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

India WatchIssue 17 JULY 2012

In association with

Welcome to the Summer edition of Grant Thornton’s India Watch, in association with the London Stock Exchange

Our guest contributor, Adam Forshyth, research Director at Arden Partners, highlights how continued demand for power in India is driving opportunities for companies with secured coal stocks and renewable energy capabilities.

Lastly, Anshu Khanna, Partner at Walker, Chandiok & Co, gives us an update on the international and local concerns on the proposed General Anti-Avoidance Regulations (GAAR) and explains how these may affect cross-border deals, foreign investments into India and domestic business transactions.

If you would like to discuss any of the matters arising in this issue or how Grant Thornton’s South Asia group can help you please contact us.

In this issue we highlight that the Grant Thornton’s India Watch Index underperformed against its peer indices but it remained resilient over the year. It appears that energy, mining and related infrastructure companies are taking the biggest falls.

The second quarter of 2012 saw domestic deal activity reinforcing the local belief in the India growth story by clocking up a total of 89 deals, amounting to USD 1.3 billion. Cross border deal activity, however, mirrored ongoing global woes and economic uncertainty, to notch up only USD 5.1 billion worth of deals for the quarter. Private Equity for the quarter also saw a fall, clocking up USD 1.8 billion in deal value.

We take a look back over the last 6 months and review what progress and developments have taken place in India’s economy. In the first three months of 2012 India’s economy grew at its slowest rate since 2003 with GDP growth of only 5.3%. For the financial year to March 2012, India’s real GDP fell to around 6.5%, down from 8.4% in the previous financial year.

Anuj Chande Partner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 e [email protected]

Munesh KhannaSenior PartnerGrant Thornton India LLPT +91 22 6626 2600e [email protected]

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India Watch - Issue 17 July 2012

Grant Thornton’s India Watch Index remains resilient over the year despite India’s slower growth

In the second quarter of 2012, it was clear that investor uncertainty in respect to India had manifested itself. While the Grant Thornton India Watch index underperformed against its peer indices in the quarter, the year to date performance remains encouraging.

80

90

100

110

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Jun 2012May 2012Apr 2012Mar 2012Feb 2012Jan 2012

–– GT India Watch – ALL

–– FTSE 100

–– FTSE AIM ALL-SHARE

–– GT India Watch – smaller caps

–– FTSE ASEAN

–– FTSE AIM 100

–– FTSE AIM UK 50

source: Thomson Datastream

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If the figures for our India Watch Small Caps are taken as representative, a good performance against the FTSE AIM ALL-SHARE and FTSE AIM 100 can be seen, with the India Smaller Caps Index closing four and five points ahead respectively. A few clear winners and losers can be seen in the index figures for this quarter: we reported in Q1 that no real sector trends had emerged and while the biggest rises in this quarter are fairly diverse, it appears that energy, mining and related infrastructure companies are taking the biggest falls.

Clear winners in Q2 come from real estate investment, media and support services. DQ Entertainment performed particularly well, especially against the backdrop of their recent history. The animation specialists gained five points in Q2 after struggling in 2011 to keep costs under control. This means DQ Entertainment finish with a year to date index of -5, a good performance given last year’s problems. Delivery of higher profit margins on distribution and the developments in their IP work have made a big difference this quarter.

Financial services company EIH continue to impress, with a solid two-point rise in Q2 and an encouraging 67-point increase from Jan 2010 to date. Their offering of a diversified Indian private equity portfolio, with exposure weighted towards infrastructure and real estate, is the cause of confidence among their directors that their underlying portfolio has yet room to mature and realise further cash distributions.

With a slim two-point rise in Q2 but a healthy seven-point rise in year to date, real estate investment company Eredene perhaps reflects the same confidence in infrastructure investment in India. As the company continues work to secure investment in the Ennore Port project – a 1.5

million TEUs (twenty foot equivalent units) build for container shipping, and a recent shareholder dispute over Matheran Realty concludes, Eredene are set to enter Q3 with great prospects.

Resilience in the sector wasn’t shared by real estate and investment firm HIRCO, whose 32-point fall was approaching that of firms who had taken the largest hit. While mining specialists Kolar Gold ended the quarter 37 points down, it was the energy sector that appears to have borne the brunt of the fall. Essar Energy continues to disappoint, with consistent underperformance that reflects overall poor results since its entry to the index in Jan 2011. Biofuel producer Nandan Cleantec and power generator OPG Power Ventures both suffered sharp falls compared with their year to date, but it was Mytrah Energy and Oilex that took the greatest shocks, 42 and 62 points down respectively. Mytrah’s announcement to expand total wind assets to 500MW by March 2013, and Oilex’s resumption of studies into prospective wells in Gujarat state, may well help to increase confidence over the next two quarters.

