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Transcript
Mergers, Foreign Collaborations and Financial
Innovations in a Global Economy
International Tax Conference on Cross Border Transactions
Theme Presentation
November 2005
Agenda
Part I: India and the global economy
Part II: The trends
Part III: The Regulatory Framework
Part IV: The Tax Framework
Part V: Concluding Remarks
2
Part I: India and the global economy
3
The Drivers of the Global Economy
Engines of growth

US and Europe are expected to grow at 2-4%

Brazil, Russia, India and China are going to
be the next big drivers of the global economy

In less than 40 years, the BRIC companies
could be larger than the G6 in dollar terms

Among BRICs, India will be the fastest
growing and will rank behind China and USA
by 2033
GDP of BRIC countries, in 2003 US$bn,
Source: Goldman Sachs BRIC report
Cumulative FDI Inflow
The movement of capital
Higher growth will lead to higher returns

Increased demand for capital will mean more
fund flows in these countries

Accompanying shifts in spending would
provide significant opportunities for global
companies
India has witnessed a strong inflow of FDI in the last 5 years
7,000
Cumulative FDI (USDmn)
40,000
FDI (USDmn)
35,000
6,000
30,000
5,000
25,000
4,000
20,000
3,000
15,000
2,000
10,000
1,000
5,000
Source: Reserve Bank of India
4
FY2004
FY2003
FY2002
FY2001
FY2000
FY1999
FY1998
FY1997
FY1996
FY1995
FY1994
FY1993
-
FY1992
-
FY1991

Why India ?

Sweeping reforms post liberalization

Cost competitiveness

Large scientific research capabilities

Reforms in key growth areas like infrastructure and power

Demographic changes

Indian companies are warming to the concept of shareholder value
5
India: Sweeping reforms post liberalization
The economic reforms process has been a key source of convergence among the
political parties, with every successive government taking the reforms forward
Dismantling
Protectionism
Average imports tariffs have
reduced from 53% in 1988 to 18%
In 2002
- Sound regulatory base in
Financial Sector
Reforms
banking, insurance and securities
- Securitisation Act
- Strengthening creditors’ rights,
debt restructuring efforts
- Avoid direct government
Strong
Infrastructure
involvement
- Allowing FDI
- Sound regulatory
framework (TRAI, CERC)
- Introduction of competition
- Removal of distortionary taxes
Fiscal Reforms
- Migration to VAT regime
- Simplicity and low cost of
compliance
- Major successes include VSNL,
Disinvestment
BALCO, CMC, Maruti Udyog,
GAIL, ONGC, NTPC
- Progress by state governments
as well
6
- Reduced barriers to movement
Globalisation
of goods and capital
- Well-poised to exploit the
Internet
India: Cost competitiveness
Source: Budget documents
Price structure comparison between India and China: higher taxes main difference
100
14-16
4-7
India
Indirect
taxes
Import duties*
3-4
Labour
Produc-tivity
Source: McKinsey Global Institute, CII
7
2-5
2-5
Interest
costs
Others**
67-72
China
FY06
FY05
FY04
FY03
FY02
FTA with Thailand, CECA with SG, moving
towards pact with ASEAN
FY01

FY00
More than half of cost diff between India &
China is on account of high tariffs and taxes
FY99

FY98
Lower custom tariffs leading to competition
and lower prices
55
50
45
40
35
30
25
20
15
10
FY97

Peak Import duty reduced to 15%
FY96
Increasing participation limits for FII and FDI
in different sectors
%

India: Large scientific research capabilities

More than 100 companies outsource R&D facilities from India

GE, Monsanto, Eli Lily, to name a few have largest facilities outside US, in India

Well established IT and ITES services market with CAGR of > 50% in last 5 yrs

IT exports touch US$ 22bn in 2004, form 20% of total exports (goods+services)
Skilled workforce: 0.36m engineers are certified every year
1400
No of engineering colleges (LHS)
0.4
1200
Annual enrollment, million (RHS)
0.35
0.3
1000
0.25
800
0.2
600
0.15
400
0.1
200
0.05
0
0
FY 98
FY 99
FY 00
FY 01
FY 02
FY 03
Source: GOI
Cisco announces US$1.1bn investment in R&D base
8
India: Key reforms in growth areas

