In association withIssue 17 JULY 2012India WatchWelcome to the Summer edition of GrantThornton’s India Watch, in associati...
India Watch - Issue 17                                                                   July 2012Grant Thornton’s India W...
India Watch - Issue 17                                                                                                  Ju...
India Watch - Issue 17                                                                                        July 2012Cha...
India Watch - Issue 17                                                                                                    ...
India Watch - Issue 17                                                                                                    ...
India Watch - Issue 17                                                                                    July 2012       ...
India Watch - Issue 17                                                                                              July 2...
India Watch - Issue 17                                                                                               July ...
India Watch - Issue 17                                                                                        July 2012GAA...
India Watch - Issue 17                                                                                                    ...
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India Watch - Indian companies listed on the London Markets, Indian M&A activity and an analysis of the Indian economy


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Welcome to the Summer edition of Grant Thornton's India Watch, in association with the London Stock Exchange. India Watch tracks the performance of all Indian companies listed on the London Markets, while also giving an overview of Indian M&A activity and an analysis of the Indian economy.

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India Watch - Indian companies listed on the London Markets, Indian M&A activity and an analysis of the Indian economy

  1. 1. In association withIssue 17 JULY 2012India WatchWelcome to the Summer edition of GrantThornton’s India Watch, in association with theLondon Stock ExchangeIn this issue we highlight that the Grant Our guest contributor, Adam Forshyth,Thornton’s India Watch Index underperformed research Director at Arden Partners, highlightsagainst its peer indices but it remained resilient how continued demand for power in India isover the year. It appears that energy, mining and driving opportunities for companies with securedrelated infrastructure companies are taking the coal stocks and renewable energy capabilities.biggest falls. Lastly, Anshu Khanna, Partner at Walker, The second quarter of 2012 saw domestic deal Chandiok & Co, gives us an update on theactivity reinforcing the local belief in the India international and local concerns on the proposedgrowth story by clocking up a total of 89 deals, General Anti-Avoidance Regulations (GAAR)amounting to USD 1.3 billion. Cross border deal and explains how these may affect cross-borderactivity, however, mirrored ongoing global woes deals, foreign investments into India and domesticand economic uncertainty, to notch up only USD business transactions.5.1 billion worth of deals for the quarter. Private If you would like to discuss any of the mattersEquity for the quarter also saw a fall, clocking up arising in this issue or how Grant Thornton’sUSD 1.8 billion in deal value. South Asia group can help you please contact us. We take a look back over the last 6 monthsand review what progress and developmentshave taken place in India’s economy. In the firstthree months of 2012 India’s economy grew atits slowest rate since 2003 with GDP growth ofonly 5.3%. For the financial year to March 2012,India’s real GDP fell to around 6.5%, down from8.4% in the previous financial year.Anuj Chande Munesh KhannaPartner, Corporate Finance Senior Partnerand Head of South Asia Group Grant Thornton India LLPGrant Thornton UK LLP T +91 22 6626 2600T +44 (0)20 7728 2133 E
  2. 2. India Watch - Issue 17 July 2012Grant Thornton’s India WatchIndex remains resilient over theyear despite India’s slower growthIn the second quarter of 2012, it was clear thatinvestor uncertainty in respect to India hadmanifested itself. While the Grant ThorntonIndia Watch index underperformed againstits peer indices in the quarter, the year to dateperformance remains encouraging.130120 –– GT India Watch – ALL110 –– FTSE 100 –– FTSE AIM ALL-SHARE –– GT India Watch – smaller caps100 –– FTSE ASEAN –– FTSE AIM 100 –– FTSE AIM UK 50 90 80 Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2012Source: Thomson Datastream2
