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INDIA
“LAND OF THE UNEXPECTED”
ELECTRONIC CAR CO.’S NEXT EXPANSION OPPORTUNITY
THREE TAKEAWAYS:
1.MAJOR CHALLENGES EXIST (IE RELATED PARTY
TRANSACTIONS)
2.ROBUST REGULATORY FRAMEWORK, BUT ENFORCEMENT IS
LACKING
3.WE NEED AN INDIA-SPECIFIC APPROACH TO THIS
INVESTMENT
AGENDA
Recommendation
Macroeconomic & Market Status
Challenges
Action plan
Appendix
•OECD Standards Analysis
•NACD Standards Analysis
•Summary of Governance Structure
3
RECOMMENDATION: EXPAND INTO INDIA WITH
SCOOTER PRODUCT LINE
Consumer
Need:
Urban consumer has high disposable income with high WTP for fuel
efficient vehicles
Electronic
Car Co.
Fuel Efficiency and Innovation are core competencies
Indian
Business
Market
Governance: Need to ensure protections of our off-shore
investments and any monetary policy changes
129M people living in urban areas, 16M scooters sold in 2015 (vs. 25M
cars) and automotive is 2nd largest consumer consumption category
Extending product suite to include smaller, urban-friendly vehicles
(i.e. scooters) aligns with market need for initial entry point
Regulation & Compliance: Corruption and contract enforcement
beginning to mature with market complexity
INDIA FINANCIAL MARKETS & REGULATIONS
• REGULATORS:
• SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
• FORWARD MARKET COMMISSION (FMC)
• RESERVE BANK OF INDIA (RBI)
• TWO MAJOR STOCK EXCHANGES:
• NATIONAL STOCK EXCHANGE (NSE)
• BOMBAY STOCK EXCHANGE (BSE)
• KEY PROVISIONS:
• COMPANIES ACT OF 2013
• SEBI CLAUSE 49
MACRO CONSIDERATIONS
• MACRO-ECONOMIC: WORLD’S FASTEST-GROWING LARGE ECONOMY
• STRONG GDP YEAR-OVER-YEAR GROWTH
• BY 2025 MOST POPULATED COUNTRY, LARGEST WORKFORCE, AND YOUNGEST
COUNTRY
• FUTURE LEADER IN GLOBAL CONSUMPTION PREFERENCES
• INDIA-SPECIFIC OPPORTUNITY:
• URBAN CONSUMER CONSUMPTION IN NEXT 5-10 YEARS
• AUTOMOBILE INDUSTRY IS YOUNG AND GROWING: +9% ANNUALLY
• GROUND TRANSPORTATION IS THE 2ND LARGEST CATEGORY OF PERSONAL
CONSUMPTION
MARKET CONTEXT
• AUTOMOTIVE SECTOR:
• GROWTH MARKET
• FAVORABLE POLICY ENVIRONMENT
• IMPORTANCE OF DEVELOPING INDIA-SPECIFIC
PRODUCTS
CHALLENGES
Political
• GOVERNANCE
• Elections
Economic
• PROTECTIONS / RIGHTS OF SHAREHOLDERS
(RELATED PARTY TRANSACTIONS)
• CONCENTRATED OWNERSHIP
Corruption
• Inflation
• Currency
• Fraud
• FED / STATE REGULATORY COMPLIANCE;
MONETARY POLICY
• CORRUPTION, BRIBERY, FRAUD
IP / Legal
• ISSUES WITH DEBT COLLECTION AND CONTRACT
ENFORCEMENT
• STABLE CURRENCY, BUT VULNERABLE TO
CHANGES IN US MONETARY POLICY
Consumer
• Tastes / Behavior
CHALLENGES
ACTION PLAN
• INVEST, BUT RECOGNIZE CHALLENGES AND UNIQUE FACTORS RELATED TO DOING BUSINESS IN
INDIA
• TO ADDRESS GOVERNANCE ISSUES:
• INVEST IN ROBUST MONITORING AND COMPLIANCE EFFORTS
• INVEST IN R&D AND PRODUCT DEVELOPMENT IN THE COUNTRY
• MAKE A DIRECT INVESTMENT, NOT A JOINT VENTURE
• TO ADDRESS UNIQUE FACTORS IN INDIAN ECONOMY
• TAKE A LONG TERM VIEW
• HIRE AND PROMOTE INDIANS IN KEY ROLES
• ENSURE PRODUCT MIX REFLECTS CONSUMER PREFERENCES: EXPAND FROM EVS TO 2-WHEELD
VEHICLES
EXECUTIVE SUMMARY & NEXT STEPS
Benefits:
High growth economy
Firm core competencies match market need
Challenges
Developing market
Likely need to pivot product to meet consumer culture
Governance
Considerations
Invest in robust monitoring and compliance efforts
Next Steps
Research market demand and preferences
Make a direct investment, not a joint venture
