Doing Business In India - IMaCS Virtus Global Partners

Doing Business in India

Strategic and Practical Considerations

501 Fifth Avenue . Suite 302 . New York, NY 10017 . 646.807.9290 . www.ivgpartners.com

January 2010

Presented by

Anil Kumar, Managing Director

[email protected] ; ph (646) 807-9290

How can I create an India Entry Strategy?

Do I need to leverage India?

Strategic Framework

• Sustainable Advantages

• Changing Global Economy

• Future Growth of India

• Organization Design

• Finding Partners

• Implementation

Page 1

How do I grow my operations in India?

How do I manage risks in India?

• Implementation

• Statutory Compliance

• Due Diligence

• Legal Aspects

• Risk Management

• Culture & Communication

• Creating Incentives

• Monitoring Investment

Stage 1: Create Strategy

•Market Study/ Industry Assessment•Competitive

Stage 2: Design Phase

•Operating Model•Preparing Key Stakeholders

Stage 3: Implement

•Business Setup•Statutory and Legal Filings

Creating an India Entry Roadmap

Page 2

•Competitive Landscape Analysis•Feasibility Assessment•Market Positioning•Location Assessment•Investment Strategy

Stakeholders•Partner Selection & Due Diligence•Organization Design•Legal & Regulatory Setup•Investment Structuring

Filings•Risk Management•People•Infrastructure•Employer Value Proposition•Funding



Strategic Framework






• Implementation

Page 3



• Implementation


• Due Diligence

• Legal Aspects

• Risk Management




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

� Eager and savvy consumer market with growing buying potential

India is One of the World’s Top Investment Destinations

0

20

40

60

80

100

India Russia Vietnam Ukraine China Chile Latvia

GR

DI S

co

re

2007 Global Retail Development Index (GRDI) 2007 Global Services Location Index

3.3

2.6

3.2

2.8

2.9

3.2

1.5

1.8

1.2

1.3

2.3

2.3

1.1

1.5

1.6

2

1.4

1.4

Indonesia

Brazil

Thailand

Malaysia

China

India

Financial structure People and skill availablity

Business environment

Services sector attracted interest of major global players and large investments are pumped in it

… India is the top destination in the AT Kearney Global Retail Development Index (2007)

Page 5

Projected GDP Growth Rates for Select Upcoming Economies

0

2

4

6

8

2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50

GD

P G

row

th R

ate

(%

)

Brazil China India Russia

AT Kearney has placed India as the most preferable destination for Services sector (2007)…

pumped in it

India is expected to outperform its rivals in the BRIC, in terms of GDP growth rate, from 2015 onwards…

Source: Goldman Sachs, “Dreaming with the BRICs”

Consumer spending and household savings have grown..

34.8

35.9

30

32

34

36

% o

f G

DP

Gross Domestic Savings

Gross Domestic Investment

Page 6

22

24

26

28

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

% o

f G

DP

� 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

..fuelled by several factors

Page 7

� 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

The Indian Demographic Dividend

Page 8

By Year 2050, India will be World’s 3rd Largest Economy

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

US

20

03

$ b

illio

ns

Page 9

-

5,000

10,000

15,000

Chi

na US

Indi

aJa

pan

Brazi

lR

ussi

a

UK

Ger

man

yFra

nce

Italy

US

20

03

$ b

illio

ns

Source: Goldman Sachs, “Dreaming with the BRICs”

Many large companies have invested into India

USD 11 billion USD 11 billion Vodafone buys HutchVodafone buys Hutch

USD 12 billion USD 12 billion POSCO to invest in building steel manufacturingplants and facilities in India by 2016POSCO to invest in building steel manufacturingplants and facilities in India by 2016

Page 10

USD 1.7 billionUSD 1.7 billionPlans to spend on its development operations inIndia over the next four yearsPlans to spend on its development operations inIndia over the next four years

USD 2 billion USD 2 billion Plans to establish three manufacturing plants toproduce photo-voltaic unitsPlans to establish three manufacturing plants toproduce photo-voltaic units

