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Doing Business In India - IMaCS Virtus Global Partners


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Doing Business in India: Strategic & Practical Considerations
Using a strategic framework to manage the challenges of business structuring, due diligence will help companies and funds create a robust India investment roadmap

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Doing Business In India - IMaCS Virtus Global Partners

  1. 1. Doing Business in India Strategic and Practical Considerations January 2010 Presented by Anil Kumar, Managing Director ; ph (646) 807-9290 501 Fifth Avenue . Suite 302 . New York, NY 10017 . 646.807.9290 .
  2. 2. 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
  3. 3. Creating an India Entry Roadmap Stage 1: Create Stage 2: Design Stage 3: Strategy Phase Implement • Market Study/ • Operating Model • Business Setup Industry Assessment • Preparing Key • Statutory and Legal • Competitive Stakeholders Filings Landscape Analysis • Partner Selection & • Risk Management • Feasibility Due Diligence • People Assessment • Organization Design • Infrastructure • Market Positioning • Legal & Regulatory • Employer Value • Location Setup Proposition Assessment • Investment • Funding • Investment Structuring Strategy Page 2
  4. 4. 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 3
  5. 5. 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
  6. 6. India is One of the World’s Top Investment Destinations 2007 Global Retail Development Index (GRDI) 2007 Global Services Location Index 100 … India is the top destination in the India 3.2 2.3 1.4 AT Kearney Global 80 China 2.9 2.3 1.4 Retail Development GRDI Score Index (2007) 60 Malaysia 2.8 1.3 2 40 Thailand 3.2 1.2 1.6 Brazil 2.6 1.8 1.5 Services sector 20 attracted interest of Indonesia 3.3 1.5 1.1 major global players 0 and large Financial structure People and skill availablity 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 Source: Goldman Sachs, “Dreaming with the BRICs” Brazil China India Russia Page 5
  7. 7. Consumer spending and household savings have grown.. 36 35.9 34 34.8 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 6
  8. 8. ..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 7
  9. 9. The Indian Demographic Dividend Page 8
  10. 10. 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 9
  11. 11. 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 10
  12. 12. 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 11
  13. 13. 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 12
  14. 14. It has become easier to invest into India 2000 on More sectors opened ; Equity caps raised in many other sectors Procedures simplified 2000 Up to 100% under Automatic Route in all sectors except a small negative list Up to 74/51/50% in 112 sectors under the 1997 Automatic Route 100% in some sectors 1991 FDI up to 51% allowed under the Automatic route in 35 Priority sectors Pre 1991 Allowed selectively up to 40% FDI Policy Liberalization Page 13
  15. 15. Potential Investment Opportunities Information Technology Software and Services - $50 billion IT-enabled Services - $17 billion E-Commerce - $8.9 billion Power Roads Transmission & Generation $40 billion Distribution $143 billion $ 116 billion Biotechnology $4.5 billion by 2010 Coal Investment Refineries Retail $ 26 billion Requirement $ 22 billion in Energy $300 billion by 2010 up to 2012 and Healthcare Cross-Country other Pipelines Infrastructure Oil & Gas $ 116 billion $ 100 billion $ 16 billion potential Areas Energy Ports Railways LNG Terminals $ 15 Billion $ 20 Billion $ 10 billion Page 14
  16. 16. 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 15
  17. 17. 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 16
  18. 18. 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 17
  19. 19. 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 18
  20. 20. Market Potential – Pharmaceuticals India is an attractive global sourcing destination for pharmaceuticals Availability of low-cost, high-quality production and regulatory compliance Large and growing US FDA-approved plant capacity Synthetic chemistry talent for early stage compound development Low cost of research and world-class testing facilities — Cost of a research scientist in India is only about 1/6th to 1/4th of that in USA Major opportunities in pharmaceuticals are in the following areas: Marketing of Patented Drugs Contract Research and Manufacturing (CRAM) IT-enabled services including clinical/market data analysis Clinical trials: revenues to grow from US$70 million (2002) to US$1-1.5 billion by 2010 driven by a 60% cost advantage and large gene pool for trials Page 19
  21. 21. Outlook and Policy - Pharmaceuticals The pharma industry is expected to grow to over US$20 billion by 2010 India has a low per capita annual spend of US$5 on pharma products and ranks 67th in the world India accounts for 22% of the global generics market The Pharmaceutical industry in India is fragmented with over 3,000 small/medium sized generic pharma manufacturers. International pharmaceutical majors like Pfizer, Johnson & Johnson, Glaxo SmithKline and Novartis have an established presence in India Consolidation likely in the fragmented Pharma industry due to recent legislation and policy updates Policy FDI up to 100% is permitted through the automatic route for the manufacture of drugs and pharmaceuticals provided the activity does not attract compulsory licensing or involve the use of recombinant DNA technology and specific cell/tissue targeted formulations The Patent (Amendment) Act enacted in April 2005 introduces product patent regime for food, chemical and pharmaceutical products – TRIPs compliant Manufacturing units are required to comply with the WHO and international standards of production Page 20
