with SEBI With the exception of the IT sector, in all other sectors, the foreign investor cannot avail of the automatic route if such investor already has a previous venture or tie-up in the same field in India. However, this requirement applies essentially to strategic business investors and not to financial investors who may hold other portfolio investments in Indian companies. Page 43

Liaison/ Representative Office - Scope of Activities Key Considerations Testing the waters without committing major resources. Developing trade relations. Collecting market information. Inspection & coordination of purchases for export to parent company. Regulatory/ Legal Framework Office expenses to be met through foreign exchange remittance from Head Office abroad. No business activity permitted. Prior RBI approval required. Liaison office not taxed. Regular filings with Registrar of Companies (ROC). Page 44

Project Office - Scope of Activities Key Considerations Office for undertaking a specific project. Approvals granted for both Government and private sector projects. Regulatory/ Legal Framework Specific approval to be obtained from RBI’s regional office. Regular ROC filings to be made. Page 45

Branch Office - Scope of Activities Key Considerations Scope of activities larger than that of a liaison office. Represent parent or other foreign company as buying/ selling agent. Research in the sector, in which the parent company is involved. Render professional or consultancy services. Undertake export/ import trading activities. Regulatory/ Legal Framework Prior RBI approval to be obtained. Regular filings to be made with the ROC. Own manufacturing activities not permitted. Taxed @ 42% (including surcharge) of profits of Indian branch. Page 46

Setting up a Wholly Owned Subsidiary Key Considerations Incorporation of an Indian company – private or public. Specific FIPB approval to be sought if investment does not qualify for automatic approval. Corporate tax @ 35%. Nature of the Company Private company to have a minimum of 2 members and a minimum paid up capital of Rs. 1,00,000/- (approx USD 2000). Public company to have a minimum of 7 members and a minimum paid up capital of Rs. 5,00,000/-. (approx USD 10,000). Page 47

Setting up a Joint Venture Company Key Considerations Approval requirement depending on sector, in which investment is made. Taxation as applicable to an Indian company. Both, the principal investment and the income are allowed to be repatriated outside India without restrictions. Dividend taxable in the hands of the shareholder. Page 48

Joint Venture or Wholly Owned Subsidiary Key Considerations Meetings ROC filings Labour And Employment Taxation Taxation of foreign personnel in India Tax treaties Page 49

Other Routes to Invest in India Key Considerations Technical Collaboration Investing in an existing Indian company Fresh issue of shares by an Indian company Purchase of existing shares in an Indian company by way of transfer Foreign Institutional Investor Page 50

Offshore Structure is commonly used for financial investment Under this structure an investment vehicle (“Fund”), which could be an ordinary company, an LLC or an LP organized in a tax favorable jurisdiction outside India will pool investments from investors. The Fund will then make investments directly into Indian portfolio companies. There would generally be an offshore investment manager (“IM”) for managing the assets of the fund and an investment advisor (“IAA”) in India for identifying deals and to carry out preliminary due-diligence on prospective investment opportunities. Page 51

Unified Structure is used for financial investments if domestic investors are also expected to participate This structure is generally used where domestic (i.e., Indian) investors are expected to participate in the fund. Under this structure, a trust or a company is organized in India. The domestic investors would directly contribute to the trust whereas overseas investors pool their investments in an offshore vehicle and this offshore vehicle invests in the domestic trust. Page 52

Movie Page 53

Due Diligence - The Bottom Line Page 55

Doing Due Diligence US vs. India Page 56

Ten Tips to Successful Due Diligence 1. Know the mindset of the target company Comprehensive information required for the due diligence process is not readily available with the Indian companies due to lack of detailed management information system. For example, detailed schedule of margins by product and by customer may not be easy to come by with these companies. The forecasting methodologies of such small and medium sized Indian companies are not very robust, often leading to simplistic projections. The forecasts tend to be aggressive, without a track record to boot. 2. Understand key differences in doing a due diligence in the western countries and in India Going in for a due diligence process with the right expectations is a critical success factor for US investors. The quality of financial statements, financial infrastructure and business and business process will be lower and less explicit than western investors are accustomed to. This results in the need to explore more risk areas and take more time for the due diligence. Page 57

Ten Tips to Successful Due Diligence (E&Y) 3. Listen for the word “N0'”: Asian culture is less direct in some respects. Western investors rarely hear their Indian counterparts say “no” even though they do not mean “yes''. 4. Look out for Hidden Skeletons: Inadequate disclosures impede the ability to access critical information that might alter the investor's perception with regard to the value of the company, environment issues and aggressive tax positions among others. 5. Evaluate Corporate Governance: Companies are slowly realizing the importance of corporate governance and some of the leading organizations are benchmarking to global standards. Some others are moving towards improvement. 6. Keep an Eye on Related Party Transactions: As a hangover of the licensing raj, Indian businesses are generally structured as conglomerates or group businesses which create extensive related party transactions. Page 58