Anuj Chande Partner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 e [email protected]

* The India Watch Index consists of 31 Indian companies listed on AIM or the Main Market (excluding GDRs). We only consider companies to be Indian if they are domiciled in India and/or foreign companies holding Indian assets or Investment companies with Indian promoters. The index has been created via Datastream, a Thomson Reuters product and is weighted by Market Value. To avoid distortion of index trends, the two largest market cap entities, Essar Energy and Vedanta Resource, are excluded.** Data sourced from Thomson Reuters.

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April – June 2012 M&A dealscapeM&A deal values for Q2 2012 registered an overall decrease of about 47% from Q2 2011 at USD 6.32 billion, with the fall being attributable to a considerable dip in cross border deal activity, despite sustained momentum in domestic M&A.

Cross border M&A deal values in Q2 2012 fell about 54% vis-à-vis 2011 levels for the same quarter. Structurally high food inflation, high interest rates, slowing GDP, and poor governance and policy paralysis have contributed to an under-whelming outlook for India for the short term, causing foreign entities to put their India investment plans on hold. Similarly,

Changing trends - Domestic deal momentum continues to score over cross border activity

Q2 2012 saw domestic deal activity reinforcing local belief in the India growth story by clocking a total of 89 deals, amounting to USD 1.3 billion, as against 86 deals at USD 1 billion for the corresponding quarter in 2011. Cross border deal activity, however, mirrored ongoing global woes and economic uncertainty, to notch up only USD 5.1 billion worth of deals for the quarter as against USD 11 billion worth of deals for Q2 2011. Private Equity for the quarter also saw a fall, clocking up USD 1.8 billion in deal value, as against USD 2.9 billion for the corresponding 2011 quarter.

the continued European Union worries that spooked investors throughout the quarter, along with speculation of a ‘Grexit’, the spectre of widespread defaults and volatile stock markets, could have proved a deterrent, at-least in the near future, to Indian companies looking to acquire targets abroad.

Domestic deal activity continued to show resilience, posting a 26% increase in deal values in Q2 2012 as compared to Q2 2011 levels.

Q2 Deal summary Volume Value (usD billion)

Year 2010 2011 2012 2010 2011 2012

Inbound 21 32 41 4.29 6.74 3.61

Outbound 62 53 24 4.63 4.26 1.46

Cross Border 83 85 65 8.92 11.00 5.07

Domestic & Internal Restructuring 114 86 89 2.53 1.00 1.26

M&A 197 171 154 11.45 12.00 6.32

PE 66 120 102 1.39 2.90 1.80

QIP 17 2 1 1.69 0.13 0.00

Grand Total 280 293 257 14.53 15.03 8.12

Deal summary: April - June 2012

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Top M&A deals: Q2 2012

Acquirer Target sector Domestic/Crossborder usD million Hongkong and Shanghai Banking Corp

The Royal Bank of Scotland - retail and commercial banking businesses in India

Banking and financial services Inbound 1,895

Piramal Healthcare Decision Resources Group Pharmaceuticals, healthcare and biotech Outbound 680Mitsui Sumitomo Insurance Company Limited

Max New York Life Insurance Company Limited

Banking and financial services Inbound 530

India Hospitality Corp Adelie Food Holdings Limited FMCG, food and beverage Outbound 350Sony Pictures Television Multi Screen Media Media, entertainment & publishing Inbound 271Roquette Freres Riddhi Siddhi Com Processing Private

Limited - Starch business of Riddhi Siddhi Gluco Biols

FMCG, food and beverage Inbound 190

Ybrant Digital Limited PriceGrabber, LowerMyBills, ClassesUSA.com

IT & ITeS Outbound 175

Bharti Airtel Qualcomm India Pvt. Limited Telecom Domestic 165Fairfax Financial Holdings Limited

Thomas Cook - India operations Travel and Tourism Inbound 163

Aditya Birla Nuvo Limited Pantaloon Retail India Limited (PRIL) - Pantaloon format of business

Retail Domestic 160

M&A sector focusBanking and financial services (BFSI) contributed 39% of deal activity by value in Q2 2012, followed by pharma, healthcare and biotech (12%), FMCG, food and beverage (9%), IT and ITeS (8%) and media, entertainment and publishing (6%).