  22. 22. 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 21
  23. 23. 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 22
  24. 24. 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$25 billion by 2010 Page 23
  25. 25. Market Potential – Healthcare Policy 100% FDI is permitted for all health-related services under the automatic route Infrastructure status has been accorded to hospitals Lower tariffs and higher depreciation on medical equipment Income tax exemption for 5 years to hospitals in rural areas, Tier II and Tier III cities Page 24
  26. 26. Market Potential – Power Sector Potential Large demand-supply gap - All India average energy shortfall of 9% and peak demand shortfall of 14% The implementation of key reforms is likely to foster growth in all segments Unbundling of vertically integrated SEBs “Open Access” to Transmission and Distribution networks Select distribution circles to be franchised/privatized Tariff reforms by regulatory authorities Opportunities in Generation for: Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each Coal-based plants at pithead or coastal locations (imported coal) Natural gas/CNG-based turbines at load centers or near gas terminals Hydel power potential of 150,000 MW is untapped as assessed by the Government of India Renovation, modernization, up-rating and life extension of old thermal and hydro power plants Opportunities in Transmission network ventures - additional 60,000 circuit km of Transmission network expected by 2012 Private sector participation possible through JV and 100% equity mode Total investment opportunity of about US$ 150 billion over a 5 year horizon Page 25
  27. 27. 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 26
  28. 28. 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 27
  29. 29. 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 28
  30. 30. 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 29
  31. 31. 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 30
  32. 32. 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 31
  33. 33. 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. As of 2008, more than 500 SEZs have been proposed, 220 of which have been created. 100% Income Tax exemption on export income for SEZ units under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years. Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units Exemption from minimum alternate tax under section 115JB of the Income Tax Act. External commercial borrowing by SEZ units up to US $ 500 million in a year without any maturity restriction through recognized banking channels. Exemption from Central and State Sales Tax and Service Tax, and other levies. Single window clearance for Central and State level approvals. Page 32
  34. 34. 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 33
  35. 35. 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 • Partner Selection Requirements Landscape Analysis • Preparing Key • Risk Management • Feasibility Stakeholders • People Assessment • Legal & Regulatory • Infrastructure • Market Positioning Setup • Employer Value • Investment • Investment Proposition Strategy Structuring • Funding • Location • Partner Due Assessment Diligence Page 34
  36. 36. 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 35
  37. 37. 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 36
  38. 38. 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 37
  39. 39. 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 38
  40. 40. Design Phase • Preparing Key Stakeholders • Business plan presentation • Financial analysis • Legal & Regulatory Setup • Choosing the right legal and tax structure • Investment Structuring Page 39
  41. 41. 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 40
  42. 42. Key Indian Cities Page 41
  43. 43. 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 42
  44. 44. Strategic Investors seeking India presence commonly use the automatic route Automatic Prior FDI in select Negative List Route Approval sectors •100% FDI permitted in most Generally, applicable in FDI not allowed in certain IT sectors following cases: sensitive sectors e.g.: ITES •No prior approval necessary; • Certain cases where FDI is • Agriculture Textiles regulated • Atomic energy Pharma Only post-facto filings Oil & Gas • Investor has existing joint • Railway Transport •FDI should be brought venture / collaboration in AMC • Real Estate (except NBFC through normal banking same field existing prior to townships/ industrial channels 13 Jan 2005 Integrated township parks, etc) • Acquisition of existing development •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 43
  45. 45. FDI limits • Petroleum Sector • Drug and Pharmaceuticals • Construction Development Project • Software Development • B2B e-commerce • Electronic hardware • Tea Sector, including tea plantation • Hospitals FDI up to 100% • ISP • 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 FDI Prohibited • Atomic Energy • Lottery business • Arms and ammunition • Railway transport • Coal and ignite Page 44
  46. 46. 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 45
  47. 47. Automatic Route vs Prior Approval • The Automatic Route requires no prior regulatory approval, but only post filing notification to RBI through their Authorized Dealer/ Bankers within 30 days of investment. • FDI in sectors/transactions requiring prior Government Approval is granted by the Government Of India, Ministry of Finance, and the Foreign Investment Promotion Board (FIPB). • An application is required to be filed with the Secretariat for Industrial Assistance • (SIA)setting out the details of investment, business plan, financials of the foreign • company, etc. Along with the application, a declaration as to whether the applicant has or had any previous financial/technical collaboration or trademark agreement in India in the same field for which approval has been sought, are required to be submitted. Approval is granted by the FIPB on a case by case basis. Page 46