Ten Tips to Successful Due Diligence (E&Y) 7. Avoid Legal Minefields Weak corporate governance is compounded with tardy legal systems where dispute resolution often remains a distant goal.. 8. Communicate with Care In any transaction, communication must be handled with utmost care. Sensitivity to Indian culture with regard to dealing with the owners who are also the entrepreneurs of the company will help to make the venture more rewarding. 9. Manage the Control Freaks It is often observed that founding members of a start-up will refuse to give up control and settle for a minority ownership stake (a common condition for many start-ups in exchange for Private Equity funding). 10. Think Global, Act Local Firms with a presence in India have a distinct edge due to their wide networks of contacts and experience of the Indian business environment. Page 59

Drill Down Due Diligence Page 60

Taxation Companies incorporated in India are treated as Indian companies for taxation • There exists a Double Taxation Avoidance Agreement with 65 countries • Peak Custom duty has been reduced to 15% • Tariff to be aligned with ASEAN levels • Value Added Tax introduced in some States from 1st April 2005 • Transparency in Tax Structure: Online/ ICT Applications • Differentiation - domestic company vs. foreign company • Facts - Wealth tax rate of 1%; tax year April to March • Tax rates in India The above rates are exclusive of the currently applicable surcharge of 2.5% on the tax and an education cess of 2% on the tax as well as the surcharge. In case of a domestic company the surcharge applicable is 10%. Page 61

Tax Regime of India – Direct Tax 1. Corporate Tax – Domestic Company – 33.66%; Foreign Company – 41.82% 2. Dividend Tax – Company – 16.995% (w.e.f. Apr 1, 2007); Money Market Mutual Fund – 25% 3. Minimum Alternate Tax 4. Capital Gains 5. Securities Transaction Tax 6. Taxation of know how fees in the hands of Foreign Companies – Royalties/Technical fees payable to non-residents are taxed on net basis. 7. Fringe Benefit Tax (FBT) - ESOPs brought under FBT (w.e.f. Apr 1, 2007) 8. Banking Cash Transactions Tax – 0.1% to apply for withdrawals over INR 50,000 9. Double Tax Avoidance Agreements (DTAAs) 10. Other Direct Tax – Wealth Tax 11. Important concept – Transfer pricing and determination of arms length price (“ALP”) Page 62

Indirect Tax 1. Customs Duty 2. CENVAT (Excise Duty) 3. Sales Tax 4. Value Added Tax 5. Service Tax 6. Octroi Duty/Entry Tax 7. Stamp Duty 8. R&D Cess 9. Works Contract Tax 10. Turnover Tax 11. Purchase Tax 12. Secondary and Higher Education Cess Page 63

Acquiring Shares or Assets of Indian Company The acquisition of the business of an Indian Company can be accomplished in one of the following ways: Purchase of Shares Purchase of Assets Purchase of an entire business for a lump-sum consideration. Purchase of individual assets of a business. Regulatory Approvals Following recent liberalization, transactions, entailing the transfer of existing shares in an Indian company between the residents and non-residents generally fall under the automatic route (i.e. no prior regulatory approval, but prescribed documents must be filed with the relevant Authorized Dealer/Banker). The transfer price needs to fall in line with the valuation methodology prescribed under foreign exchange regulations The transfer of shares form a non-resident to another non-resident would also generally not require any prior regulatory approval, except in cases where the transferee non-resident has a previous joint venture (financial/technical) or tie up in India as stipulated. Page 64

Acquiring Shares or Assets of Indian Company Sale of Assets: ‘Slump Sale’ The sale of a business undertaking is on a slump-sale basis when the entire business is transferred as a going concern for a lump-sum consideration. ‘Cherry picking’ assets would not be possible under this kind of transaction. The implications for this type of transaction are described below. Income Tax Implications Where the business of the transferred company is more than 36 months old, the business would be treated as a long-term capital asset and the gains from its transfer would be taxed at a rate of 20 percent (plus applicable surcharge and education cess). Otherwise, the gains would be subject to tax at 33.66 percent in the case of a domestic company and at 41.82 percent in the case of a foreign company. On a slump sale, the purchaser records the assets acquired into its books by allocating the purchase consideration on the basis of fair values of assets acquired and claims depreciation thereon, wherever applicable. Part of the consideration could also be attributed to eligible intangible assets based on their fair values (as discussed in ‘Sale of Assets: Itemized Sale’ below) and depreciation should be available on the stepped-up value of these assets, if supported by a valuation report from an independent adviser. Transfer Taxes The transfer of assets by way of a slump sale would attract stamp duty. The rates of stamp duty would generally range between five per cent and 10 per cent. Page 65