The BFSI sector’s performance was spurred by two cross border deals - Mitsui Sumitomo’ strategic stake purchase in Max New York Life Insurance Ltd for about USD 530 million, and HSBC’S deal to buy the Indian retail and commercial banking businesses of Royal Bank of Scotland for USD 1,895 million. Factors such as the extended timelines to obtain branch licenses from the Reserve Bank of India by foreign banks, low banking and financial services penetration in the country and fundamental growth opportunities in the Indian economy have made the Indian BFSI sector an avenue for both domestic consolidation and foreign interest. However, the sector has also seen some stress in the form of deteriorating asset quality due to bad loans to sectors such as aviation, and domestic and overseas liquidity constraints. It will be

Banking and financial services [39%]

Pharmaceuticals,healthcare and biotech [12%]

FMCG, food and beverage [9%]

IT & ITeS [8%]

Media, entertainment andpublishing [6%]

Others [26%]

Top M&A sectors: April - June 2012

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interesting to watch how the sector performs in terms of deal activity in the second half of 2012.

The biggest deal in the pharma, healthcare and biotech sector was Piramal Healthcare Limited’s acquisition of the US based Decision Resources Group for approximately USD 680 million. The impending patent cliff in the US, as well as rising research costs, lower drug approval rates and mounting regulatory pressures in the developed markets have long been considered to fuel Indian M&A activity in the pharmaceutical sector.

The Indian media, entertainment and publishing sector has demonstrated growth in the last few years due to headroom provided by rising disposable incomes, strong consumption in tier two and three cities, under-penetration and the fast-growing new media businesses. It is therefore not surprising that the sector saw players such as Eros International Plc and Sony Pictures Television increasing their stake in Indian entities.

The FMCG, food and beverage sector saw an interesting deal in India Hospitality Corp’s acquisition of Adelie Food Holdings Ltd, a ready-to-eat food products supplier in the UK, for a reported USD 350 million, signaling the readiness of Indian companies to establish a global presence.

Other sectors such as oil and gas, which were top performers in Q2 2011, have shown muted performance in the corresponding 2012 quarter. This could be attributed to the current policy regime and the failure of some projects to obtain clearances from several ministries such as environment and forests, and defence.

Other sectors such as power and aviation are expected to see heightened deal activity from the

Investor Investee sector usD million Morgan Stanley Continuum Wind Energy Power and energy 210APG - pension fund Lemon Tree Hotels Hospitality 130Warburg Pincus Future Capital Holdings Banking and financial services 112Advent International Corporation CARE Hospital Pharmaceutical, healthcare and biotech 105TA Associates Omega Healthcare Management

Services BPO unitIT & ITeS 93

Indivest Pte Limited - Government of Singapore Investment Corporation Pte Limited

Marico Limited FMCG, food and beverage 75

Sequoia Capital Global Equities Just Dial Pvt Limited IT & ITeS 61ChrysCapital Intas Pharmaceuticals Limited Pharmaceutical, healthcare and biotech 56NYLIM Jacob Ballas Super Religare Laboratories Pharmaceutical, healthcare and biotech 50KKR TVS Logistics Services Logistics 48

Top Pe deals: Q2 2012

second half of the year onwards, the former being driven by attractive asset valuations, and the latter by potential government measures to ease FDI. The retail sector could also see heightened activity once clarity is achieved on FDI in multi brand retail.

The above deal rationales demonstrate that whilst cross border activity might have slowed down significantly, India’s fundamental growth story remains strong. Ironing out governance and structural issues could give the dealscape a much needed shot in the arm.

Private equity: signs of a cautious slowdownPrivate Equity (PE) for Q2 2012 fell by 38% to total USD 1.8 billion, as compared to USD 2.9 billion for Q2 2011. The total deal values for Q2 2012 have also registered a fall as compared to Q1 2012, which saw USD 2 billion worth of deals. While it may be too early to draw a conclusive trend for PE for 2012, it seems that PE investments have temporarily slowed down, most likely due to the economic and regulatory uncertainties currently clouding India.

Top sectors for PE in the quarter included IT & ITES (18%), pharma, healthcare and biotech (15%), power and energy (14%), BFSI (13%) and hospitality (8%). However, PE investors who look at long term returns, have also invested in those sectors of the Indian economy that currently have a huge demand and supply mismatch (power and energy), and massive potential due to a burgeoning middle class with rising disposable incomes (hospitality).