USD 1 billionUSD 1 billionPlans investment in private equity, real estate,

and private wealth management

Plans investment in private equity, real estate,

and private wealth management

USD 1 billionUSD 1 billionPlans investment in private equity in Indian

markets

Plans investment in private equity in Indian

markets

Many large companies have invested into India

Page 11

USD 0.98 billion USD 0.98 billion Aditya Birla Group increased its stake in Idea

Cellular by acquiring 48.14-percent stake

Aditya Birla Group increased its stake in Idea

Cellular by acquiring 48.14-percent stake

Mylan Laboratories acquired a majority stake

in Matrix Laboratories

Mylan Laboratories acquired a majority stake

in Matrix Laboratories USD 0.74 billionUSD 0.74 billion

India has consistently improved over the last 17 years

Progressive Reforms Process

Strong Economic Environment

•Opportunities to enter new sectors as the reforms process opensthem up for foreign direct investment (FDI). For example, SingleBrand Retail, Life and General Insurance

•Growing GDP and FDI, falling rates of interest and maturing capitalmarkets creates private equity investment opportunity ininfrastructure, telecom, cement, toll roads, bridges, manufacturing,technology, and pharmaceuticals

•Growing consumer population expands markets across sectors

Page 12

Large Domestic Market

Availability of Resources

•Growing consumer population expands markets across sectors

•Opportunities to use India as a test market for clinical trials anddeveloping products for the global market

•Growing through acquisitions of strong Indian companies acrosssectors

•Availability of raw material and highly skilled workforce

•Opportunities to set up manufacturing bases in India, both for fulfillinglocal demand, as well as for developing a global sourcing hub

•Opportunities to set up R&D, software development and engineeringcenters that cater to their global operations

•Opportunities to set up centers for business process outsourcingLeveraging India as a source of high quality managerial talent

It has become easier to invest into India

Up to 100% under Automatic Route in all sectors except a small negative list

More sectors opened ; Equity caps raised in many other sectors Procedures simplified

2000

2000 on

Page 13

Allowed selectively up to 40%

Up to 74/51/50% in 112 sectors under theAutomatic Route 100% in some sectors

FDI up to 51% allowed under the Automatic route in 35 Priority sectors

Pre 1991

1991

1997

FDI Policy Liberalization

Potential Investment Opportunities

Information Technology

� Software and Services - $50 billion

� IT-enabled Services - $17 billion

� E-Commerce - $8.9 billion

Biotechnology

� $4.5 billion by 2010

PowerGeneration$143 billion

Transmission &Distribution $ 116 billion

Roads $40 billion

Page 14

� $4.5 billion by 2010

Retail

� $300 billion by 2010

Healthcare

� $ 16 billion potential

Energy

InvestmentRequirementin Energy

up to 2012 and other

Infrastructure Areas

LNG Terminals

$ 10 billion

Refineries

$ 22 billionCoal

$ 26 billion

Oil & Gas

$ 100 billion

Railways$ 15 Billion

Ports$ 20 Billion

Cross-CountryPipelines

$ 116 billion

Markets with Significant Export Potential

� Airport and Ground Handling Equipment

� Computers and Peripherals

� Education Services

� Electric Power Generation, Distribution and Transmission

� Mining and Mineral Processing Equipment

� Oil and Gas Field Machinery

� Pollution Control Equipment

� Safety and Security Equipment

Page 15

Distribution and Transmission Equipment

� Food Processing & Cold Storage Equipment

� Machine Tools

� Medical Equipment

� Telecommunications Equipment

� Textile Machinery

� Water Treatment

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 offormats:

Market Potential – Retail

Page 16

formats:� Food and Grocery: The largest category but largely unorganized

� Home Improvement and Consumer Durables: Over 20% p.a. CAGR estimated in the next 10years

� 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 widevariety of goods for international retail companies

� Many international retailers including Wal-Mart, GAP, JC Penney etc. are already procuringfrom India

Policy

� 100% FDI is allowed in Cash and Carry Wholesale formats. Franchiseearrangements 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.

