Embracing Indian investment abroad - SANNE · embrace India’s strategies to harness inbound growth as well as diversify outbound investments. SANNE hosted a Mumbai roundtable featuring

Embracing Indian investment abroadIn this edition:

> What is the current state and target for FPI / FDI within India?

> What needs to be done to achieve India’s targets?

> What actions can India implement to take advantage of the opportunities arising from the current macroeconomic state?

> Is Mauritius an appealing proposition?

> What is the state of outbound investments within India?

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SANNEGROUP.COMIssue 13 | August 2019

MAKING THE DIFFERENCE FOR OUR CLIENTS

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SANNEGROUP.COM

Welcome to Connect, SANNE’s regular

technical bulletin for fund managers,

their intermediaries and investors.

As part of our commitment of servicing clients and

sharing knowledge with the industry, this special edition

of SANNE Connect focuses on what next can we do to

embrace India’s strategies to harness inbound growth as

well as diversify outbound investments.

SANNE hosted a Mumbai roundtable featuring industry

leading experts to discuss recent investment trends.

Interwoven through these themes, our expert panel

explore the Indian market, both inbound and outbound.

Our expert panel included the following people:

> Brij Bhushan – Senior Vice President, Product & Market Management, South Asia, HSBC Securities Services

> Siddharth Shah – Partner, Khaitan & Co

> Rashmi Guptey – Chief Financial Officer Lightbox India Advisors

> Dr. Ramakrishna Sithanen – Chairman and Director SANNE in Mauritius

> Keyur Shah – Chief Financial Officer HDFC Property Ventures

> Kunal Shah – Partner, PwC Financial Services

The key themes under discussion by our expert panel were:

> What is the current state for FPI / FDI within India?

> What needs to be done to achieve India’s targets?

> What actions can India implement to take advantage of the opportunities arising from the current macroeconomic state?


> What is the state of outbound investments within India?

The aim of this special edition of Connect, is to share what

we have learnt from industry leaders, this time from our

panel of experts in Mumbai.

Enjoy the read!

Peter NagleCountry Head – Mauritius

e. [email protected]

1 2 3 4 5 6

1. Brij Bhushan 2. Siddharth Shah 3. Dr. Ramakrishna Sithanen 4. Rashmi Guptey 5. Kunal Shah 6. Keyur Shah


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There has been a perceptible shift in overseas investment over the last decade. Analysis of the trends in direct investments over the last decade reveal that while investment flows, both inward and outward, they gained momentum during the latter half of the past decade.

FPI prioritised over FDI

Brij Bhushan outlined the current state of Foreign Portfolio

Investment (FPI) in India, “Since we [India] started this

regime in 1991/1992, we have seen a progressive regime

which has allowed a lot of liberalization and reform in the

policies themselves. This has been attracting a lot of capital

from across the world. The traditional sources of capital are

the developed markets such as America, Europe and Japan

though money may be flowing from other jurisdictions. I

think that the AUC of FPI currently stands at US$ 500bn

which is quite sizable and larger than India’s mutual fund

industry at this point in time.”

While India has historically seen more FPI than Foreign

Direct Investment (FDI), with global investors having a

positive perception of India’s FPI regime, the framework and

the ease of investing into India have big benefits.

Recent trends show FDI catching up

In the 2018 fiscal year alone, total FDI into India stood at

US$ 42bn, with the Government aiming to increase this to

US$ 100bn by 2022. The leading challenge for India relating

to FDI is to catch up with the likes of China and America.

To remain ahead, India must find ways to attract money into

the economy which is then deployed into productive assets

directly.

What is the current state and future for FPI and FDI within

India?

KEY TOPICS

> Are investments broad-based with high increasing future targets?

> Are Real Estate and Infrastructure the future?

