This document provides an overview and strategic considerations for doing business in India. It discusses leveraging India's sustainable advantages like a large consumer market and educated workforce. It outlines a three stage process for creating an India entry strategy involving market research, organization design, and implementation. Key risks like regulatory compliance and cultural differences are also addressed. Several high growth industries in India like IT, infrastructure, retail, and healthcare are highlighted with estimates of market potential and foreign investment levels. Recent policy reforms to liberalize foreign investment are noted. In conclusion, India presents many opportunities for international companies given its strong economic growth outlook and improving business environment.
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Doing Business In India - Virtus Global Partners
1. 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
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. 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
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. 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. 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
7. 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
8. 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
9. ..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
11. 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
12. 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
13. 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
14. 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
15. 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
16. 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
17. 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
18. 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
19. 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
20. 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
21. 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
22. 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
23. 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
24. 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
25. 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
26. 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
27. 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
28. 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
29. 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
30. 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
31. 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
32. 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 31
33. 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
34. 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
35. 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
36. 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
37. 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
38. Design Phase
• Preparing Key Stakeholders
• Business plan presentation
• Financial analysis
• Legal & Regulatory Setup
• Choosing the right legal and tax structure
• Investment Structuring
Page 37
39. 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
41. 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
42. 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
43. 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
44. 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
45. 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
46. 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
47. 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
48. 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
49. 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
50. 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
51. 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
52. 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
53. 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
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
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. 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. 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
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. 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
65. 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
66. 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
67. 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
68. 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
69. 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
70. 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
71. 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
72. 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
73. 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
74. 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
75. 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
76. Legal Matters
Legal Matters
Dispute Resolution
Intellectual Property Protection
State Governments
Company Income Tax
Page 75
77. 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
78. Intellectual Property
Special Protection Activities
Handbook of copyright law
Cooperation with police academy
Workshops and seminars for department chiefs
Page 77
79. 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
80. 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
81. 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
82. 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
83. 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
84. 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
85. 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
86. 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
87. 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
88. 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
89. 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
90. 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
91. 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
92. 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
93. 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
94. 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 93
95. 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
96. 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
97. 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
98. 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
99. 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
100. Look for the word “No”
“We will see”
Means “NO”
“I will try”
“Possibly”
Page 99
101. 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
102. 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
103. 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
104. 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