  3. 3. India Watch - Issue 17 July 2012If the figures for our India Watch Small Caps million TEUs (twenty foot equivalent units) build * The India Watch Index consists of 31 Indianare taken as representative, a good performance for container shipping, and a recent shareholder companies listed on AIM oragainst the FTSE AIM ALL-SHARE and FTSE dispute over Matheran Realty concludes, Eredene the Main Market (excluding GDRs). We only considerAIM 100 can be seen, with the India Smaller are set to enter Q3 with great prospects. companies to be Indian ifCaps Index closing four and five points ahead Resilience in the sector wasn’t shared by they are domiciled in India and/or foreign companiesrespectively. A few clear winners and losers can real estate and investment firm HIRCO, whose holding Indian assets or Investment companiesbe seen in the index figures for this quarter: we 32-point fall was approaching that of firms who with Indian promoters. Thereported in Q1 that no real sector trends had had taken the largest hit. While mining specialists index has been created via Datastream, a Thomsonemerged and while the biggest rises in this quarter Kolar Gold ended the quarter 37 points down, it Reuters product and isare fairly diverse, it appears that energy, mining was the energy sector that appears to have borne weighted by Market Value. To avoid distortion of indexand related infrastructure companies are taking the brunt of the fall. Essar Energy continues to trends, the two largestthe biggest falls. disappoint, with consistent underperformance market cap entities, Essar Energy and Vedanta Clear winners in Q2 come from real estate that reflects overall poor results since its entry to Resource, are excluded.investment, media and support services. DQ the index in Jan 2011. Biofuel producer Nandan ** Data sourced from Thomson Reuters.Entertainment performed particularly well, Cleantec and power generator OPG Powerespecially against the backdrop of their recent Ventures both suffered sharp falls comparedhistory. The animation specialists gained five with their year to date, but it was Mytrahpoints in Q2 after struggling in 2011 to keep costs Energy and Oilex that took the greatest shocks,under control. This means DQ Entertainment 42 and 62 points down respectively. Mytrah’sfinish with a year to date index of -5, a good announcement to expand total wind assets toperformance given last year’s problems. Delivery 500MW by March 2013, and Oilex’s resumptionof higher profit margins on distribution and the of studies into prospective wells in Gujarat state,developments in their IP work have made a big may well help to increase confidence over the nextdifference this quarter. two quarters. Financial services company EIH continue toimpress, with a solid two-point rise in Q2 andan encouraging 67-point increase from Jan 2010to date. Their offering of a diversified Indianprivate equity portfolio, with exposure weightedtowards infrastructure and real estate, is the causeof confidence among their directors that theirunderlying portfolio has yet room to mature andrealise further cash distributions. With a slim two-point rise in Q2 but a healthyseven-point rise in year to date, real estate Anuj Chandeinvestment company Eredene perhaps reflects the Partner, Corporate Financesame confidence in infrastructure investment in and Head of South Asia GroupIndia. As the company continues work to secure Grant Thornton UK LLP T +44 (0)20 7728 2133investment in the Ennore Port project – a 1.5 E 3
  4. 4. India Watch - Issue 17 July 2012Changing trends - Domesticdeal momentum continues toscore over cross border activityQ2 2012 saw domestic deal activity reinforcing local belief in the Indiagrowth story by clocking a total of 89 deals, amounting to USD 1.3 billion, asagainst 86 deals at USD 1 billion for the corresponding quarter in 2011. Crossborder deal activity, however, mirrored ongoing global woes and economicuncertainty, to notch up only USD 5.1 billion worth of deals for the quarteras against USD 11 billion worth of deals for Q2 2011. Private Equity for thequarter also saw a fall, clocking up USD 1.8 billion in deal value, as againstUSD 2.9 billion for the corresponding 2011 quarter.Deal summary: April - June 2012Q2 Deal Summary Volume Value (USD billion)Year 2010 2011 2012 2010 2011 2012Inbound 21 32 41 4.29 6.74 3.61Outbound 62 53 24 4.63 4.26 1.46Cross Border 83 85 65 8.92 11.00 5.07Domestic Internal Restructuring 114 86 89 2.53 1.00 1.26MA 197 171 154 11.45 12.00 6.32PE 66 120 102 1.39 2.90 1.80QIP 17 2 1 1.69 0.13 0.00Grand Total 280 293 257 14.53 15.03 8.12April – June 2012 MA dealscape the continued European Union worries thatMA deal values for Q2 2012 registered an spooked investors throughout the quarter, alongoverall decrease of about 47% from Q2 2011 at with speculation of a ‘Grexit’, the spectre ofUSD 6.32 billion, with the fall being attributable widespread defaults and volatile stock markets,to a considerable dip in cross border deal activity, could have proved a deterrent, at-least in the neardespite sustained momentum in domestic MA. future, to Indian companies looking to acquire Cross border MA deal values in Q2 2012 targets abroad.fell about 54% vis-à-vis 2011 levels for the Domestic deal activity continued to showsame quarter. Structurally high food inflation, resilience, posting a 26% increase in deal values inhigh interest rates, slowing GDP, and poor Q2 2012 as compared to Q2 2011 levels.governance and policy paralysis have contributedto an under-whelming outlook for India forthe short term, causing foreign entities to puttheir India investment plans on hold. Similarly,4