Significant milestones in infrastructure developments over last 5 years

New Telecom Policy of 1999 led to rapid penetration of telephony

Government initiated NHDP at a cost of US$13.2bn (Phase 1&2) until 2008
– Phase 3 to add another 10,000km by 2012
–

Plans to extend further by another 26,000km
Electricity Act 2003 improves investment scenario in power sector
– US$ 62bn of investments only in generation until 2012
–
Additional investments in T&D and generation could push total to US$150bn

Development of new airports and upgradation of major airports

Private sector participation in ports

Increased investments in mining (oil & gas, coal, minerals)
– NELP progressing well
–
Private / Foreign participation in iron ore, coal into last lap of evolution
9
India: Demographic changes have ….

Almost half the population is under 25 years

Literacy levels among young significantly high

Impact of mass media is potent

Legacy savings nest of US$600bn+

Time to ditch the adage ‘Indians live poor but die rich’
Literacy levels
Age profile
2003
2002
15-19
% of population
(2003)
10.6
84.3
76.1
20-24
10.0
76.9
70.2
25-34
17.1
67.9
57.4
35-44
12.8
58.6
46.9
45+
18.3
45.2
36.9
(%)
Source: NRS
10
Age group
< 14
15-24
25-39
40-59
> 59
Popn (mn)
363.61
189.98
228.27
167.39
79.36
Source: India Census 2001
(%)
35.3%
18.5%
22.2%
16.3%
7.7%
… changed consumption patterns

Rising share of spend on ‘new services’ and lifestyle

Savings rate remains high @ 24%

Penetration of media, higher literacy and a nascent credit culture underpin the
transition
Consumer expenditure pie
Urban
Rural
Other food
22%
Other food
20%
Other non-food
29%
Other non-food
42%
Vegetables
4%
Vegetables
6%
Milk & milk
products
8%
Cereals
10%
Clothing &
footw ear
8%
Milk & milk
products
8%
Cereals
18%
Fuel & light
9%
Fuel & light
9%
Source: NSS Report 2003, ICICI Securities Research
Clothing &
footw ear
7%
Source: NSS Report 2003, ICICI Securities Research
11
India: Unlocking shareholder value

Universal restructuring : Top 100…Midcap 200… down to SMEs

Relearned the mantra post liberalisation: ROCE > WACC !

Focus on de-gearing and free cash flows

Operating rates near peak – Cement, Automobiles, Steel, Mining, Electricity

Well positioned for modular, ‘high yield’ capex phase

Job creation - Manufacturing renaissance
–
Textiles, Tourism, Pharma R&D, Ad industry joins IT/ITES in globalisation/ outsourcing
–
PSUs : ‘employment boomers’ of 70s’ to retire over next 3-5 years
The ROCE transformation
RoCE
Free cash flow mantra
WACC
Rf
20%
500
18%
FCF
Net D/E (RHS)
NWC/ Sales (RHS)
Capex
80%
400
70%
300
60%
200
50%
100
40%
0
30%
-100
20%
2%
-200
10%
0%
-300
16%
12%
10%
8%
(Rs bn)
14%
6%
4%
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
0%
FY96
FY97
FY98
FY99
FY00
FY01
FY02
Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100)
Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100)
12
FY03
FY04
Part II: The trends
13
International Investors have reposed faith in the
Indian Economy …
 As per a study conducted by AT
Kearney, India ranks among the top
3 in global FDI Confidence Index
 Growth opportunities in India have
attracted global investors including
VC funds and private equity
investors
–
Cumulative FDI Inflow
India has witnessed a strong inflow of FDI in the last 5 years, USD mn
8000
75000
Cumulative FDI
PE
Investments
worth
over
USD1.75bn in FY2005 (USD 1bn in
1HFY06) and exits of over
USD 545mn (USD 939mn in
1HFY06)
FDI
6000
55000
4000
35000
2000
15000
0
-5000
1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200496
97
98
99
00
01
02 03 (R) 04 (P) 05 (P)
Source: RBI
FDI Confidence Index
India ranks 3rd in global FDI Confidence Index
China
USA
India
UK
Ger
France
A us
HK
Italy
Japan
0
Source: A T Kearney
14
0.5
1
1.5
2
2.5
… which is reflected in bullish capital markets