Market Potential – Retail

Page 17

Market Potential – Power Sector

Potential

� Large demand-supply gap - All India average energy shortfall of 9% and peakdemand 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

Page 18

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 powerplants

� Opportunities in Transmission network ventures - additional 60,000 circuitkm 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

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

Market Potential – Pharmaceuticals

Page 19

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

� 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

Outlook and Policy - Pharmaceuticals

Page 20

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

Market Potential – IT and IT Enabled Services

Potential

� India’s inherent IT capabilities - talented workforce and world-classcompanies

� Availability of technically skilled and English-speaking labor force at a fraction of the costcompared to US and Europe

� Quality orientation, project and process management expertise

� Enhanced global service delivery capabilities of Indian companies through a combination ofgreenfield initiatives, M&A, alliances and partnerships with local players

� International recognition of India’s strengths

Page 21

� 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 andmaintenance as priority areas due to a high offshoreable component

� High growth of domestic IT & ITeS market due to several regulatory andtechnological 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 suchas telecom, banking, insurance, retail, healthcare, tourism and automobiles.

� Opportunity to supply to the global market in addition to serving the growingdomestic demand

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 designatedareas/zones

� IT Act, 2000 legalizes the acceptance of electronic records and digitalsignatures providing a legal backbone to e-commerce

Page 22

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.

Page 23

� 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. Themedical 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

Market Potential – Healthcare

Policy

� 100% FDI is permitted for all health-related services under the automaticroute

� 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 TierIII cities

Page 24


Potential

� Large demand-supply gap - All India average energy shortfall of 9% and peakdemand 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

Page 25

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 powerplants

� Opportunities in Transmission network ventures - additional 60,000 circuitkm 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


Policy

� 100% FDI permitted in Generation, Transmission & Distribution - theGovernment 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 ofoperation; waiver of capital goods import duties on mega power projects(above 1,000 MW generation capacity).

Page 26

(above 1,000 MW generation capacity).

� Independent Regulators: Central Electricity Regulatory Commission forcentral PSUs and inter-state issues. Each state has its own ElectricityRegulatory Commission.

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

Page 27

� 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

Market Potential – Real Estate and Construction

Policy

� 100% FDI is allowed in real estate development subject to minimum scalenorms 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

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 yearsage 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

Page 29

� 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% in1993 to 2.5% in 2006-07

� Investment opportunity across all segments in the banking and financialservices 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 nextstage of banking reforms is proposed

Market Potential – Banking and Financial Sector

Policy

� Reserve Bank of India (RBI), India’s central bank, is the regulator for thebanking 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

Page 30

� Indian private banks can be 74% foreign owned, with a 5% cap on ownershipby any one entity

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

Page 31

� Opportunity to address the global auto components market while leveragingIndia’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) toact as a driver for growth

� Potential of over US$5 billion for investment in India

Policy

� 100% FDI allowed through the automatic route

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.

Page 32

� 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.



Strategic Framework






• Implementation

Page 33



• Implementation


• Due Diligence

• Legal Aspects

• Risk Management




Stage 1: Create Strategy

•Market Study/ Industry Assessment•Competitive

Stage 2: Design Phase

•Operating Model•Organization Design•Partner Selection

Stage 3: Implement

•Business Setup•Statutory and Legal Requirements

Creating an India Entry Roadmap

Page 34

•Competitive Landscape Analysis•Feasibility Assessment•Market Positioning•Investment Strategy•Location Assessment

•Partner Selection•Preparing Key Stakeholders•Legal & Regulatory Setup•Investment Structuring•Partner Due Diligence

Requirements•Risk Management•People•Infrastructure•Employer Value Proposition•Funding

� Good local partners knowledgeable regarding the local market and

procedural issues.

� Study the Market & Competition.

� Good planning.

� Aggressive due diligence and follow up.

Keys to Success in India

Page 35

� Aggressive due diligence and follow up.

� Patience and commitment.

� Hire good advisors

� Understand the rules, standards and regulations.

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

Page 36

• 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

Creating Strategy

• Feasibility Assessment• Price Point

• Unit economics

• Cost benefit Analysis

• Change in consumer tastes, preferences

• Market Positioning• Branding/ Positioning

• Impact on P&L

Page 37

• 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

Design Phase

• Operating Model• Form of enterprise

• Corporate structure

• Partnership structure

• Organization Design• Number of employees

• Mix of local and global staff

• Partner Selection

Page 38

• Partner Selection• Value Proposition

• Key Advantages

• Risk Assessment

• Due Diligence

Design Phase

• Preparing Key Stakeholders• Business plan presentation

• Financial analysis

• Legal & Regulatory Setup• Choosing the right legal and tax structure

• Investment Structuring

Page 39

Implementation

• Business Setup• Registration of company

• RBI approvals

• Statutory and Legal Requirements

• Risk Management

• People

Page 40

• People• Hiring key personnel

• Infrastructure

• Employer Value Proposition• Recruitment strategy

• Long term / Short term incentive programs (ESOP’s / variable pay / incentives)

