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India: Open for Investment
German M&A and Private Equity Forum 2016
17 March 2016
Delano Furtado
Contents
2
India - A “Bright Spot” in the Global Economy
Key sectors for Inbound Investment
Indian Budget 2016 – Investment and Tax related highlights
Recent Tax related developments in India (from a M&A
perspective)
Entry Routes and FDI
New Initiatives
Opportunities Ahead
Trilegal contacts
India: A “Bright Spot” in the Global Economy
Spotlight – recent achievements
55th rank: World Economic Forum Global Competitiveness Index 2015-
16 (last year's rank: 71)
1st rank: Financial Times's estimated greenfield FDI ranking for 2015
(2014 rank: 5)
7.3%: IMF projected growth rate for India (2015-16)
An increase in FDI by 40% in (Apr–Dec 2015-16); compared to the
previous year
Industrial growth rate increased to 3.1% (Apr-Dec,2015-16)
compared to 2.6% in the previous year
8th rank: Protecting Minority Investors Indicator (World Bank Ease of
Doing Business Index)
4
Driving Factors
5
Key Economic Drivers
India's Structural Strengths Nearly Unmatched
World's Youngest Population
China's Debacle
English Speaking Population
Rising Incomes combined with Aspirational Consumerism
India's Development Inevitable
Key Sectors for Foreign Investment
Defence
7
Sectoral Cap Key Conditions
Automatic upto 49%
Above 49% with prior
approval of the Foreign
Investment Promotion
Board
FIPB approval for: (i) change in ownership, and (ii)
transfer of stake.
‘Modern and state of the art’ technology: Above 49%
investment allowed
Security clearance and compliance with defence
ministry guidelines
Key Players: Lockheed Martin, Airbus, Boeing, Atlas Elektronik
Insurance
8
Sectoral Cap Key Conditions
Automatic upto 26%
Government approval
from 26% to 49%
49% cumulative limit
(includes FDI + FPI + NRI
+ FVCI)
IRDAI license requirement
‘Ownership’ and ‘control’ conditions
Investment cap applicable to insurance companies,
insurance brokers, third party administrators,
surveyors and loss assessors and other insurance
intermediaries
Key Players: HDFC Standard Life, Bajaj-Allianz, Max-Bupa,
Tata-AIG
Railway Infrastructure
9
Sectoral Cap Key Conditions
Earlier: Prohibited (except
mass rapid transport
systems)
100% Automatic
Activities include construction, O&M of:
(i) Suburban corridor projects through the public-
private partnership (PPP) route, (ii) high-speed train
projects, (iii) dedicated freight lines, (iv) rolling stock,
(v) railway electrification, (vi) signaling systems, (vii)
freight terminals, (viii) passenger terminals (ix)
infrastructure in industrial parks pertaining to
railways and (x) mass rapid transport system
(MRTS)
Investment in "sensitive areas" requires prior
approval
Key Players: Bombardier, Alstom, Siemens
Construction Development
10
Sectoral Cap Key Conditions
100% Automatic Minimum built up area and capitalisation norms removed
Lease income excluded from definition of ‘real estate
business’
Exit permitted on the completion of each ‘phase’
Incentives for construction of affordable housing (< 30, <60
sq mtrs)
Key Players: Hochtief, Blackstone
Single Brand Retail Trading
11
Sectoral Cap Key Conditions
Automatic Route upto
49%
Government approval
from 49% to 100%
Alternative to the “franchisee model”
Only single brand products permitted - same brand
that is used internationally
Relaxing of norms for “state of the art” and “cutting-
edge” technology products
Domestic sourcing requirements for FDI beyond
51%
Single brand entity now permitted to undertake retail
trading through e-commerce subject to operating
physical stores.
Key Players: Adidas AG, Hugo Boss AG, Grohe AG
Multi Brand Retail Trading & E-commerce
12
Sectoral Cap Key Conditions
Upto 51% with prior
Government approval
E-commerce – 100%
Automatic
Minimum amount to be invested: USD 100 million
USD 50 million to be invested in back-end
infrastructure such as processing, manufacturing,
quality control etc.