Strong rally in the market in
spite of minor hiccups along the
way
Superior
returns
attracting
increased FII participation
–

Stock Markets are Witnessing a Bull Run, USD mn
FII Inflows
8100
15000
7600
7100
9000
6600
3000
6100
-3000
5600
-9000
5100
-15000
Jan-05
4600
Feb-05
Mar-05
Apr-05
May-05
Jun-05
Jul-05
Aug-05
Sources: SEBI, www.moneycontrol.com
Performance of Emerging Market Economies
Total Equity Holdings of MFs and FIIs
India has delivered superior returns over the last year
Increased institutional buying in the stock markets
50
Country
Y-o-Y Return PE Ratio
India
51.69%
16.38
South Korea
50.38%
12.06
Indonesia
15.76%
12.29
Hong Kong
12.46%
13.82
FTSE
11.91%
13.03
Taiwan
6.83%
15.02
Thailand
5.98%
10.89
Dow Jones
2.36%
16.33
Malaysia
1.30%
15.54
Source: Bloomberg, Returns as on Oct 7, 2005
8600
Sensex
21000
Nearly 800 registered FIIs with
a cumulative investment of over
USD 39 bn
Equity Mutual Funds have
emerged as strong players with
AUM of about USD12 bn
MF Inflows
45
MF
FII
40
35
30
75.10%
25
80.95%
20
15
81.63%
10
5
24.90%
18.37%
19.05%
0
USD bn
Aug-04
Feb-05
Source: AMFI, SEBI ; Mutual fund data for only pure equity funds
15
Aug-05
Sep-05
India Inc. is on a second wave of investments …
Industrial and Services Growth
Industrial growth catching up with
Industrial growth has complemented growth in services
Industry growth
Services growth
12
10
8
6
4
2
0
Jun- Oct- Feb- Jun- Oct- Feb- Jun- Oct- Feb- Jun02 02 03 03 03 04 04 04 05 05
services after a long gap
–
Automobiles, Capital goods,
Engineering & construction, metals
lead industrial growth
Strong correlation between business
Source: CSO
NCAER BCI and Capital Goods output
confidence index (BCI) and capex
Capex is closely related to the Business Confidence Index
170
–
40
NCAER BCI
BCI at record high indicates strong
Capital goods (RHS)
30
20
capex cycle into near future
Power, Oil & Gas, Metals,
10
0
80
-10
Automobiles, Textiles, Construction
Source: NCAER, CSO
16
May-05
May-04
May-03
May-02
May-01
May-00
May-99
May-98
May-97
driving investments
May-96
-20
May-95
50
May-93
–
110
(% chg YoY)
140
(Index)

May-94

…underpinned by domestic capital raising …
Companies are tapping primary
Primary Market Issuances
equity markets for financing a First half of 2006 has already witnessed issuances of over USD 1.6 bn
large number of expansion with many more issues in the pipeline
Issue Amount USD mn
No: of issues
projects
6000
50
–
A record USD 4.9 bn of equity
raised in FY 05 demonstrating
the depth of markets
Virtuous cycle of larger IPOs
leading to increasing inflows
by QIBs; especially FIIs
–
Primary markets remain active
with a total of USD 1.7 bn
equity raised by 35 companies
in first 6 months of 2005-06
–
The primary market will
continue to remain active with
a strong pipeline of issues
expected to hit the market
4,915
5000
40
4,087
4000
30
3000
1,690
2000
1000
568
232
238
10
0
FY 2001
Source: Prime Database
17
20
0
FY 2002
FY 2003
FY 2004
FY 2005
* Data till September 30, 2005
FY 2006*
No. of Issues
–
Issue Amount