“Last year we saw inflows of US$ 42bn into India. A large chunk goes to the USA (US$ 250bn) and China (US$ 250bn, inclusive of Hong Kong). When we look at China, they have seen a consistently high level of FDI inflows. This is a challenge that we as an economy must overcome going forward. India must get more money into the country that goes into productive assets directly.” BRIJ BHUSHAN

Looking ahead, despite the challenges facing the country in

increasing FDI into India, Rashmi Guptey shared how FDI

inflows and the ambitious targets set by the Government

would impact the asset classes of start-up and venture

capital. “We believe that this (investments into the larger

sectors such as construction, real estate, telecoms and

services), will be a great feeder for the start-up economy.

Once you have those many investments and an expected

US$ 2trn being spent within these sectors by 2020 in the

economy, what we want to see is a trickle-down effect to the

start-ups eco system and any new business models that

evolve to solve problems associated with these large

sectors.”


“Overall 2018 was fantastic with the Flipkart exit that paves a long way forward for the Startup Sector. Such exits reassure the market and are proof that Indian investments can garner great returns. The fact that the same Government is going to continue (re-election in 2019), hopefully we will now see these reforms pan out over the coming years, especially with the Start-Up India action plan.” RASHMI GUPTEY

Real Estate and Infrastructure is the future

When looking at composition and asset classes, India is

witnessing the largest FPI and FDI inflows to date.

Siddharth Shah, comments, “We have traditionally seen

Services, ICPs, Pharma, Life-sciences have always been at

the top. We are seeing a lot of more real asset classes

becoming interesting. While in the short run, assets such as

Infrastructure and Real Estate have gone through their own

pain due to governance, performance and regulatory

overhang – which created its own challenges for operators.

As we see the trend going forward that these (Real Estate

and Infrastructure) are the asset classes that we expect to

see a lot more allocation of capital from global investors.”

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There is wide agreement on Real Estate and Infrastructure,

with instruments such as REITs and InvITs, being the

growth drivers for the Indian FDI market, capable of

absorbing the inflows expected by the Government when

aiming to increase to US$ 100bn by 2022.

Since 2014, the Indian Government has made great strides

in inviting representation from the industry when

developing the FDI policies pertaining to attracting REITs

and additional inbound FDI flows. The thought put forward

to the Government was the question of

“Is Indian ownership of commercial Real Estate a

necessity?”.

“Real Estate is one of the largest contributors to FDI in India. It is omnipresent and across all businesses.” KEYUR SHAH


Rashmi GupteyChief Financial Officer

Lightbox India


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Real estate ownership is a drag on the return on capital

employed or return on equity experienced by industries

such as pharmaceuticals, ecommerce and manufacturing.

The current Indian Government is aware of the challenges

facing the real estate market space. Now that India has

seen the first REIT launched in 2019, we will see substantial

capital coming into the real estate sector, especially after

the real estate policy was amended.

“The Government wants foreign investors to make money in real estate. They are aware of the challenges which foreign investors have faced in real estate investments. Hence they have simplified the regulations and opened up investments in the sector.” KEYUR SHAH

Problems still remain within the real estate market from

the historic foreign investments made during 2007 to 2009,

most of these have yet to be exited to date.

Regarding opportunity in future exits, Keyur Shah said,

“In 2018 and 2019 we have seen substantial exits, and

when exits happen, foreign investors become more

confident on the notion that there is money to be made in

India and we can put out more money.

My perspective is that there is a lot more capital that will

come into real estate and we have just seen the tip of the

iceberg.”

Despite the future being optimistic for FPI and FDI, the

current situation from the angle of taxation for foreign

investments and attracting foreign investors, taxation

regimes are a very important feeder to have in place.

Looking back four or five years ago, India had a negative

taxation sentiment from foreign investments and investors,

however, to-date, several tax law changes have now

opened up avenues to attract money flows back into India.

Grandfathering gains made on assets before 31

January 2018

“When listed shares became taxable, the Government made the right move by saying that any gains that were made from the date of amendment, which was 31 January 2018, were only grandfathered. Meaning that you paid tax prospectively rather than retrospectively which definitely added more confidence since we are not taxing any individual who had invested for many years and made gains out of it.” KUNAL SHAH

Despite positive moves, several steps are still left to be

made by both the industry and Government relating to

policy, regime and implementation.