  48. 48. 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 No business activity permitted. Office expenses to be met through foreign exchange remittance from Head Office abroad. The foreign entity needs to have a successful profit making track record during immediately preceding 3 years in the home country. Prior RBI approval required. Liaison office not taxed. Regular filings with Registrar of Companies (ROC). Page 47
  49. 49. 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 The foreign entity needs to have a successful profit making track record during immediately preceding 5 years in the home country. Regular ROC filings to be made. The activities permitted do not include manufacturing (unless set up in an Special Economic Zone) and retail trading. Page 48
  50. 50. 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 Regular filings to be made with the ROC. Own manufacturing activities not permitted. Taxed @ 42% (including surcharge) of profits of Indian branch. Page 49
  51. 51. 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 2,000). Public company to have a minimum of 7 members and a minimum paid up capital of Rs. 5,00,000/-. (approx USD 10,000). Public Company has more corporate compliances but can list on stock exchange Page 50
  52. 52. 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 51
  53. 53. Joint Venture or Wholly Owned Subsidiary Key Considerations Meetings ROC filings Labour And Employment Taxation Taxation of foreign personnel in India Tax treaties Page 52
  54. 54. 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 53
  55. 55. 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 54
  56. 56. Due Diligence - The Bottom Line Page 55
  57. 57. Doing Due Diligence US vs. India Page 56
  58. 58. 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
  59. 59. 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
  60. 60. 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
  61. 61. Drill Down Due Diligence Page 60
  62. 62. 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
  63. 63. 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
  64. 64. 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
  65. 65. 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 64
  66. 66. 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 65
  67. 67. 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 66
  68. 68. 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 67
  69. 69. 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 68
  70. 70. 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 69
  71. 71. 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 70
  72. 72. Legal Matters Legal Matters Dispute Resolution Intellectual Property Protection State Governments Company Income Tax Page 71
  73. 73. 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 72
  74. 74. Intellectual Property Special Protection Activities Handbook of copyright law Cooperation with police academy Workshops and seminars for department chiefs Page 73
  75. 75. 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 74
  76. 76. 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 75
  77. 77. 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 76
  78. 78. 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 77
  79. 79. Legal Considerations Outsourcing through Ownership Model Owning the Intellectual Property Enforcing the Contract Protecting Trade Secrets and IP Liability Tax Considerations Employment Issues Page 78
  80. 80. 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 79
  81. 81. 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 80
  82. 82. 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 81
  83. 83. 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 82
  84. 84. 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 83
  85. 85. 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 84
  86. 86. 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 85
  87. 87. 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 86
  88. 88. 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 87
  89. 89. 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 88
  90. 90. 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 89
  91. 91. 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 90
  92. 92. Look for the word “No” “We will see” “I will try” Means “NO” “Possibly” Page 91
  93. 93. 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 92
  94. 94. 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 93
  95. 95. Our Approach to Cross Border Advisory Review Strategy Assess and Plan Process Monitor and Implementation Measure • Key Business • Future Business Requirements • Sourcing Strategies, Goals • Current State Financial portfolio Arrangements and Objectives • Assessment goals • Supply Chain • Financial • Performance Strategic Improvements Portfolio • Measurement Acquisition and • Financial Portfolio Improvements (baseline and Sourcing Goals Realignment • Strategic going-forward) Organization and • Strategic Acquisition • • Reality Testing Operating Model Acquisition • Sourcing • Customer Performance • Operational Arrangements • Feedback Management Improvements • Key Issues & • Continuous Outsourcing • IT process/ E- Opportunities • Improvement Opportunities commerce Implementation Model Strategic Acquisition and Sourcing Arrangement E-commerce and Infrastructure Business Process Improvements Financial Portfolio Optimization Organizational and Operating Model Page 94
  96. 96. 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 95