Acquiring Shares or Assets of Indian Company Amalgamation In India, one of the most popular and tax-efficient means of corporate consolidation is amalgamation. Amalgamation enjoys favorable treatment under income tax and other laws, subject to fulfillment of stipulated conditions under the respective laws. Exchange Control Regulations In India, capital account transactions are still not fully liberalized. Hence, certain foreign investments required the approval of the Government of India. A court-approved merger is specifically exempted from obtaining any such approvals if, post-merger, the stake of the foreign company does not exceed the prescribed sectoral cap. Takeover Code Regulations The acquisition of shares in a listed company beyond a specific percentage triggers implications under the regulations of India’s Stock market regulator, the Securities and Exchange Board of India (SEBI). However, a court-approved merger is specifically excluded from the application of these regulations. Thus, a court-approved merger is the most tax-efficient means of corporate consolidation or acquisition, subject to following considerations: More procedural formalities and a longer time frame of four to six months. Both the parties must be corporate entities in India. Page 66

Considerations in Determining Deal Structure Ease of exit including any currency exchange restrictions, the impact of Sarbanes-Oxley in the U.S. and overseas company listing requirements in India; Relative valuations in the U.S. and India capital markets for the type of investment, particularly a services business; Ease of acquisition by the likely set of acquirers as an exit strategy; Investor “comfort” with the limitations on preference shares under the India Companies Act of 1956, as amended (the “Companies Act”); and Location of “market pull” for the investee company. Page 67

Exit through Strategic Sale If the transferee is an Indian resident, then as per the FDI Regulations notified by the RBI, if the investee company is listed at the time of exit, then the investor cannot exit at a price that is higher than the prevailing market price of the shares. In case the Indian company is unlisted at the time of such exit through a strategic sale, then the exit price will have to be as determined by a chartered accountant or an investment banker registered with SEBI. However, the RBI has carved out a specific exemption from this exit pricing restriction for FVCIs registered with SEBI. Further, if the strategic buyer happens to be another non-resident party, then again, the exit pricing restrictions of the RBI will not be applicable. Page 68

Exit Consideration Capital Gains No objection certificate required for new ventures – No objection certificate from Indian Partner has been a key negotiation point for Foreign Company having existing JV relationship in India. NOC has been made in-applicable for new ventures by foreign company. Shareholders agreement and implications thereof – right a first refusal, tag along rights and drag along rights Liquidation process – long drawn and court approval process Page 69

Cash Repatriation Capital and income arising from foreign investment in India can be freely repatriated (except for cases where the investment is made on non-repatriation basis), subject to provision of a no-objection certificate from the Indian revenue authorities or a certificate from a chartered accountant confirming that taxes payable, if any, are deposited into the Indian government treasury. Page 70

Acquisition of Shares Acquisitions may be made of an existing Indian company which may be either a private or a public company. Acquisition of shares of a public listed company is subject to the guidelines of the Securities Exchange Board of India (SEBI) Foreign investors looking at acquiring equity in an existing Indian company through stock acquisitions can do so under the automatic route. Page 71

Foreign Technology Transfer Foreign technology induction is encouraged by the Government both through FDI and through foreign technology collaboration agreements. No approvals are required in respect to all those foreign technology agreements which involve: a lump sum payment of up to USD 2 million royalty payable up to 5% on net domestic sales and 8% on exports, subject to a total payment of 8% on sales, without any restriction on the duration of royalty payments. Note - It is permissible for an Indian Company to issue equity shares against lump- sum fee and royalty in convertible foreign currency Page 72

Preference Shares Indian companies can mobilize foreign investment through issue of preference shares for financing their projects/industries. Issue of preference shares is permissible only as rupee denominated instruments. All preference shares have to redeemed out of accumulated profits/ fresh capital within a period of 20 years as per Indian Company Law. Preference shares, carrying a conversion option, must comply with sectoral caps on foreign equity. If the preference shares do not have conversion option, they fall outside the FDI cap. Page 73

Exchange Control Regulations of India Exchange control is regulated under the Foreign Exchange Management Act, 1999 (“FEMA”) Foreign exchange transactions have been divided into two broad categories – current account transactions and capital account transactions. The Indian rupee is fully convertible for current account transactions, subject to a negative list of transactions that are prohibited/ require prior approval. The exchange control laws and regulations for residents apply to foreign invested companies as well. Repatriation of Capital Foreign capital invested in India is generally repatriable, along with capital appreciation, if any, after the payment of taxes due on them, provided the investment was on repatriation basis. Page 74