Make R&D and product development investments in the country
THREE TAKEAWAYS:
1.MAJOR CHALLENGES EXIST (IE RELATED PARTY
TRANSACTIONS)
2.ROBUST REGULATORY FRAMEWORK, BUT ENFORCEMENT IS
LACKING
3.WE NEED AN INDIA-SPECIFIC APPROACH TO THIS
INVESTMENT
APPENDIX
APPENDIX 1: OECD PRINCIPLES
Principle
Limitations
1: Rights of Shareholders -While regulations in place, effective restitutions inadequate
2: Equitable Treatment
of Shareholders
3: Role of Stakeholders
4: Disclosure and
Transparency
5: Responsibility of
Boards
-RPTs not illegal
-Lack of transparency in transactions
-RPTs threaten cooperation
-Audit and disclosure standards loosely enforced
-Better enforcement of board independence needed
-In surveys, most independent board members don’t see
themselves responsible for oversight
ACHIEVING OECD STANDARDS
• WHILE ACTIONS HAVE BEEN TAKEN BY THE SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI) AND
THE RESERVE BANK OF INDIA (RBI), INDIA'S CENTRAL BANKING INSTITUTION, SOME CHANGES STILL NEED
TO TAKE PLACE IN ORDER TO ACHIEVE THE OECD PRINCIPLES.
• BETTER ENFORCEMENT OF RULES AND PRINCIPLES NEED TO BE IN PLACE
• ADDITIONAL SHAREHOLDER PROTECTIONS:
•
ABUSE OF RELATED PARTY TRANSACTIONS: EXISTING LAW DOES NOT PROHIBIT RPTS IN INDIA
•
CONCENTRATED OWNERSHIP: MOST PUBLIC COMPANIES IN INDIA ARE CLOSELY HELD BY FAMILIES OR THE
STATE
•
PROMOTE GREATER ACCOUNTABILITY OF CONTROLLING SHAREHOLDERS
•
NEED OF GREATER TRANSPARENCY AND DISCLOSURE: BOARDS MUST REQUIRE FULL DISCLOSURE OF THE
DETAILS OF RPTS AND ENFORCE COMPLIANCE
APPENDIX 2: NACD STANDARDS
Principle
Assessment of System
I. Board Responsibility for Governance
Meets
Context
II. Corporate Governance Transparency Lacking
Lack of transparency in transactions
III. Director Competency &
Commitment
Meets
Requires diversity in board
IV. Board Accountability & Objectivity
Lacking
V. Independent Board Leadership
Mixed Bag
VI. Integrity, Ethics & Responsibility
Mixed Bag
Lack of transparency and communication
around RPTs
Requirements for outside directors, but
may not be truly independent
Companies Act, 2013
VII. Attention to Information, Agenda &
Strategy
Mixed Bag
VIII. Protection Against Board
Entrenchment
Meets
IX. Shareholder Input in Director
Selection
Meets
X. Shareholder Communications
Lacking
Source: NACD https://www.nacdonline.org/files/PDF/KEY%20AGREED%20PRINCIPLES%202011.pdf
Retrenchment provision in Companies
Act, 2013
Lack of transparency and communication
around RPTs
APPENDIX 3: GOVERNANCE SUMMARY
Chairman of the Board
Board Members
Shareholders
Capital
Labor
Contracts
Minority Shareholders
CEO Power
Director Power
Hostile Takeovers
Rate of Return
Radical Change
Independent or executive director
Independent or executive director
Equity or prederence shares, along with participation rights
Represented through debt and equity – avg CoC is 15%
Local, firm-level or industry-level trade unions affiliated to
larger Federations “Central Trade Union Organisations”
Uneven enforcement; Article 299 governs contracts with
government
Rights to requisition in a general meeting and to approach
company law board regarding mismanagement
High power position, limited checks by board
Governance structured by Indian Companies Act of 2013.
High power, although indep. Dir.s not truly indep.
Rare – companies often controlled by familes or
government; provisions in Indian Takeover Code
15-20% considered successful
Difficult, although government is makingmarket reforms