  5. 5. India Watch - Issue 17 July 2012Top MA deals: Q2 2012Acquirer Target Sector Domestic/Crossborder USD millionHongkong and Shanghai The Royal Bank of Scotland - retail and Banking and financial services Inbound 1,895Banking Corp commercial banking businesses in IndiaPiramal Healthcare Decision Resources Group Pharmaceuticals, healthcare and biotech Outbound 680Mitsui Sumitomo Insurance Max New York Life Insurance Banking and financial services Inbound 530Company Limited Company LimitedIndia Hospitality Corp Adelie Food Holdings Limited FMCG, food and beverage Outbound 350Sony Pictures Television Multi Screen Media Media, entertainment publishing Inbound 271Roquette Freres Riddhi Siddhi Com Processing Private FMCG, food and beverage Inbound 190 Limited - Starch business of Riddhi Siddhi Gluco BiolsYbrant Digital Limited PriceGrabber, LowerMyBills, IT ITeS Outbound 175 ClassesUSA.comBharti Airtel Qualcomm India Pvt. Limited Telecom Domestic 165Fairfax Financial Holdings Thomas Cook - India operations Travel and Tourism Inbound 163LimitedAditya Birla Nuvo Limited Pantaloon Retail India Limited (PRIL) - Retail Domestic 160 Pantaloon format of business MA sector focusTop MA sectors: April - June 2012 Banking and financial services (BFSI) contributed 39% of deal activity by value in Q2 2012, followed by pharma, healthcare and biotech (12%), FMCG, food and beverage (9%), IT and ITeS (8%) and media, entertainment and publishing (6%). The BFSI sector’s performance was spurred by two cross border deals - Mitsui Sumitomo’ strategic stake purchase in Max New York Life Insurance Ltd for about USD 530 million, and HSBC’S deal to buy the Indian retail and commercial banking businesses of Royal Bank of Scotland for USD 1,895 million. Factors Banking and financial such as the extended timelines to obtain branch services [39%] licenses from the Reserve Bank of India by foreign banks, low banking and financial services Pharmaceuticals, penetration in the country and fundamental healthcare and biotech [12%] growth opportunities in the Indian economy FMCG, food and beverage [9%] have made the Indian BFSI sector an avenue for both domestic consolidation and foreign interest. IT ITeS [8%] However, the sector has also seen some stress in Media, entertainment and the form of deteriorating asset quality due to bad publishing [6%] loans to sectors such as aviation, and domestic and overseas liquidity constraints. It will be Others [26%] 5
  6. 6. India Watch - Issue 17 July 2012interesting to watch how the sector performs in second half of the year onwards, the former beingterms of deal activity in the second half of 2012. driven by attractive asset valuations, and the The biggest deal in the pharma, healthcare and latter by potential government measures to easebiotech sector was Piramal Healthcare Limited’s FDI. The retail sector could also see heightenedacquisition of the US based Decision Resources activity once clarity is achieved on FDI in multiGroup for approximately USD 680 million. The brand retail.impending patent cliff in the US, as well as rising The above deal rationales demonstrate thatresearch costs, lower drug approval rates and whilst cross border activity might have slowedmounting regulatory pressures in the developed down significantly, India’s fundamental growthmarkets have long been considered to fuel Indian story remains strong. Ironing out governance andMA activity in the pharmaceutical sector. structural issues could give the dealscape a much The Indian media, entertainment and needed shot in the arm.publishing sector has demonstrated growth in thelast few years due to headroom provided by rising Private Equity: Signs of a cautious slowdowndisposable incomes, strong consumption in tier Private Equity (PE) for Q2 2012 fell by 38% totwo and three cities, under-penetration and the total USD 1.8 billion, as compared to USDfast-growing new media businesses. It is therefore 2.9 billion for Q2 2011. The total deal values fornot surprising that the sector saw players such Q2 2012 have also registered a fall as comparedas Eros International Plc and Sony Pictures to Q1 2012, which saw USD 2 billion worthTelevision increasing their stake in Indian entities. of deals. While it may be too early to draw a The FMCG, food and beverage sector saw conclusive trend for PE for 2012, it seems thatan interesting deal in India Hospitality Corp’s PE investments have temporarily slowed down,acquisition of Adelie Food Holdings Ltd, a most likely due to the economic and regulatoryready-to-eat food products supplier in the UK, uncertainties currently clouding India.for a reported USD 350 million, signaling the Top sectors for PE in the quarter included ITreadiness of Indian companies to establish a ITES (18%), pharma, healthcare and biotechglobal presence. (15%), power and energy (14%), BFSI (13%) Other sectors such as oil and gas, which and hospitality (8%). However, PE investorswere top performers in Q2 2011, have shown who look at long term returns, have alsomuted performance in the corresponding 2012 invested in those sectors of the Indian economyquarter. This could be attributed to the current that currently have a huge demand and supplypolicy regime and the failure of some projects to mismatch (power and energy), and massiveobtain clearances from several ministries such as potential due to a burgeoning middle class withenvironment and forests, and defence. rising disposable incomes (hospitality). Other sectors such as power and aviation areexpected to see heightened deal activity from theTop PE deals: Q2 2012Investor Investee Sector USD millionMorgan Stanley Continuum Wind Energy Power and energy 210APG - pension fund Lemon Tree Hotels Hospitality 130Warburg Pincus Future Capital Holdings Banking and financial services 112Advent International Corporation CARE Hospital Pharmaceutical, healthcare and biotech 105TA Associates Omega Healthcare Management IT ITeS 93 Services BPO unitIndivest Pte Limited - Government of Marico Limited FMCG, food and beverage 75Singapore Investment CorporationPte LimitedSequoia Capital Global Equities Just Dial Pvt Limited IT ITeS 61ChrysCapital Intas Pharmaceuticals Limited Pharmaceutical, healthcare and biotech 56NYLIM Jacob Ballas Super Religare Laboratories Pharmaceutical, healthcare and biotech 50KKR TVS Logistics Services Logistics 486
  7. 7. India Watch - Issue 17 July 2012 Outlook for H2 2012Top PE sectors: April - June 2012 Notwithstanding the rather dismal MA, and lackluster PE performance for Q2 2012 quarter, this could well be the proverbial darkest hour before the dawn. The end of June 2012 saw some welcome and rapid reprieves – clarifications on GAAR not being applied on a retrospective basis, an arrest of the free-fall of the rupee and the resumption of responsibility for the finance ministry by the Prime Minister Manmohan Singh, who was instrumental in India’s economic liberalisation in 1990. From a valuation perspective, analysts now deem India to be trading at historically low levels, IT ITeS [18%] and hence see attractive multiples. Further, India’s domestic demand remains strong, thanks to rising Pharmaceuticals, consumption levels and increasing purchasing healthcare and biotech [15%] power – in 2011, India rose to third place globally Power and energy [14%] in terms of purchasing power parity, only behind USA and China, with reports suggesting Banking and financial that India will continue to be the third largest services [13%] economy in 2015. The combination of these Hospitality [8%] factors could be a renewed interest in Indian entities by foreign players and higher Others [31%] inbound activity. Key drivers of outbound MA such as strong balance sheets, the need to look beyond home markets and attractive valuations continue to exist, even if the current economic uncertainty in the European and American markets may have put the cross border ambitions of Indian companies temporarily on hold. Factors such as the recent unveiling of a plan to address Europe’s distressed banking sector by European leaders could, if successful, see a rebound in outbound MA. Finally, if the momentum demonstrated so far by domestic deal activity also sustains in H2 2012, the dealscape may see a turnaround in the latter half of 2012. However, the industry will also keep a wary eye on headwinds such as a possible increase in fuel prices, deterioration of the With special European situation, lackluster demand for exports thanks for their from other nations such as US, and – much closer contribution to home – poor monsoons. Ankita Arora and Sowmya Karthik Balisagar Valuations Manager and Assistant Ravikumar of the Head of Valuations South Asia Group Grant Thornton Grant Thornton UK LLP India Dealtracker T +44 (0)20 7865 2475 team. E 7
  8. 8. India Watch - Issue 17 July 2012An update on the Indian economyIn this economic update we take a look back over the last six months and reviewwhat progress and developments have taken place in India’s economy.In the first three months of 2012 India’s likely consequences of these corruption scandalseconomy grew at its slowest rate since 2003 being that many prospective investors will eitherwith GDP growth of only 5.3% in comparison feel that India’s risk profile is now too high forto the same period in 2011 – well below analyst significant capital deployment or that valuationsexpectations and a decline of around 80 basis will need to be knocked back considerably topoints from the previous quarter (October 2011 account for the increased December 2011). On a positive note however, and as reported in The wider view of India’s economic position the Economist:also shows a substantial decline in economic “IKEA, a Swedish furniture chain, boostedgrowth. For the financial year to March 2012, morale by saying it would invest up toIndia’s real GDP fell to around 6.5%, down from €1.5 billion ($1.9 billion) in India—although8.4% in