Keyur ShahChief Financial Officer

HDFC Property Ventures


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SANNEGROUP.COM

Are Khan’s recommendations a force of good?

On 24 May 2019, the Khan Committee submitted its

report to the Securities and Exchange Board of India

(SEBI) outlining the recommended amendments that

would be required to further rationalise and simplify

the existing SEBI FPI regulations. There are three key

recommendations that are most likely to improve the

state of affairs for foreign investors.

1) Fast track registration process

> Market sentiment persisted towards the process of

registering with a local custodian before an FPI can

invest into India being long, tedious and often ill-timed.

> Solutions outlined to allow Public Retail Funds (PRF) to

have a fast track process when applying for FPI

registration. PRF are already regulated entities and have

broad-based investors making both SEBI and policy

makers very comfortable.

> Doing away with a lot of the registration requirements

for such funds would have a big impact on the status-

quo of FPI in India.

2) Private wealth money

Historically, India has not seen Private Wealth Money

flowing into the market within the existing FPI

framework.

KEY TOPICS

> Are Khan’s recommendations a force of good?

> Looking at the bigger picture of foreign investments

> Criticality of consistency, clarity and certainty

“In India, you have to register, and you have to create a broad-based fund structure. Once you have created a fund structure, that specific fund structure becomes the FPI. In the market, the feedback from private banks and broker dealers, who are providing wealth management services at an individual level, is that they do not want their assets to be comingled into a fund where personalized investment and advisory services cannot be given. This was an obvious handicap for the market and industry.” BRIJ BHUSHAN

The recommendation provided outlines that private

banks and broker dealers who do not want to create a

fund should still be allowed a Category 3 FPI license to

invest their client’s money.

What needs to be done to achieve

India’s target by 2022

Brij BhushanSenior Vice President, Product &

Market Management, South

Asia, HSBC Securities Services



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SANNEGROUP.COM

3) Reversing the 24% threshold

> Currently, a group of FPIs are not allowed to hold more than 24% of a company’s equity, with no individual FPI or FPI group being able to hold more than 10%.

> Regulations allow for a company to pass a board regulation to increase the threshold from 24% up to the sectoral cap, however, this caused more friction and rising costs than benefits.

Brij Bhushan described market challenges faced by funds

and FPIs as, “What we saw in the market was that

companies were either not bothered about increasing the

cap, it is an administrative process. So, we saw a lot of

companies, by default being stuck at 24%. And also, the law

allows them to fit in an intermediate cap as well from 24%

to the sectoral cap, a lot of companies came out with

innovative caps of 26.5%, 30%, 32%, etc. So, it added to the

compliance cost as well, in one sector you could have three

companies at different caps. The market as a whole really

struggles with the compliance of that.”

> The recommendation aims to resolve this going forward,

opting from a sectoral down threshold approach and limiting

thresholds to one of three levels only – 74%, 51% and 24%.

> The panel unanimously in agreed that this recommendation

would increase the amount of floating stock that is available

to foreigners. The expectation is that this will have a positive

impact on the weighting of India within global indices,

improving money flow into India.

Looking at the bigger picture

Looking at the Khan committee recommendations, the ball

is now with SEBI and the whole industry is hoping to see

changes in the coming weeks and months, however, to

progress and further change the landscape of FPI and FDI

within India, there must be a shift in mentality both within

the industry and among policy makers on how foreign

investments are visualised and classified.

“I think from a policy maker perspective, we

have just been programmed to think along the

lines of how the foreign investment regime has

been conceived and developed. It was always

an FPI that overshadowed a lot of FDI capital,

where any policy change would be geared

around FPIs to give them a certain specific

treatment. Maybe it is time, for a policy maker

today, in my view, to start looking at it so that

the policy moves to foreign investment if at all,

or more general, rather than creating

complexity around FPI, FDI, FVCI, etc.”

SIDDHARTH SHAH


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This indecisiveness is sometimes what is probably pushing

investors away because there is no certainty or clarity on

the regime where you are investing. It causes

apprehension on “You do not know what is coming next”,

and this is something that is critical to attract investors

from a long-term perspective.