• Funding

Key Indian Cities

Page 41

Structuring Investments

Strategic Investor

(FDI)

Operate as a Foreign

Company

Operate as an Indian

Company

Liaison Office

Branch Office

Project Office

Joint Ventures

Wholly owned Subsidiary

Private

Public

Page 42

Investing

in India

Financial Investor

(FII or FVCI)

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

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

Public

•100% FDI permitted in most sectors

•No prior approval necessary; Only post-facto filings

•FDI should be brought through normal banking channels

Automatic Route

Prior Approval

Generally, applicable in following cases:

• Certain cases where FDI is regulated

• Investor has existing joint venture / collaboration in same field existing prior to 13 Jan 2005

Negative List

FDI not allowed in certain sensitive sectors e.g.:

• Agriculture

• Atomic energy

• Railway Transport

• Real Estate (except townships/ industrial parks, etc)

� IT� ITES� Textiles� Pharma� Oil & Gas� AMC� NBFC� Integrated township

FDI in select sectors

Strategic Investors seeking India presence commonly use the automatic route

Page 43

channels

•Investment represented by fresh issue of shares

13 Jan 2005

• Acquisition of existing shares in financial services sector

Applications processed by Foreign Investment Promotion Board [FIPB] Decision generally within 4-6 weeks

parks, etc)� Integrated township development

� Industrial parks� Industrial model towns� Hotels and tourism� SEZ’s�Atomic energy�Railway transport�Lottery business,gambling and betting

FDI limits

FDI up to 100%

• Petroleum Sector• Construction Development Project• B2B e-commerce• Tea Sector, including tea plantation• ISP• Domestic Airlines• Hotel and Tourism

• Drug and Pharmaceuticals• Software Development• Electronic hardware• Hospitals• Venture capital funds/companies• Roads and highways

• Development of Airports• ISP with Gateways, radio-paging,

end-to-end bandwidth• Establishment and operation of

facilities

• Telecommunication services• Mining of precious stones• Atomic minerals• Exploration and mining of coal and

ignite for captive consumption

FDI up to 74%

Page 44

facilities• Private sector banks

ignite for captive consumption

• Broadcasting• Domestic airlines

• Investing companies in infrastructure/services

• FM Broadcasting• Print Media

• Defense Industries• Insurance

• Retail Trading• Atomic Energy• Arms and ammunition• Coal and ignite

• Gambling and betting• Lottery business• Railway transport

FDI up to 49%

FDI up to 26%

FDI Prohibited

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.

Page 45

� 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.

• 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).

Automatic Route vs Prior Approval

Page 46

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.

Key Considerations

� Testing the waters without committing major resources.

� Developing trade relations.

� Collecting market information.

� Inspection & coordination of purchases for export to parent company.

Liaison/ Representative Office - Scope of Activities

Page 47

Regulatory/ Legal Framework

� No business activity permitted. Office expenses to be met through foreignexchange remittance from Head Office abroad.

� The foreign entity needs to have a successful profit making track recordduring immediately preceding 3 years in the home country.

� Prior RBI approval required.

� Liaison office not taxed.

� Regular filings with Registrar of Companies (ROC).

Project Office - Scope of Activities

Key Considerations

� Office for undertaking a specific project.

� Approvals granted for both Government and private sector projects.


� The foreign entity needs to have a successful profit making track recordduring immediately preceding 5 years in the home country.

Page 48

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 anSpecial Economic Zone) and retail trading.

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.

Page 49

� Undertake export/ import trading activities.


� Regular filings to be made with the ROC.

� Own manufacturing activities not permitted.

� Taxed @ 42% (including surcharge) of profits of Indian branch.

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 forautomatic approval.

� Corporate tax @ 35%.

Nature of the Company

Page 50

Nature of the Company

� Private company to have a minimum of 2 members and a minimum paid upcapital of Rs. 1,00,000/- (approx USD 2,000).

� Public company to have a minimum of 7 members and a minimum paid upcapital of Rs. 5,00,000/-. (approx USD 10,000).

� Public Company has more corporate compliances but can list on stockexchange

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 repatriatedoutside India without restrictions.