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Karthik Balisagar Valuations Manager and Assistant Head of Valuations South Asia GroupGrant Thornton UK LLPT +44 (0)20 7865 2475 e [email protected]

With special thanks for their contribution to Ankita Arora and sowmya Ravikumar of the Grant Thornton India Dealtracker team.

IT & ITeS [18%]

Pharmaceuticals,healthcare and biotech [15%]

Power and energy [14%]

Banking and financialservices [13%]

Hospitality [8%]

Others [31%]

Top Pe sectors: April - June 2012Outlook for H2 2012Notwithstanding the rather dismal M&A, and lackluster PE performance for Q2 2012 quarter, this could well be the proverbial darkest hour before the dawn.

The end of June 2012 saw some welcome and rapid reprieves – clarifications on GAAR not being applied on a retrospective basis, an arrest of the free-fall of the rupee and the resumption of responsibility for the finance ministry by the Prime Minister Manmohan Singh, who was instrumental in India’s economic liberalisation in 1990. From a valuation perspective, analysts now deem India to be trading at historically low levels, and hence see attractive multiples. Further, India’s domestic demand remains strong, thanks to rising consumption levels and increasing purchasing power – in 2011, India rose to third place globally in terms of purchasing power parity, only behind USA and China, with reports suggesting that India will continue to be the third largest economy in 2015. The combination of these factors could be a renewed interest in Indian entities by foreign players and higher inbound activity.

Key drivers of outbound M&A such as strong balance sheets, the need to look beyond home markets and attractive valuations continue to exist, even if the current economic uncertainty in the European and American markets may have put the cross border ambitions of Indian companies temporarily on hold. Factors such as the recent unveiling of a plan to address Europe’s distressed banking sector by European leaders could, if successful, see a rebound in outbound M&A.

Finally, if the momentum demonstrated so far by domestic deal activity also sustains in H2 2012, the dealscape may see a turnaround in the latter half of 2012. However, the industry will also keep a wary eye on headwinds such as a possible increase in fuel prices, deterioration of the European situation, lackluster demand for exports from other nations such as US, and – much closer home – poor monsoons.

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Munesh KhannaSenior PartnerGrant Thornton India LLPT + 91 22 6626 2600e [email protected]

In the first three months of 2012 India’s economy grew at its slowest rate since 2003 with GDP growth of only 5.3% in comparison to the same period in 2011 – well below analyst expectations and a decline of around 80 basis points from the previous quarter (October 2011 to December 2011).

The wider view of India’s economic position also shows a substantial decline in economic growth. For the financial year to March 2012, India’s real GDP fell to around 6.5%, down from 8.4% in the previous financial year.

so what has been the cause of this decline?Persistently high inflation has dogged India’s economy for a number of years now and even with a near-monthly increase in the country’s key interest rate recently (although it was kept at 8% in the last meeting of India’s central bank), inflation continues to be a significant thorn in the side of India’s economy and its quest for stabilisation and increased growth.

The value of the rupee against the dollar has also played a material part in the destabilisation of India’s economy over the last few months in particular. As reported by the BBC, since July last year, the Indian rupee has seen one of the biggest declines among Asian currencies against the dollar – dropping by more than 27%. The depreciation of the rupee, coupled with a backdrop of declining global demand and high inflation (as highlighted above) has made the creation of a platform from which sustainable and increasing economic growth can be achieved, incredibly challenging.

While India’s government has attempted to introduce new policies to help battle the country’s economic decline, many analysts feel there is a major lack of impetus as well as a clear, realistic growth plan. In addition, some important new economic reforms (particularly those which will allow greater foreign investment in India) have been delayed, for over a year, amid the on-going corruption scandals which continue to cast a dark shadow over India’s political arena and further increase the risk profile of the country for many of those international institutions interested in investing in Asia’s third largest economy. The

An update on the Indian economyIn this economic update we take a look back over the last six months and review what progress and developments have taken place in India’s economy.

likely consequences of these corruption scandals being that many prospective investors will either feel that India’s risk profile is now too high for significant capital deployment or that valuations will need to be knocked back considerably to account for the increased risk.