“From a regulatory standpoint, if you look at

the overall FPI regime, there was an April

circular which caused more disruption within

the market. Now there is this Khan committee

recommendation which is ultimately going to

be going to regulation, and again people will

have to relook at their structure and see if they

meet the requirements or not. In fact, we were

trying to track the number of changes which

have come through in the FPI regulation - in

the last six to eight months there have been

30 to 40 changes.” KUNAL SHAH

Can India better facilitate growth of FDI and FPI

India is not exempt nor immune from the global economic

slowdown that is expected, however, there is a way in

which Indian growth can be sustained but requires the

definite and cooperative role played by the Government.

One way to kick-start the Indian economy or make it grow

or sustain growth is to push the real estate sector.

Rashmi Guptey said, “We need to stop thinking of

acronyms like FPI, FDI, FVCI and go beyond thinking of

regulations in such an isolated manner. I think it is time

to understand that foreign capital comes into India and

that it is our job to make sure that the Capital invested

achieves the kind of returns expect from a burgeoning

economy like India.”

Criticality of consistency, clarity and certainty

With expected requirements from the policy makers

within India evolving beyond that of visualizing foreign

investments from a wider, macro lens instead of being

niche to fund buckets, an essential improvement area

for the Government is the ability to be consistent in the

reforms made.

With a prime example of Government inconsistency in

policy and the direct impact on FinTech companies

Rashmi Guptey advised, “Aadhaar (form of personal

identification in India) was fantastic, you had FinTech

companies basing their models on Aadhaar. Their KYC

had come down to 50 Indian Rupees per customer,

which is significant for a business based on a FinTech

model. Suddenly the Supreme Court says “Aadhaar is no

longer the only source of identity and you do not need to

be held to it”.

A KYC which previously cost 50 INR, will now cost

you 400 INR for the same process, which

effectively impacts the bottom line of the business.

The Government started off well, but somewhere

down the line, they undid what they did and went

five years back in time.

This indecisiveness of the Government in policies

and reforms is a consistent pain point. It has been

identified as a driver of uncertainty and lack of

confidence in India among global investors.

Though positive on the overall recommendations, a

sustained period of policy stability and clarity has

been directly affecting businesses and industries. It

has investors doing business instead of focusing on

assessing if their individual structures are still

compliant with regulatory standards.

RASHMI GUPTEY

Kunal ShahPartner

PwC Financial Services



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SANNEGROUP.COM

“We, as a country, do not have organized rental

housing set-ups for participation by large

institutional investors. Globally there are funds

and institutions investing extensively and

exclusively in rental housing. Today in India,

owing to lack of institutionalized rental housing

set up, only renting of housing is seen more at

an individual level with lack of scale. This is

clearly one area where the Government can play

a more defining role to create a great

investment asset class which will not only

attract investors and boost the economy, but

create huge employment opportunity and

achieve the ambitious goal of housing for all for

the billion plus population of the country.”

SIDDHARTH SHAH

It would be a win/win situation for both the developers of

real estate and the Government in its ambition to achieve the

Pradhan Mantri Awas Yojana Housing for all by 2022.

Developers of real estate can be motivated to rent out

instead of selling if they receive the required cash flow and

they are not listed, however, the road is suitably challenging

to realise this opportunity.

“It is a complex situation but with appropriate

regulation, and with some policy initiatives, a

big push can be given to rental housing,

because today, everything is moving to

‘Uberisation’, you can rent cars, you can rent a

camera, you can rent a tent”. KEYUR SHAH

Why do you need to buy when you can rent?

In the residential sector we need to figure out a way where

we push rental housing in a big way – a policy or regulatory

initiative from the Government is needed. It will also

achieve the Government’s agenda of housing for all by

2022, whether it is owned, or it is rented, it does not

matter. It can be shelter for all by 2022.

Siddharth ShahPartner

Khaitan & Co



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SANNEGROUP.COM

There are counter-prevailing forces at work. Depreciation of the Rupee, increasing yield in other countries, reversing monetary accommodation in the US. Similarly, the two largest economies are currently in a trade war. These events are likely to be bad for emerging markets because global output, trade and investment will be affected as two of the largest economies are fighting. On the other hand, there might be niche opportunities for India.