the previous financial year. on closer inspection that sum was spread over many years. Coca-Cola followed suit with theSo what has been the cause of this decline? announcement of an additional $3 billion inPersistently high inflation has dogged India’s investment, taking the total earmarked for Indiaeconomy for a number of years now and even by 2020 to $5 billion. A ratings agency provedwith a near-monthly increase in the country’s oddly helpful, too: on June 25th Moody’s signalledkey interest rate recently (although it was kept at it would not follow Standard Poor’s and Fitch,8% in the last meeting of India’s central bank), which have both warned of a possible downgradeinflation continues to be a significant thorn in of India to junk status. Its rating, which hoversthe side of India’s economy and its quest for just within investment grade, remains stable, thestabilisation and increased growth. agency said.” The value of the rupee against the dollar has In addition, there is further hope following thealso played a material part in the destabilisation recent resumption of responsibility for the financeof India’s economy over the last few months in ministry by the Prime Minister, Manmohanparticular. As reported by the BBC, since July last Singh. Pranab Mukherjee, the previous financeyear, the Indian rupee has seen one of the biggest minister, left his position on 26 June following adeclines among Asian currencies against the dollar terrible time in office – overseeing a substantial– dropping by more than 27%. The depreciation decline in India’s growth rate, spiralling inflationof the rupee, coupled with a backdrop of rates and failing to put in place a suitable solutiondeclining global demand and high inflation (as for India’s budget deficit. The hope in Premierhighlighted above) has made the creation of a Singh comes from his previous track record asplatform from which sustainable and increasing finance minister, a position he held in 1991, wheneconomic growth can be achieved, incredibly he was the driving force behind the opening upchallenging. of India economy to foreign investment and the While India’s government has attempted to initiation of the privatisation of publicintroduce new policies to help battle the country’s sector companies.economic decline, many analysts feel there is a The extent to which the appointment ofmajor lack of impetus as well as a clear, realistic Premier Singh as finance minister will helpgrowth plan. In addition, some important new reverse the country’s current economic prospectseconomic reforms (particularly those which will will be seen in time but it will certainly be seenallow greater foreign investment in India) have as a move forward for many within India andbeen delayed, for over a year, amid the on-going the wider global economy. If Premier Singhcorruption scandals which continue to cast a dark is able to implement the much needed policy Munesh Khannashadow over India’s political arena and further reforms prior to the next general election in 2014, Senior Partnerincrease the risk profile of the country for many India’s economy outlook is likely to improve Grant Thornton India LLP T + 91 22 6626 2600of those international institutions interested in considerably. E in Asia’s third largest economy. The8
  9. 9. India Watch - Issue 17 July 2012Indian power– the next five yearsDespite threats to India’s GDP growth, power be opportunities for new capacity developers whodemand in India remains resilient. Against this, can secure coal or who do not need it.a significant barrier to entry has arisen: access It is also likely that more imported coal willto coal. This will slow supply of new capacity, put upward pressure on electricity prices. Evenmaintain a power deficit and put upward pressure despite the recent fall in global coal prices, theyon prices, despite the threat of lower growth. remain some 36% above the price of Indian coalCompanies that have secured access to coal, or after adjusting for differences in calorific valuethose that are not dependant on it, are now in a and transportation. The use of more importedstrong position to benefit from better pricing and coal in the Indian fuel mix will raise the averagecontinued growth opportunities for new projects. cost of production. Additionally some of the Power shortages remain a problem across larger power producers bid for contracts on theIndia. Despite adding a record amount of new basis of very low cost Indonesian coal. Indonesiacapacity in 2011/12, the gap between peak has subsequently introduced legislation topower demand and available capacity increased link the price of exported coal to internationalfrom 9.8% to 10.6%. Recent press reports have benchmarks, damaging the economics of thesehighlighted significant power cuts with some contracts. There is now considerable pressureareas of Uttar Pradesh, Uttarakhand and Andhra from the power companies to have contractsPradesh facing outages of between four and nine revised upwards.hours a day. The pressure for price increases may be In order to