On a positive note however, and as reported in the Economist:

“IKEA, a Swedish furniture chain, boosted morale by saying it would invest up to €1.5 billion ($1.9 billion) in India—although on closer inspection that sum was spread over many years. Coca-Cola followed suit with the announcement of an additional $3 billion in investment, taking the total earmarked for India by 2020 to $5 billion. A ratings agency proved oddly helpful, too: on June 25th Moody’s signalled it would not follow Standard & Poor’s and Fitch, which have both warned of a possible downgrade of India to junk status. Its rating, which hovers just within investment grade, remains stable, the agency said.”

In addition, there is further hope following the recent resumption of responsibility for the finance ministry by the Prime Minister, Manmohan Singh. Pranab Mukherjee, the previous finance minister, left his position on 26 June following a terrible time in office – overseeing a substantial decline in India’s growth rate, spiralling inflation rates and failing to put in place a suitable solution for India’s budget deficit. The hope in Premier Singh comes from his previous track record as finance minister, a position he held in 1991, when he was the driving force behind the opening up of India economy to foreign investment and the initiation of the privatisation of public sector companies.

The extent to which the appointment of Premier Singh as finance minister will help reverse the country’s current economic prospects will be seen in time but it will certainly be seen as a move forward for many within India and the wider global economy. If Premier Singh is able to implement the much needed policy reforms prior to the next general election in 2014, India’s economy outlook is likely to improve considerably.

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Adam ForsythResearch DirectorArden PartnersT +44 (0) 20 7614 5952e [email protected]

Indian power – the next five yearsDespite threats to India’s GDP growth, power demand in India remains resilient. Against this, a significant barrier to entry has arisen: access to coal. This will slow supply of new capacity, maintain a power deficit and put upward pressure on prices, despite the threat of lower growth. Companies that have secured access to coal, or those that are not dependant on it, are now in a strong position to benefit from better pricing and continued growth opportunities for new projects.

Power shortages remain a problem across India. Despite adding a record amount of new capacity in 2011/12, the gap between peak power demand and available capacity increased from 9.8% to 10.6%. Recent press reports have highlighted significant power cuts with some areas of Uttar Pradesh, Uttarakhand and Andhra Pradesh facing outages of between four and nine hours a day.

In order to address this problem, India is planning to add almost 100GW of new power capacity over the next five years to an installed base of 200GW. If successful it will be adding more than the total installed capacity in the UK. However, almost 60% of the new capacity is targeted to come from coal generation and coal supplies have come under pressure.

While there is political will to improve coal supplies, we think there will still be a coal deficit across the next five years. Coal India Limited will improve production but the significant planned increase in capacity means that the power sector will still need more imported coal. Imports of coal to the power sector could potentially double to meet the demands of new capacity.

A problem then arises because Indian power stations have been designed for low calorie, high ash Indian coal and are limited in the amount of higher calorie imported coal that they can burn. While new stations will be more flexible, policy is that, with the exception of specific coastal stations, they retain the ability to burn all Indian coal if required. This factor will limit the total amount of new capacity that can be added.

As a result, even if we factor in a lower GDP growth rate of just 6%, a power deficit is likely to remain despite the corresponding lower growth in peak demand. This means that there will still

be opportunities for new capacity developers who can secure coal or who do not need it.

It is also likely that more imported coal will put upward pressure on electricity prices. Even despite the recent fall in global coal prices, they remain some 36% above the price of Indian coal after adjusting for differences in calorific value and transportation. The use of more imported coal in the Indian fuel mix will raise the average cost of production. Additionally some of the larger power producers bid for contracts on the basis of very low cost Indonesian coal. Indonesia has subsequently introduced legislation to link the price of exported coal to international benchmarks, damaging the economics of these contracts. There is now considerable pressure from the power companies to have contracts revised upwards.

The pressure for price increases may be tempered by weaker global coal prices although they would have to fall a lot further. Upward revisions may also be limited by the ability of the State Electricity Boards (SEBs) to pay for increases. However, with 16 SEBs in the process of implementing end-user tariff increases themselves, there is scope for the prices paid to generators to improve in the long run.

In summary, the continuing deficit means opportunities to bring new capacity to the market will remain and the upward pressure on prices means that the potential rewards for doing so should improve. Of course any new capacity will either need secured coal supplies or not depend on coal. As a result we see opportunities for companies with secured coal (either in India or abroad) and for companies developing renewable capacity.

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Currently India has specific anti-avoidance provisions engraved both in the domestic tax laws and in some of the tax treaties through the ‘limitation of benefits’ clause. The Indian Finance Minister, in the Union Budget 2012 proposed General Anti Avoidance Regulations (GAAR), one of the most significant contemporary tax reforms being pursued by the Indian policymakers.