What can the private sector or the Government in India

piece together to take advantages of some of these

situations?

Short term gains but long-term concerns

There are definite short-term gains that may come in the

direction of India as a result of the trade dispute between

China and America. Gains in the form of potential investment

inflows into India as well as greater trade being allocated to

India as a stop-gap. There is however significantly more

concerning items on the horizon that will likely negatively

impact India instead of opening doors.

KEY TOPICS

> What sectors need developing?

> What new avenues to explore.

> Ensuring digital platforms support new services.

The trade disputes from the USA are not limited just to China as

they have challenged Canada, Mexico, Europe, UK and Japan. A

trade war is never localised to the players alone, it threatens to

involve everybody, and there is no winner.

Outlining the risk of dumping from China Siddharth Shah

commented, “America has been the largest trading partner with

China and with that relationship slowing down, would China look

elsewhere, because they have the capacities that they have

created over many years, to a trend of dumping? This again

could act as a stress factor between India and China.”

The differences in infrastructure between China and India is a

leading barrier to the potential realisation of any trade

opportunities for India.

“From the face of it, it looks like a lot of

opportunity. India has a lot of demand and supply,

but the infrastructure and the level of capacity that

China has built against India is phenomenal. The

logistics and infrastructure such as ports to roads,

roads to freights, freights to logistics, all of that

needs to be developed a lot more in India before

the opportunity can switch that drastically. I think

there is a long way to go, but we can definitely

look at it as an opportunity.” RASHMI GUPTEY

KEY TOPICS

> Can India take advantage of macroeconomic situations globally, most notably the geopolitical uncertainty of Brexitor the trade war between China and the USA?

What is India’s next step and where do the opportunities lie?


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SANNEGROUP.COM

KEY TOPICS

A short-term blip with specific challenges

Mauritius has not lost its shine as a unique selling proposition

for global funds. Mauritius is still benefiting from the long-

standing history with India, especially in terms of investments

and the tax treaty signed in 1982. Further, Mauritius is still

called upon as a market over Singapore due to the ease of set-

up, cost, timing, availability of good administrative services

and time zone perspective.

Any of the short-term movements from Mauritius to

Singapore have largely been driven from the uncertainty and

lack of clarity around GAAR (General Anti-Avoidance Rules)

and the market anticipation of how these rules will be

ultimately be tested within the realms of fund structure.

Managers and Investors are taking their own position and

viewpoint of whether the pooling is sufficient or if they need

to have an office.

“As rules evolve, people may start

re-evaluating the situation as to whether

they need to go through Singapore. Some

may get comfortable continuing to do

business through Mauritius relying on the

substance created through pooling of

investors and other strong commercial

justifications such as ease of business,

conducive regulatory frame work diversified

investment base, cost effectiveness,


KEY TOPICS

Mauritius consolidates USP for global pooling structures

political and economic stability etc. while choosing Mauritius which remains a strong contender.” SIDDHARTH SHAH

Challenges Mauritius may face going forward

The allure of Singapore is perhaps driven by the demand for

different asset classes as funds look to move away from

equity funds.

“If you look at different asset classes, moving

from equity to others which includes maybe

debt investors, debt funds, or classic distress

funds who will earn income other than equity.

They are still looking at Singapore and

Luxembourg as options.” KUNAL SHAH

For players covering these funds, they do not necessarily have

a pooling vehicle in Mauritius or Singapore. They are already

pooling in the Cayman Islands because they are still part of a

larger global fund. Hence a decision of pooling locations are

being made on which jurisdiction will provide better

substance to claim a treaty benefit.

Those with a strong investment team on the ground in

Singapore may also look to having the pooling structure n

Singapore.

SANNEGROUP.COM


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SANNEGROUP.COM

Small niches need policy attention and revisions

There is broad agreement that India as a market is not yet

ready for outbound investments, and the restrictions in place

by the Government do not allow an easy-to-deal environment

for such opportunities.