� Dividend taxable in the hands of the shareholder.

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� Dividend taxable in the hands of the shareholder.

Key Considerations

� Meetings

� ROC filings

� Labour And Employment

� Taxation

� Taxation of foreign personnel in India

Joint Venture or Wholly Owned Subsidiary

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� Taxation of foreign personnel in India

� Tax treaties

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

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Strategic Framework






• Implementation

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• Implementation


• Due Diligence

• Legal Aspects

• Risk Management




Due Diligence - The Bottom Line

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Doing Due Diligence US vs. India

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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.

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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.

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 theirIndian 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 mightalter the investor's perception with regard to the value of the company, environmentissues and aggressive tax positions among others.

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issues and aggressive tax positions among others.

5. Evaluate Corporate Governance:

Companies are slowly realizing the importance of corporate governance and some ofthe leading organizations are benchmarking to global standards. Some others aremoving towards improvement.

6. Keep an Eye on Related Party Transactions:

As a hangover of the licensing raj, Indian businesses are generally structured asconglomerates or group businesses which create extensive related party transactions.

Ten Tips to Successful Due Diligence (E&Y)

7. Avoid Legal Minefields

Weak corporate governance is compounded with tardy legal systems where disputeresolution often remains a distant goal..

8. Communicate with Care

In any transaction, communication must be handled with utmost care. Sensitivity toIndian culture with regard to dealing with the owners who are also the entrepreneursof the company will help to make the venture more rewarding.

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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 controland settle for a minority ownership stake (a common condition for many start-ups inexchange for Private Equity funding).

10. Think Global, Act Local

Firms with a presence in India have a distinct edge due to their wide networks ofcontacts and experience of the Indian business environment.

Drill Down Due Diligence

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•• Companies incorporated in India are treated as Indian companies for taxationCompanies incorporated in India are treated as Indian companies for taxation

•• There exists a Double Taxation Avoidance Agreement with 65 countriesThere exists a Double Taxation Avoidance Agreement with 65 countries

•• Peak Custom duty has been reduced to 15%Peak Custom duty has been reduced to 15%

•• Tariff to be aligned with ASEAN levelsTariff to be aligned with ASEAN levels

•• Value Added Tax introduced in some States from 1st April 2005Value Added Tax introduced in some States from 1st April 2005

•• Transparency in Tax Structure: Online/ ICT ApplicationsTransparency in Tax Structure: Online/ ICT Applications

• Differentiation - domestic company vs. foreign company

• Facts - Wealth tax rate of 1%; tax year April to March

Taxation

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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%.

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

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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”)

Indirect Tax

1. Customs Duty

2. CENVAT (Excise Duty)

3. Sales Tax

4. Value Added Tax

5. Service Tax

6. Octroi Duty/Entry Tax

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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

� 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

Considerations in Determining Deal Structure

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Companies Act of 1956, as amended (the “Companies Act”); and

� Location of “market pull” for the investee company.

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

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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.

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.

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� Shareholders agreement and implications thereof – right a first refusal, tag

along rights and drag along rights

� Liquidation process – long drawn and court approval process

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.

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� 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.

Acquisition of Shares

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route.

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

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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

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.

Exchange Control Regulations of India

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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.

Legal Matters

� Dispute Resolution

� Intellectual Property Protection

� State Governments

� Company Income Tax

Legal Matters

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Special Economy Courts

� Industrial Tribunal - employee disputes

� Tax Tribunal - tax disputes

� Debts Recovery Tribunal - debts disputes

Local Lawyer

Dispute Resolution

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Local Lawyer

� Responsible for legal issues in our company

Special Protection Activities

� Handbook of copyright law

� Cooperation with police academy

� Workshops and seminars for department chiefs

Intellectual Property

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Responsibility

� Registration

� 13 procedures to register

a company

Responsible for Necessary

Infrastructure

State Governments

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Infrastructure

�Offices

� Electricity

� Internet and telephone

connection

�Water supply

Offer National Industry Parks

Apart from India’s …

� robust communication infrastructure;

� large English-speaking workforce;

� low labor costs and overheads; and

� appropriate time-zone difference with the West,

Outsourcing to India

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… 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.

� 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

Business Process Outsourcing

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Information Technology Enabled Services (ITES) industry.