Though in the final Finance Bill, its applicability has been deferred by a year to 1st April 2013, we all know that GAAR has made a debut in India and it is a reality now even though effective after a year.

Taxpayers, domestic and foreign, will witness a paradigm shift in the empowerment and approach of tax authorities in India towards taxation of transactions, structures and arrangements. GAAR provisions may impact cross border deals, investments into India by foreign institutional investors and private equity funds, as well as day to day business transactions. These provisions are substantially overriding in nature and would impact all restructuring and acquisitions. GAAR provisions expressly clarify that the holding period of a structure or arrangement and the fact that

GAAR: A dynamic move in the right direction?

it provides a legitimate exit route for investors is not relevant for the purpose of determining commercial substance.

GAAR is one of the proposals which is facing maximum criticism from within and outside India. The question arises while similar provisions also exist in other countries. Why is there so much hue and cry about Indian GAAR proposals? A possible answer may be that the issue is not whether India should have GAAR or not, but more around the possibility of its misuse and ineffective implementation.

The current dispute resolution system in India, wide powers of Indian tax officials and their unpredictable assessment of cases worry the international community (especially considering GAAR’s wide scope and lack of proper guidelines to avoid its misuse).

Internationally, tax avoidance has been recognised as an area of interest and several countries have expressed concern over tax evasion and avoidance. Tax payers across the world arrange their business/affairs in a way that gives them maximum tax advantage. On one hand, tax authorities look at these transactions carrying a reduction in tax liability with a jaundiced eye while taxpayers label the same transactions as genuine ‘tax planning’. This difference in approach and outlook becomes the subject matter of debate and may turn into protracted litigation.

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Some of the emerging concerns, mentioned below, are dampening M&A activity and the funding market.1 Very wide scope: Scope of Indian GAAR

is very wide as it seeks to cover all the arrangements which have an element of ‘tax benefit’ accruing to the taxpayer.

2 GAAR v treaty provisions: Proposed GAAR provisions would apply even if the treaty provisions are more beneficial. A unilateral enactment of a new domestic tax law which is contrary to an existing treaty, without an amendment to that treaty, could possibly be regarded as violation of international law and is generally known as ‘treaty override’. As per the rules of legislative interpretation, specific legislation overrides general legislation. Therefore, the argument may be taken that a change to a domestic law generally, which could be the case with GAAR, may not affect the treaty. However, in the absence of an anti-avoidance provision under the treaty, reaction of India’s treaty partner countries needs to be observed.

3 Wide powers of tax authorities: Tax authorities are given powers to invoke GAAR by using any one of the criterion which are vast as well as ambiguous. Thus there is a need to lay down more objective criteria and specific administrative guidelines for invoking GAAR and to establish a reasonable level of accountability for the tax authorities.

4 Constitution of the Panel: It may be ideal if certain industry experts are nominated for the Approving Panel who can bring in their expert knowledge/experience which can help understanding the true business or commercial purpose of a transaction.

ConclusionA country’s tax regime is a very significant factor if not decisive factor for a foreign investor to invest its funds in any jurisdiction. Today businesses are looking at inorganic growth to achieve better economies of scale, synergy and competency in the form of business reorganisations. Therefore the tax policies of the government need to be critically framed as to achieve the purpose of tax reform and also to be positive to the business environment of the country.

Worldwide, GAAR has been criticised and supported equally by international tax experts. The rule of law requires law to be certain and predictable, such that law abiding citizens are aware of what is permitted and what is prohibited. While the concept of GAAR may be against this principle, to some extent, GAAR is important, since it is not humanly possible to make laws for each and every tax avoidance tool used by a creative taxpayer.

The success of GAAR lies in its judicious, selective and sensible implementation. In the Indian context, considering the aggression of tax administration in some cases, the introduction of GAAR may be worrisome to a tax payer unless implemented in a balanced manner with adequate safeguards for protecting the taxpayer. Tax payers would keenly await draft subordinate legislation, which law makers expect would be open for public debate.

The intent of the Indian lawmakers to legislate GAAR is progressive in so far as tax policy decisions are directed. However, an important question is whether, in the current context, the introduction of GAAR is well timed, or if it is still a premature effort towards alignment with internationally accepted principles of anti-avoidance.

Anshu KhannaPartner Tax & Regulatory Practice Walker, Chandiok & Co T +91 40 6630 8240e [email protected]

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