“People are making meaningful and cautious outbound investments. India still continues to be a market that is more inbound focused in a way, and there is still enough potential that businesses see.” SIDDHARTH SHAH

There are pockets of investors that have ventured into the

offshore investment space. Most notably, India has seen the

classic case of resources with the moves into Africa, with

supporting targets within the Government to achieve a total

investment into Africa of US$ 160bn by 2025. India has more

recently seen outbound investment trends in the strategic

M&A space for the sectors of Technology and Pharma where

a presence in the USA is required.

What is the state of outbound investments

within India?

KEY TOPICS

> What restrictions are Government placing?

> Are investors looking more to Africa for outbound opportunities?

“The regulator in a way has not allowed a full-

blown regime which allows you to start going

and investing in companies that are pure

offshore. They still want some or other benefit

coming back to India.” KUNAL SHAH

The Alternative Investment Funds (AIFs) is the only regime

that is currently available for pooling money from domestic

investors, however, in order to make outbound investments,

the number of restrictions are onerous.

With outbound investments not growing any faster than the

current rate due to India being a capital deficit country. Brij

Bhushan comments, “We still need a lot of money ourselves

before we can start investing money abroad.”

Our panel concluded by agreeing that the underlining focus

for the vast majority of fund managers, institutions and

regulators within India is still, and will continue to largely

be, focused on inbound investments. The questions remain

whether the Government of India will be able to provide

certainty, clarity and consistency that the Indian market

need to fully grasp the growth capability in India and boost

the confidence of foreign investors.


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SANNEGROUP.COM

AMERICAS

BVI*

Cayman Islands*

New York

EMEA

Belgrade

Cape Town

Dubai

Dublin

Frankfurt*

GuernseyJersey

London

Luxembourg

Madrid

Malta

Mauritius

Netherlands

Paris

ASIA-PACIFIC

Hong Kong

Japan

Mumbai

Shanghai

Singapore

Tokyo*Affiliated partner

More than 1,600 people worldwide

FTSE 250 listed business

In excess of £250bn AUA

SANNE has undertaken to engage with all of the markets in which it operates to share knowledge, collaborate with peers and hear from industry leaders as to their thoughts on the key issues and topics affecting the industry and its practitioners.

Established for over 30 years and listed on the Main

Market of the London Stock Exchange, SANNE has more

than 1,600 employees worldwide and has in excess of £250

billion assets under administration. Our network of offices

provide global managers with highly skilled and director-led

teams of asset class specialists.

As a leading global provider of alternative asset and

corporate services we are delighted to announce that we

have further extended our global reach with the opening of

our new office in Mumbai, India. With existing offices in 18

leading international finance centres, SANNE now has a

local presence in one of the world’s fastest growing

alternative markets.

Global alternative asset and corporate administration done differently

Should you wish to find out more about our services and operations please speak to us, we would be delighted to hear from you.

“We have been providing high quality alternative and corporate services to clients in India for more than 25 years, this next phase of evolution in the region is an exciting one for us.” PETER NAGLE

RUBINA TOORAWAChief Operating Officer − SANNE in

Mauritius

t. +230 4671300


VAROUNEN GOINDENDirector, Head of Business Development

Mauritius & India

t. +230 454 9985


KHUSHBOO CHOPRAHead of Business Development − India

t. +91 022 4445 1064


PETER NAGLECountry Head − Mauritius

t. +230 4673000



VALÉRIE MANTOTHead of Business Development

Asia Pacific & Mauritius

t. +65 3158 7474


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SANNEGROUP.COM

To find out more about SANNE, please email Varounen Goinden, our Director, Head of Business Development – Mauritius & India, [email protected] or alternatively visit us online, sannegroup.com

Information on Sanne and its regulators can be accessed via sannegroup.com


EDITOR: Sivani Pillay – Marketing & Communications ManagerDESIGN: Kieran Blake – Marketing Administrator

Documents

Embracing Indian investment abroad - SANNE · embrace India’s strategies to harness inbound growth as well as diversify outbound investments. SANNE hosted a Mumbai roundtable featuring