… and overseas capital raising

Overseas fund raising options Break up of Equity Capital Issuances
participation through DRs and FCCBs
– GDR and FCCB gaining Significant international investor
IPO/FPO DR FCCB
100%
significant popularity
12.90%
90%
3.00%
80%
32.56%
40.63%
70%
12.11%
60%
50%
22.77%
84.10%
40%
30%
55.33%
20%
36.60%
10%
0%
FY 04
FY 05
Source: Prime Database (Excluding Sponsored ADR Issues)
18
FY 06*
* Data till September 30, 2005
Case Study 1: Reliance Industries Multi-currency
Term Loan

US$ 350 mn multi-currency
June 2005
loan
–
Facility consists of a USD,
Euro and JPY tranche
–
Reliance Industries Limited
Syndicated with a consortium
of
34
banks
across
13
Syndication of term loan
countries
–
Finest pricing among offshore
USD 350,000,000
medium term loans
19
Case Study 2: Motherson Sumi’s FCCB

Asia’s first Euro denominated FCCB (deal size
July 2005
EUR 50 mn)
–
Conversion Premium of 50%
–
5 yr, Zero Coupon, Bullet deal with issue at par
–
Redemption Premium of 126.77% ; YTM 4.8%
–
Call Option after 3 years with 130% hurdle and
Ideal from the Company’s standpoint
–
FCCB Offering
EUR 50,300,000
no greenshoe

Motherson Sumi
Currency provides a better match for its cash
flows with nearly two thirds of production
exported
20
Growth Through Consolidation and Inorganic
Expansion: Predatory India Inc

Large number of companies in India are looking at achieving growth through
acquisition of companies in the US, Europe and Asia
–
Key aspect of acquisition of the customers of the target
–
Creation of value through usage of the manufacturing set up at a lower cost Indian
location
–

Acquisition of a competency / technology
The potential Indian acquirers are evaluating the available opportunities on the
following criteria
–
Reasonably large customer base including blue chip customers
–
Established technology
–
Reasonable size
–
Flexibility towards shifting of operations to India, if required, and a willing management
21
Indian Corporates are Seeking International
Acquisition Opportunities to Reach Global Size
Target Name
Acquirer Name
Date
Announced Total
Value (USD mn)
Industry
Television-tube Business
Videocon International Ltd
Jun 05
291
Manufacturing
Natsteel Asia Pte Ltd
Tata Steel Ltd
Aug o4
284
Steel
Flag Telecom Group Ltd
Reliance Gateway Net Private
Oct 03
191
Telecom
DSI Financial Solutions Pte
HCL Technologies Ltd
Nov 04
157
Software
Tyco Global Network
Videsh Sanchar Nigam Ltd
Nov 04
130
Telecom
Tata Motors Ltd
Nov 03
118
Auto
Reliance Industries Limited
Jun 04
97
Textile
Tata Daewoo Commercial
Vehicle Co. Ltd
Trevira Gmbh
22
International Companies are also Seeking a Foothold
in the Growing Indian Market
Target Name
Acquirer Name
Date
Announced Total
Value (USD mn)
Industry
BPL Mobile Cellular Ltd
Hutchison Telecommunications
Nov 05
1,152
Telecom
I-flex Solutions Ltd
Oracle Corp
Aug 05
779
Software
Indian Phone Ventures
Hutchison Telecommunications
Feb 05
592
Telecom
ACC
Holcim
Jan 05
583
Cement
GECIS Global
US Based Private Equity Firms
Non 04
500
BPO
Aircel Televentures Ltd
Afk Sistema
Feb 05
450
Telecom
Flextronics Software Sys Ltd
Flextronics Intl Ltd
Jun 04
399
Software
Digital Globalsoft Ltd
Hewlett-Packard Co
Dec 03
304
Applications
Software
23
Emerging Trends- M&A