Legal Matters Legal Matters Dispute Resolution Intellectual Property Protection State Governments Company Income Tax Page 75

Dispute Resolution Special Economy Courts Industrial Tribunal - employee disputes Tax Tribunal - tax disputes Debts Recovery Tribunal - debts disputes Local Lawyer Responsible for legal issues in our company Page 76

Intellectual Property Special Protection Activities Handbook of copyright law Cooperation with police academy Workshops and seminars for department chiefs Page 77

State Governments Responsibility Registration 13 procedures to register a company Responsible for Necessary Infrastructure Offices Electricity Internet and telephone connection Water supply Offer National Industry Parks Page 78

Outsourcing to India Apart from India’s … robust communication infrastructure; large English-speaking workforce; low labor costs and overheads; and appropriate time-zone difference with the West, … India has the following advantages to offer: The brand equity built by the software services sector in India which exports software to 95 countries around the world. Faster adoption of well-defined business processes resulting in higher productivity gains. India has state-of-the-art technologies for total solutions: outsource turnkey projects. India has a stable government and is one of the world's 10 fastest-growing economies. Page 79

Business Process Outsourcing Business Process Outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers and manages. The selected process based on defined and measurable performance criteria. Business Process Outsourcing (BPO) is one of the fastest growing segments of the Information Technology Enabled Services (ITES) industry. Page 80

Cost and Quality Advantages Outsourcing to India is now more about high quality rather than cost Indian companies are fast scaling up to match or surpass international quality standards and are ensuring that they stay ahead through stable quality systems and continuous quality improvement. Page 81

What’s Happening Today Deals are getting bigger and more complex. First mover advantages have helped earlier players to capture a larger share by expanding. Banks and Financial Institutions looking at India. Diversity of BPO services being provided. Investments in captive call centers. Service companies must have an India strategy. Page 82

Outsourcing & India From Software to BPO India call centers and BPO are the focus now India to become back-office of the world Activities Software companies have higher margins Software development & maintenance Call centers Document processing Financial analysis Legal support Page 83

Legal Considerations Outsourcing through Ownership Model Owning the Intellectual Property Enforcing the Contract Protecting Trade Secrets and IP Liability Tax Considerations Employment Issues Conclusions Page 84

Outsourcing through Ownership Model Large requirements, IP related work Tax Advantages Income Tax Holiday till 2009 Customs, excise waivers Export requirements not onerous US$ 250,000 over 5 years 10% net foreign exchange inflow Good HR infrastructure - easy to hire people Hybrid structures leverage benefits and reduce risks Page 85

Owning Intellectual Property Key Considerations Indian copyright law may apply Standard “works for hire” clause may not viable Patent protection unlikely Some concerns on fair use provisions for pre-existing IP Page 86

Enforcing the Contract Key Considerations Customers want home jurisdiction and governing law. Arbitration v. Court - from an enforcement perspective. Execute an onshore contract with the subsidiary. Avoiding Indian courts other than for injunctive relief. Very few disputes have arisen. Page 87

Protecting Trade Secrets & Intellectual Property Key Considerations India’s piracy rate is misleading. No specific statute for data protection and privacy. Common law remedies and jurisprudence applicable. Indian service companies follow safe harbor provisions. Injunctive & equitable relief reasonably easy. Need for forum shopping for IP friendly court. Not easy to enforce employee restrictions. Criminal remedies are an option. Page 88

Liability Issues Key Considerations Indirect & consequential damages very unlikely. No damages culture in Indian courts. Liquidated damages possible if reasonable. Enforcement of SLA type penalties can be a challenge. Exchange control laws may prevent payment. Page 89

Tax Considerations Some structures may fall foul of tax considerations Export requirement Receipt in foreign exchange Change in tax regime could alter pricing marginally Will the income tax holiday go away? New service tax on BPO companies PE issues arising from supervision and equipment Investment structuring for outsourcing to subsidiary Transfer pricing regime yet to stabilize Page 90

Employment Issues Key Considerations Requirements for layoff of employees onerous. Messy employment requirements rarely followed. BPO Companies may be affected. Government policies on women working at night. Government policies on flexible hours, holidays, etc. Stock options - restrictions on purchase of foreign stock. Recent skirmishes on IP related employee movement. Not easy to restrict employees. Some visa & immigration problems both ways. Page 91

Outsourcing Conclusions Ownership model is very attractive IP ownership issues should not be overlooked Set a high legal compliance standard Very few legal problems practically Huge opportunity due to supply, diversity of services Page 92