Domestic sourcing requirements
States free to disallow FDI in MBRT
Restrictions on opening stores in smaller cities
E-commerce - policy arbitrage and 'market place
model'
• Tesco
Pharmaceuticals
13
Sectoral Cap Key Conditions
Greenfield-Automatic
Route upto 100%
Brownfield- Approval
Route upto 100%
Restriction on inclusion of non-compete provisions
against Indian promoters
FDI upto 100% under the Automatic Route for
manufacturing medical devices
Key Players: Novartis, Bayer, Roche, GlaxosmithKline
'MAKE IN INDIA’
Initiative to make India a global 'manufacturing hub’
Establishment and expansion of manufacturing and assembly plants in
India – BMW, Mercedes-Benz, Audi start to localise assembly and
production for some models
Department of Industrial Policy and Promotion’s “Fast Track System for
German Companies”
Replacement of multiple registers with a single electronic register
Self-certification for non-risk, non-hazardous businesses
German Investor Specific - Opportunities
14
15
‘STARTUP INDIA’
Initiative to create a conducive environment for startups in India
Wide definition of ‘start up’ to determine eligibility
Start-up India Action Plan – simplification and handholding, support and
incentives, industry-academia partnerships and incubation
RBI regulatory relaxations for startups
India ranks 3rd among global startup ecosystems with more than 4,200
new-age companies
German Investor Specific - Opportunities
Indo-German Bilateral Agreements
Agreement for the Avoidance of Double Taxation, 1996
Agreement on Social Insurance, 2008
Agreement for the Promotion and Protection of Investments,
1998
Defence Co-operation Agreement, 2006
Science and Technology Co-operation Agreement, 1974
Extradition Treaty, 2004
16
German Investment in India
8th largest foreign investor.
Invested US$ 8.4bn between
April 2000- December 2015.
17
Source: DIPP.
Indian Budget 2016: Investment and Tax related highlights
Key Highlights – Investment driven
Proposed reforms of the FDI Policy in Insurance, Pension, Asset
Reconstruction Companies and Stock Exchanges
100% FDI to be allowed through the Approval Route in marketing of
food products ‘produced and manufactured’ in India
Amendments in the Companies Act to provide enabling environment for
start-ups
Commitment to providing a stable tax regime – one time settlement of
ongoing cases under retrospective amendment.
19
Key Highlights – Tax driven
Domestic companies set-up on or after 1 March 2016, engaged in manufacturing or
production of article or thing : Option is provided to tax income at the rate of 25% (plus
applicable surcharge and education cess), if the company while computing its total income
has not claimed any deduction (such as under section 10AA, accelerated depreciation etc.).
The option is to be exercised in prescribed manner before furnishing the tax returns.
To encourage research and development activities and to make India a global R&D hub, it is
proposed that royalty income of a resident (patentee) in respect of a patent developed and
registered in India shall be taxable @ 10% of gross royalty
Excise & Customs Duty
Concessional rates / exemption has been extended on inputs required for manufacture
of final goods in specific sectors (mainly IT);
Customs duty exemptions on tools and toolkits, and procedural relaxations have been
extended to incentivize the MRO sector in India;
Several minor cesses levied by various ministries with low levels of collection proposed
to be scrapped to ease tax compliance
Clarifications on certain provisions of indirect tax introduced with an intent to provide
clarity / reduce litigation
20
Tax related developments in India (from a foreign investor perspective)
Higher withholding tax rate not to apply on payments to non-residents for
failure to furnish PAN- The existing provisions, provide that any person who is
entitled to receive any amount on which tax is deductible at source shall furnish
his PAN to the deductor, failing which TDS rate is 20%. In this budget, it is
proposed that the provisions of this section shall not apply to payments to non-
residents, on providing the relevant tax residency certificate.
Sale of shares of a private company by non-resident- There was some
confusion whether 10% concessional tax rate would be applicable on sale of
shares in a private company. This has now been clarified. Long term capital
gains on transfer of shares in a company where public is not substantially
interested is taxable at 10%.
Rupee denominated bonds - Capital gains arising in case of appreciation of
rupee in such bonds (issued by Indian corporates outside India) shall be exempt
from tax, with a view to providing relief to the non-resident, bearing the risk of
currency fluctuation.
Key Developments
22
• Minimum Alternative Tax (MAT) provisions not applicable to foreign companies
having no business presence in India (whether retrospectively, or prospectively).
The issue of MAT on FIIs/ FPIs came up in the case of Castleton Investment
Limited, which held that MAT is applicable to both domestic and foreign
companies. As a result, the Income Tax Authorities started demanding MAT
from foreign investors on capital gains accruing to FIIs/ FPIs from the sale of
shares. The notices issued by the Income Tax Department were heavily
opposed by the foreign investors and it was argued that MAT can only be levied
on book profits, which they do not maintain in India.