address this problem, India is tempered by weaker global coal prices althoughplanning to add almost 100GW of new power they would have to fall a lot further. Upwardcapacity over the next five years to an installed revisions may also be limited by the abilitybase of 200GW. If successful it will be adding of the State Electricity Boards (SEBs) to paymore than the total installed capacity in the UK. for increases. However, with 16 SEBs in theHowever, almost 60% of the new capacity is process of implementing end-user tariff increasestargeted to come from coal generation and coal themselves, there is scope for the prices paid tosupplies have come under pressure. generators to improve in the long run. While there is political will to improve coal In summary, the continuing deficit meanssupplies, we think there will still be a coal deficit opportunities to bring new capacity to the marketacross the next five years. Coal India Limited will will remain and the upward pressure on pricesimprove production but the significant planned means that the potential rewards for doing soincrease in capacity means that the power sector should improve. Of course any new capacity willwill still need more imported coal. Imports of either need secured coal supplies or not dependcoal to the power sector could potentially double on coal. As a result we see opportunities forto meet the demands of new capacity. companies with secured coal (either in India or A problem then arises because Indian power abroad) and for companies developingstations have been designed for low calorie, high renewable capacity.ash Indian coal and are limited in the amount ofhigher calorie imported coal that they can burn.While new stations will be more flexible, policyis that, with the exception of specific coastalstations, they retain the ability to burn all Indiancoal if required. This factor will limit the totalamount of new capacity that can be added. Adam Forsyth As a result, even if we factor in a lower GDP Research Directorgrowth rate of just 6%, a power deficit is likely to Arden Partners T +44 (0) 20 7614 5952remain despite the corresponding lower growth E adam.forsyth@arden-partners.comin peak demand. This means that there will still 9
  10. 10. India Watch - Issue 17 July 2012GAAR: A dynamic move inthe right direction?Internationally, tax avoidance has been recognised as an area ofinterest and several countries have expressed concern over tax evasionand avoidance. Tax payers across the world arrange their business/affairs in a way that gives them maximum tax advantage. On onehand, tax authorities look at these transactions carrying a reductionin tax liability with a jaundiced eye while taxpayers label the sametransactions as genuine ‘tax planning’. This difference in approachand outlook becomes the subject matter of debate and may turn intoprotracted litigation.Currently India has specific anti-avoidance it provides a legitimate exit route for investorsprovisions engraved both in the domestic tax is not relevant for the purpose of determininglaws and in some of the tax treaties through the commercial substance.‘limitation of benefits’ clause. The Indian Finance GAAR is one of the proposals which is facingMinister, in the Union Budget 2012 proposed maximum criticism from within and outside India.General Anti Avoidance Regulations (GAAR), one The question arises while similar provisions alsoof the most significant contemporary tax reforms exist in other countries. Why is there so much huebeing pursued by the Indian policymakers. and cry about Indian GAAR proposals? A possible Though in the final Finance Bill, its applicability answer may be that the issue is not whether Indiahas been deferred by a year to 1st April 2013, we should have GAAR or not, but more aroundall know that GAAR has made a debut in India the possibility of its misuse and ineffectiveand it is a reality now even though effective after implementation.a year. The current dispute resolution system in Taxpayers, domestic and foreign, will witness a India, wide powers of Indian tax officials andparadigm shift in the empowerment and approach their unpredictable assessment of cases worry theof tax authorities in India towards taxation international community (especially consideringof transactions, structures and arrangements. GAAR’s wide scope and lack of proper guidelinesGAAR provisions may impact cross border deals, to avoid its misuse).investments into India by foreign institutionalinvestors and private equity funds, as well as dayto day business transactions. These provisionsare substantially overriding in nature and wouldimpact all restructuring and acquisitions. GAARprovisions expressly clarify that the holding periodof a structure or arrangement and the fact that10