Cross-border M&A to continue

–
In-bound M&A in sectors like IT/BPO, telecom and manufacturing
–
Outbound M&A in pharmaceuticals, auto & auto ancillary, textiles, oil & gas
Buyouts driven by private equity funds expected to gain ground
Rs mn
2003
2004
2005
Deals
Value
Deals
Value
Deals
Value
Inbound
24
581.7
12
116.3
21
455.6
Outbound
23
1338.4
21
668.1
30
1081.4
Total
47
1920.1
33
784.4
51
1537
Source: Bloomberg; includes only completed transactions; average size and range calculated on deal values that are
Publicly announced

Predominantly cash transactions
–
Stock is yet to see an emergence as a currency in cross border transactions
24
Emerging Trends- Private Equity

Private Equity boom in emerging
Private Equity Investments in India ( US$ mn)
markets
–
1,000
India’s phenomenal investment
800
opportunities are attracting the likes
700
of Carlyle and Blackstone
–
600
542
526
500
Well entrenched capital markets and
413
400
ease of transactions ensure smooth
300
197
200
exits for PE players

917
900
99
100
-
Buyouts driven by private equity
Q1-2004
Q2-2004
Q3-2004
Source: Business Today, August 2005
funds expected to gain ground
25
Q4-2004
Q1-2005
Q2-2005
Case Study 1: Tata Tea’s acquisition of Tetley

First Leveraged Buy-out ( Rs. 2,135 cr)
–
March 2000
Instant access to Tetley’s worldwide
operations, combined turnover at Rs 3,000 cr

Tata Tea Limited
Financial Innovation at its best
–
SPV created to ring fence risk with equity
Acquisition of 100% equity stake in
Tetley Tea (UK)
contributed by Tata Tea and Tata Tea Inc
INR 21,350,000,000
–
Debt of 235 mn pounds raised in the form of
long term debt and revolver; charge against
Tetley’s brand and assets
–
Tata Tea’s exposure only to the extent of
equity component of 70 mn pounds
26
Case Study 2: Amtek Group’s Global Steps
Phase I: Setting up a strong efficient base

Amtek Group is a leading player in auto
December 2002
ancillary business manufacturing connecting
rods, crankshafts, gear shifter forks, etc
Phase II: Acquires Domain Expertise in a niche

Sets up a joint venture with Benda Kogyo,
Japan for manufacture of flywheel ring gears
and flexplates
Acquires
Smith
Jones,
Inc.,
a
leading
manufacturer of flywheel ring gears

Acquisition of 100% equity stake
in Smith Jones, Inc. (USA)
Rs358,010,000
Phase III: Acquires Smith Jones, Inc

Amtek Auto Limited
–
Present in the OEM and replacement market
–
Market share of around 40% in the USA
Acquisition catapults Amtek Auto into number
three producer of ring gears in the world and
provides access to key OEM customers
27
Case Study 3: Vodafone enters India

Largest investment in the Indian telecom
sector by overseas player (Deal Size: Rs
September 2005
6700 cr)
–
India is the third-largest mobile with 65 mn
Bharti Televentures
subscribers; growth of 54% Y/Y
–
Bharti is the fastest-growing mobile market in
Asia with 14 mn subscribers

Rs 21,350,000,000
10% of Bharti at Rs 351/sh with 4.39%
indirectly from Bharti Enterprises and 5.61%
from Warburg Pincus
–
Sale of 10% equity stake to
Vodafone Plc.
Exit for Warburg Pincus who originally
invested US$ 300 mn for 18 % in 1999-2001
28
Part IV: The Regulatory framework
29
Investment in India – Alternatives
Portfolio Investment
Investment In India by
Foreigners

Foreign Direct Investment
Portfolio Investment by institutional investors through Securities and Exchange Board of
India Regulations
–
Requires registration with SEBI