Culture • Cultural Aspects — Four major Religions: Major religions are Hindu, Muslim, and some Christians — Diverse Languages: There are 15 recognized languages with Hindi as the official language • Social Interactions Indian’s are very open and will ask personal questions — The proper greeting is namaste or hello — 3 feet of personal space, and gestures have different meanings — Strong male hierarchy — • Entertainment Protocols — Most meetings are between 11am and 4pm — Always use the professional title — An invitation to an Indian’s home should be taken seriously Page 94

Business Conduct Business cards are in English, and exchanged at the first meeting. — Hindi … the major official language in India — Different official languages in different states — More than 20 languages spoken in India — English => language of the international commerce — What‘s your name? => English — What‘s your good name? =>“Hinglish“ Gifts are also a popular custom, but adhere to religious observance. The use of a respected 3rd person intermediary for introduction is recommended. Plan meetings in advance, and do not make a tight time schedule. Page 95

Think Local The Indianized Chinese KFC – Tandoori Chicken preferred to the ‘KFC experience’ McDonalds – ‘McVeggie Burger’ & ‘McAloo Tikki’ Domino’s – ‘Peppy Paneer’ & ‘Chicken Chettinad’ Pizza Hut / Pizza Express – spicing it up! Page 96

Recruitment/ Retention Strategies Recruitment For every 5 openings, only 1 qualified candidate Employees seen as internal “customers” HR managers judged as salespeople- rather than administrators Retention Differentiating company from competitors compensation and benefits tailored to particular job Play on sense of togetherness de-emphasize pay-for-performance More important whether person liked and respected performance ability not valued as strongly Page 97

Negotiation Preparation is a key to success in India. Present issues in a hierarchical order There is low sensitivity to time. A relationship must be formed. Negotiations should be at the highest level of the Indian organization. Do’s Don’ts Rely on written agreements, not Don’t be swayed by kindness YES. Don’t bring up business on the first Modern India relies on contracts meeting. Consider other firms. Don’t trust every manager as equal Bring a group of negotiators. Save concessions for strategic implementation. Page 98

Look for the word “No” “We will see” Means “NO” “I will try” “Possibly” Page 99

Monitoring Operations Assess Performance Keep Management Focused Identify Areas for Improvement Review Monthly Reports Participate in Board Meetings Attend Industry Conferences Discuss Results with Management Talk to Department Heads, Other Managers Scan News Headlines Analyze Industry Studies, Research Check for Fraudulence, Inconsistencies Page 100

About Virtus Global Partners One of the Leading US-India Cross Border Transaction Advisory Firms • We advise funds and corporations on US-India cross border transactions such as mergers & acquisitions, strategic alliances, due diligence and market feasibility research • Principals have several years of relevant industry experience in US and India, both transactional and operational • Strong capabilities in Global Strategic Consulting, Analytics, Knowledge Process Outsourcing and Information Technology Services • Headquartered in New York with offices in Mumbai, New Delhi, Chennai and Kolkatta. Key transactions Page 101

Our Approach to Cross Border Advisory Process Review Strategy Assess and Plan Monitor and Implementation Measure Future Business Key Business • • Sourcing • Requirements Strategies, Goals Current State • Arrangements Financial portfolio and Objectives • Assessment Supply Chain • goals Financial Performance • • Improvements Strategic Portfolio • Measurement Financial Portfolio • Acquisition and Improvements (baseline and Realignment Sourcing Goals Strategic going-forward) • Strategic • Organization and Acquisition • Reality Testing • Acquisition Operating Model Sourcing Customer • • Operational • Performance Arrangements • Feedback Improvements Management Key Issues & • Continuous • IT process/ E- • Outsourcing Opportunities • Improvement commerce Opportunities Model Implementation Strategic Acquisition and Sourcing Arrangement E-commerce and Infrastructure Business Process Improvements Financial Portfolio Optimization Organizational and Operating Model Page 102

Our Office Locations New York (Headquarters): The Graybar Building 420 Lexington Avenue Suite 300 New York, NY 10170 India Offices: Delhi, India Mumbai, India Building No. 8, 2nd Floor 4th floor, Electric Mansion Tower-A Appasaheb Marathe Marg, DLF Cyber City, Phase II Prabhadevi Gurgaon - 122002 Mumbai - 400 025 Chennai, India Kolkata, India V Floor, Karumuttu Centre FMC Fortuna, A-13 V Floor 634 Anna Salai 234/3A, AJC Bose Road Chennai - 600 035 Calcutta - 700 020 Page 103

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Doing Business In India - Virtus Global Partners

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