• Thereafter, Central Board of Direct Taxes (CBDT) issued instructions clarifying
that MAT provisions will not be applicable to those foreign institutional investors
(FIIs) / foreign portfolio investors (FPIs) which do not have a permanent
establishment in India. The proposed amendment in the budget is to provide a
legislative force to the aforementioned controversy.
GAAR -The government is committed to implement GAAR w.e.f. April 1, 2017
Key Developments
23
Start-Up Tax Exemption
• 100% of profits derived by an eligible set-up exempt, for three consecutive
years out of five years from the year in which such start-up is incorporated
• Capital gains of an investor tax exempt, if the long term capital gains proceeds
arising from transfer of long term capital assets are invested within six months
from the date of the transfer by a taxpayer in units of such Specified Fund setup
to finance the start-ups
• An eligible start-up is a company engaged in eligible business which fulfils the
following conditions:
it is incorporated on or after April 1, 2016 but before 1 April, 2019;
the total turnover of its business does not exceed INR 250 Million (USD 3.7
Mn) in any of the previous years beginning on or after 1 April, 2016 and
ending on 31 March, 2021; and
it holds a certificate of eligible business from the Inter-Ministerial Board of
Certification as notified in the Official Gazette by the Central Government.
Key Developments
24
Entry Routes and FDI
Entry into India
Modes
Liaison Office, Project Office, Branch Office
Joint Venture, Wholly Owned Subsidiary, LLPs
Direct and Indirect Share acquisitions, Asset purchases/Business
Transfers
Share Swap permitted (made automatic in most cases)
26
Forms of Investment
Foreign Direct Investment (FDI)
Foreign Portfolio Investment (FPI)
Foreign Venture Capital Investment (FVCI)
27
Entry into India
Modes of Acquisition: Share acquisition
28
Key Considerations:
Historical liabilities are also taken over.
Less transaction cost.
Structure:
Investor
TargetPromoter100%
ownership
Share
Acquisition
Offshore
Onshore
29
Structure:
Key Considerations:
Only identified business / assets are acquired.
High transaction cost.
Example: Elanco’s purchase of Novartis’s Animal Health Division
Modes of Acquisition: Itemized Sale/ Slump Sale
Investor
New Co.TargetBusiness
Transfer
Offshore
Onshore
30
Key Considerations:
Tax benefits.
Minimum disruption to the licenses/approvals.
Involves court process and, therefore, is more time consuming (6-8
months).
Structure:
Modes of Acquisition: Court-approved Demerger
Investor
New Co.TargetCourt
approved
Demerger
Offshore
Onshore
Foreign Direct Investment
Long term investment in the equity share capital of Indian companies
Routes: "Automatic" or "Approval”
Prior Government approval for investments in– defence
manufacturing, broadcasting, aviation, telecom etc.
Prohibited Sectors –lottery and gambling, atomic energy, tobacco and
tobacco products, real estate etc.
Pricing guidelines – floor price and ceiling, methodology liberalised
over time
90% of FDI for 2014-15 came through the Automatic Route
31
New Initiatives
'Put' and 'Call' options permitted with conditions
De-listing regulations made simpler
Merger Control/Anti trust regulations – target entity based
exemptions
Validity period of Industrial Licenses – most sectors delicensed
'eBiz' - government's online portal for applications of licenses,
clearances and registrations
33
Initiatives – Investment
Amendments to corporate laws to improve business confidence
even in closely held companies
Audit Committee
Key Managerial Personnel/Officer In Default
Independent Directors
Whistle blower
Minority protection
Related Party Transactions defined
SEBI Clause 49 – for ListCos
India's enhanced anti bribery and corruption laws
Insider Trading Regulations 2015 – stricter compliance
34
Initiatives- Corporate Governance
35
Initiatives - Labour
Streamlining laws - definition of “wage”
Consolidate existing 44 labour laws to just 5 - wages, social
security, industrial safety and welfare, and industrial relations
Increasing threshold for retrenchment of workmen from 100 to
300 without Government approval
Online portal for employers – registrations under different
legislations, filing of returns etc.