Cost and Quality Advantages

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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.

� Outsourcing through Ownership Model

� Owning the Intellectual Property

� Enforcing the Contract

� Protecting Trade Secrets and IP

Legal Considerations

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� Liability

� Tax Considerations

� Employment Issues

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

Owning Intellectual Property

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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.

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� Very few disputes have arisen.

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.

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� Injunctive & equitable relief reasonably easy.

� Need for forum shopping for IP friendly court.

� Not easy to enforce employee restrictions.

� Criminal remedies are an option.

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.

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� Exchange control laws may prevent payment.

� 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

Tax Considerations

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� Investment structuring for outsourcing to subsidiary

� Transfer pricing regime yet to stabilize

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.

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� 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.



Strategic Framework






• Implementation

Page 85



• Implementation


• Due Diligence

• Legal Aspects

• Risk Management




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

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• 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

� 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.

Business Conduct

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� 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.

Think Local

� The Indianized Chinese

� KFC – Tandoori Chicken preferred to the ‘KFC experience’

� McDonalds – ‘McVeggie Burger’ & ‘McAloo Tikki’

Domino’s – ‘Peppy Paneer’ & ‘Chicken Chettinad’

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� Domino’s – ‘Peppy Paneer’ & ‘Chicken Chettinad’

� Pizza Hut / Pizza Express – spicing it up!

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

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� 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

� 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.

Negotiation

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Do’s

� Rely on written agreements, not YES.

� Modern India relies on contracts

� Consider other firms.

� Bring a group of negotiators.

� Save concessions for strategic implementation.

Don’ts

� Don’t be swayed by kindness

� Don’t bring up business on the first meeting.

� Don’t trust every manager as equal

�“We will see”

�“I will try”

� “Possibly”

Look for the word “No”

Means “NO”

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Monitoring Operations

� Assess Performance

� Keep Management Focused

� Identify Areas for Improvement

� Review Monthly Reports

� Participate in Board Meetings

Page 92

� Attend Industry Conferences

� Discuss Results with Management

� Talk to Department Heads, Other Managers

� Scan News Headlines

� Analyze Industry Studies, Research

� Check for Fraudulence, Inconsistencies

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, bothtransactional and operational

• Strong capabilities in Global Strategic Consulting, Analytics, Knowledge ProcessOutsourcing and Information Technology Services

• Headquartered in New York with offices in Mumbai, New Delhi, Chennai and Kolkatta.

About Virtus Global Partners

Page 93

• Headquartered in New York with offices in Mumbai, New Delhi, Chennai and Kolkatta.

Key transactions

Assess and Plan Process Implementation

Monitor and Measure

• Future Business Requirements

• Financial portfolio goals

• Strategic Acquisition and Sourcing Goals

• Organization and Operating Model

• Performance ManagementOutsourcing

• Sourcing Arrangements

• Supply Chain Improvements

• Financial Portfolio Realignment

• Strategic Acquisition

• Operational Improvements

• IT process/ E-

• Current State Assessment

• Performance Measurement (baseline and going-forward)

• Reality Testing• Customer

Feedback• Continuous

Review Strategy

• Key Business Strategies, Goals and Objectives

• Financial Portfolio Improvements

• Strategic Acquisition

• Sourcing Arrangements

• Key Issues & Opportunities

Our Approach to Cross Border Advisory

Page 94

Financial Portfolio Optimization

Business Process Improvements

Organizational and Operating Model

• Outsourcing Opportunities

• IT process/ E-commerce Implementation

• Continuous Improvement Model

Key Issues & Opportunities

E-commerce and Infrastructure

Strategic Acquisition and Sourcing Arrangement

Our Office Locations

New York (Headquarters):

The Graybar Building420 Lexington AvenueSuite 300New York, NY 10170

India Offices:

Delhi, India Mumbai, India

Page 95

Delhi, India Building No. 8, 2nd FloorTower-ADLF Cyber City, Phase II Gurgaon - 122002

Mumbai, India 4th floor, Electric Mansion Appasaheb Marathe Marg, Prabhadevi Mumbai - 400 025

Chennai, India V Floor, Karumuttu Centre 634 Anna Salai Chennai - 600 035

Kolkata, India FMC Fortuna, A-13 V Floor 234/3A, AJC Bose Road Calcutta - 700 020