  11. 11. India Watch - Issue 17 July 2012Some of the emerging concerns, mentioned Conclusionbelow, are dampening MA activity and the A country’s tax regime is a very significant factorfunding market. if not decisive factor for a foreign investor to invest1 Very wide scope: Scope of Indian GAAR its funds in any jurisdiction. Today businesses is very wide as it seeks to cover all the are looking at inorganic growth to achieve better arrangements which have an element of ‘tax economies of scale, synergy and competency in the benefit’ accruing to the taxpayer. form of business reorganisations. Therefore the2 GAAR v treaty provisions: Proposed GAAR tax policies of the government need to be critically provisions would apply even if the treaty framed as to achieve the purpose of tax reform and provisions are more beneficial. A unilateral also to be positive to the business environment of enactment of a new domestic tax law which the country. is contrary to an existing treaty, without an Worldwide, GAAR has been criticised and amendment to that treaty, could possibly be supported equally by international tax experts. regarded as violation of international law and is The rule of law requires law to be certain and generally known as ‘treaty override’. predictable, such that law abiding citizens are As per the rules of legislative interpretation, aware of what is permitted and what is prohibited. specific legislation overrides general legislation. While the concept of GAAR may be against this Therefore, the argument may be taken that principle, to some extent, GAAR is important, a change to a domestic law generally, which since it is not humanly possible to make laws could be the case with GAAR, may not affect for each and every tax avoidance tool used by a the treaty. However, in the absence of an anti- creative taxpayer. avoidance provision under the treaty, reaction The success of GAAR lies in its judicious, of India’s treaty partner countries needs to selective and sensible implementation. In the be observed. Indian context, considering the aggression of tax3 Wide powers of tax authorities: Tax authorities administration in some cases, the introduction of are given powers to invoke GAAR by using GAAR may be worrisome to a tax payer unless any one of the criterion which are vast as implemented in a balanced manner with adequate well as ambiguous. Thus there is a need to safeguards for protecting the taxpayer. Tax payers lay down more objective criteria and specific would keenly await draft subordinate legislation, administrative guidelines for invoking which law makers expect would be open for GAAR and to establish a reasonable level of public debate. accountability for the tax authorities. The intent of the Indian lawmakers to legislate4 Constitution of the Panel: It may be ideal if GAAR is progressive in so far as tax policy certain industry experts are nominated for decisions are directed. However, an important the Approving Panel who can bring in their question is whether, in the current context, the Anshu Khanna expert knowledge/experience which can help introduction of GAAR is well timed, or if it is Partner Tax Regulatory Practice understanding the true business or commercial still a premature effort towards alignment with Walker, Chandiok Co purpose of a transaction. internationally accepted principles of T +91 40 6630 8240 anti-avoidance. E 11
  12. 12. About us Grant Thornton UK LLP established a dedicated South Asia Group in 1991 to serve Asian owned businesses in the UK as well as those investing into and from the Indian subcontinent. We are proud to be one of the first UK accountancy firms to focus on this region. We are widely recognised as one of the leading international firms advising on India-related matters and have been in involved in every IPO involving an Indian company on AIM, with the exception of the real estate sector. For those clients requiring advice in both the UK and India we offer a seamless service building on the already strong and close relationship between Grant Thornton UK LLP and Grant Thornton India. International and emerging markets blog As part of our commitment to remaining at the forefront of changes and developments in regards to UK-India relationship we will be using this space to post original thought leadership and research relevant to the industry. The idea is to encourage discussion around these issues and to open up new areas and debate. To participate: More information about our South Asia Group can be found at:© 2012 Grant Thornton UK LLP. All rights reserved.‘Grant Thornton’ means Grant Thornton UK LLP, a limitedliability partnership.Grant Thornton is a member firm of Grant Thornton International Ltd(Grant Thornton International). References to ‘Grant Thornton’ are to thebrand under which the Grant Thornton member firms operate and referto one or more member firms, as the context requires. Grant ThorntonInternational and the member firms are not a worldwide partnership.Services are delivered independently by member firms, which are notresponsible for the services or activities of one another. Grant ThorntonInternational does not provide services to clients.This publication has been prepared only as a guide.No responsibility can be accepted by us for loss occasionedto any person acting or refraining from acting as a result ofany material in this