Social security agreements between India and various countries
36
Initiatives – New Regulations
Proposed Bankruptcy Code
Consolidation of various insolvency laws under a ‘Single Code’
Insolvency regulator
Insolvency adjudicating authority
Fast-track insolvency process
Insolvency professionals
Real Estate Regulation and Development Bill, 2015
Compulsory registration of all projects
Percentage of project cost to be maintained in escrow – prevents diversion to
other projects
Regulation of developers, brokers and agents
Restrictions on change in original plans and structural designs
Construction development sector recently liberalised
Arbitration and Conciliation (Amendment) Act, 2015
Parties are required to expressly oust the jurisdiction of an Indian court in an ICA
Arbitral tribunal’s powers have been widened
Conflict of interest requirements for arbitrators
Fixed timelines
Commercial Courts, Commercial Division and Commercial Appellate
Division of the High Courts Act, 2015
Wide meaning of commercial dispute
Specialised commercial courts at various levels
Dispute value threshold
Fixed Timelines
Initiatives - Enforcement
37
Opportunities Ahead
What to expect in the next 12 months?
Infrastructure investment – construction of smart cities,
highways,
Huge capital expenditure - by German companies in India to
increase manufacturing presence
Pacts signed for co-operation in areas of food safety, aviation
security, railway transport and promotion of languages
Euro 1 billion assistance for India’s solar power projects
39
Opportunities ahead
40
PM Modi visited Germany last April
Chancellor Merkel visited India in October
Identified Sectors for cooperation
Manufacturing
Skilling
Clean energy
Infrastructure
Innovation and education
Setting up a fast-track system for German companies in India
Technology intensive manufacturing including aviation and defence
Investments in Railways including high speed rail
Trilegal: Contacts
Trilegal: Our Experience
Trilegal is one of India's top-tier law firms with offices in four of India's major
cities - Mumbai, New Delhi, Bangalore and Hyderabad
Best Client Service Award -Chambers Asia-Pacific Awards 2015
Nominated for Best Law Firm Award - Chambers Asia-Pacific Awards 2015
Our Key German clients: DEG, Hochtief, Deutsche Bank, Bosch, Deutsche
Borse, RWE Power, Schaeffler Holding
Trilegal expertise spans emerging sectors- Corporate M&A and Private Equity,
Manufacturing, Defence and Aviation, Aviation, Energy & Infrastructure
42
Delano Furtado
43
Delano Furtado is a Partner at Trilegal and part of the corporate practice group. His primary practice areas are mergers and acquisitions, joint ventures, corporate restructuring and disposals, private equity and venture capital.
He specialises in strategic M&A and has experience in complex, cross border transactions involving clients from Europe, U.S. and Latin America and has advised them on various Indian law issues.
Delano has also advised private equity funds and venture capital investors in connection with their financial investments in listed and closely held Indian companies.
Some of his clients include, Hochtief AG, Heineken N.V, Heidelberg AG, Brisa – Auto-Estradas-de-Portugal, Vulcabras Azaleia S.A, the Andrade Gutierrez Group, Lauren Engineers and Constructors, Imerys, Alliance Boots, TietoEnator Corporation, Giorgio Armani, Godrej Group, Tata Power Company, Larsen & Toubro and Mumbai International Airport.
The private equity and venture capital funds he has advised include JP Morgan, Goldman Sachs, Abraaj Capital and NEA Venture Partners,
Delano has been awarded the ‘Young Lawyer of the Year 2014 (Male)’ by IDEX Legal Awards.
Delano is an alumnus of ILS, Pune, India. He is a member of the Bar Council of Maharashtra and Goa, India.
Partner
T +91 22 4079 1007
Himanshu Sinha
44
Himanshu is Partner at Trilegal and heads the Tax practice. He has advised clients on entire range of direct tax matters including International Tax, Transfer Pricing and Tax Controversies. He has more than eighteen years of experience in Direct Taxes. He has represented large MNC clients before the Tax Tribunal, Authority for Advance Rulings and the higher courts with reported judgments to his credit.
He has handled transactions involving complex tax issues, both cross-border and domestic. He has negotiated Advance Pricing Agreements with the Government on behalf of well-known global companies.
Prior to joining Trilegal, he worked with a Big Four accounting firm. Himanshu spent more than a decade in the Indian Revenue Service (IRS) where he worked as Assistant Commissioner of Income Tax, Deputy Director (Investigation), Deputy Director (International Tax) and Transfer Pricing Officer.
He is currently serving as a member of one of the focus groups of the Tax Administration Reform Commission set up by the Ministry of Finance, Govt. of India. He has been named as one of the leading Tax Controversy leaders of India by International Tax Review in 2014.
Himanshu is an alumnus of Campus Law Centre, Delhi and Harvard Law School. He is a member of Bar Council of Delhi, India.
Partner
T +91 11 4259 9200
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