Foreign Direct Investment is freely allowed in all sectors including the services sector, except
a few sectors where the existing and notified sectoral policy does not permit FDI beyond a
ceiling

FDI for virtually all items allowed through the automatic route under powers delegated to the
Reserve Bank of India (RBI) and for the remaining items through Government approval
–
Government approvals are accorded on the recommendation of the Foreign Investment Promotion
Board (FIPB)
Automatic Route – Through
RBI
Foreign Direct Investment
Approval Route – Through
FIPB
30
Investment in Existing Companies
Unlisted entity
Investment in Existing Company
Listed entity
Unlisted entity

Fair valuation of shares to be performed by a chartered accountant as per the
Guidelines issued by the Controller of Capital Issues
Listed entity

If the investment is made in a listed entity, the Acquirer needs to comply with
various provisions of Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeovers) Regulations, 1997
31
Easing of Government Approval Process


FDI limits being eased up
–
100% in all infrastructure projects, drugs and pharmaceuticals, hotels and tourism, etc
–
Currently at 74% in banking, telecom services, exploration and mining
–
49% in civil aviation
–
26% in insurance
Foreign investment approval through FIPB route do not require any further clearance from
RBI for the purpose of receiving inward remittance and issue of shares to foreign investors
–
RBI Notification:
 Notification by the company to the RBI within 30 days of receipt of inward
remittances
 Filing the required documentation within 30 days after issue of shares
32
Part V: The Tax framework
33
Tax Regime – Taxing the Corporate
 Domestic Company – 33.66%
 Income tax: 30% plus surcharge: 10%
plus cess: 2%
 Foreign Company – 41.82%
 A minimum alternate tax under Section
– Income tax: 40% plus surcharge: 2.5%
115 JB(7.5% plus 2.5% plus 2.0%) is also
imposed
plus cess: 2%
The Indian
Corporate
 Fringe Benefit Tax – 30.6%
 Dividend Distribution Tax – 14.025%
 FBT: 30% plus cess: 2% on certain
– DDT : 12.5% plus surcharge: 10% plus
percentages of expenditure
cess: 2%
34
Tax Regime – Issues
Carry Forward of Losses
 Can be carried forward and set off
against future profits up to 8 years
 No carry backward of business
losses
Special Tax Treatment
 100% Tax exemption for Export
Oriented Units (EOUs)
Facilitation of R&D
Securities Transaction tax (STT)


STT levied at 0.02%

Abolition of long-term capital gains

Need to cover

Weighted deduction benefit for
biotechnology, drugs and
pharmaceuticals
Tax advantage of 7-8% as against
35% in developed countries
35
–
Share buy-back
–
Shares transferred under open offer
–
Sale/transfer of shares under SEBI
approved routes
Tax Regime: Taxing the Foreign Corporate
Non-residents
 Royalties, Fees from technical
services, Income from GDRs,
dividends, interest, etc. taxed at
variable rates
 Applicability of MAT?
Cross Border M&A
 Transfer of shares in Indian
company to a foreign entity (shareswap) not tax-neutral
 Embargo on carry forward of losses
under certain conditions
 Asset purchase transactions are not
tax neutral
Foreign Dividends and Capital gains
 Dividends from foreign subsidiaries
taxed at 35%
 Profits from foreign subsidiaries
taxed at 20%
Controlled Foreign Corporations
(CFC)
36

Foreign Income in a country with a
tax rate lower than tax rate
applicable to resident shareholders
is classified CFC

CFC is taxed at the rate applicable
to resident shareholders
Part VI: Concluding Remarks
37
Recap


The borders in a global economy are becoming seamless
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India occupies a favorable place for foreign investment
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Indian corporates are looking at opportunities abroad
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Financial innovation has spawned a host of products
The Regulatory and the Tax framework
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Foreign Investment in the form of FII/FDI
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FII Investment requires SEBI registration
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FDI Investment through (a) approval and (b) automatic route
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Indian and Foreign corporates taxed differently
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Tax structure needs to be streamlined to facilitate cross border transactions
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