Financing the Growth of India

Financing the Growth of India Breakout session Netherlands-India Business Meet (NIBM) 31 May 2016 KPMG.com/in 1

Today s Presenters Nidhi Maheshwari Function: International Tax and Regulatory Services Role: Partner Mobile: +91 9810583215 Email: nmaheshwari@bsraffiliates.com Ruben Mikkers Function: Transaction Services, Amstelveen, the Netherlands Role: Partner Mobile: +31 65 207 87 89 Email: mikkers.ruben@kpmg.nl A Chartered Accountant with a diversified industry experience of 15 years and a focus on technology, media, telecom and financial services sector Has extensively advised companies on corporate tax, entry and exit strategy, inbound and outbound investment structuring and devising tax-efficient ownership and operating structures A CFA, CMA and CFM with a wide sector experience, including industrial markets, consumer markets, chemicals, pharma and healthcare Has been involved in various engagements such as vendor due diligence projects, buy-side due diligence projects and independent business reviews 2

India A bright spot in the global economy Policy reforms and recent growth in investments to drive India s growth GDP Growth Rate (%) China 6.0 6.3-3.5-1.0 India 0.0 1.0 Brazil 0.3 1.0 Russia 2.2 2.2 Japan UK 7.5 7.5 India emerged as the top FDI destination in 2015, receiving USD 63 billion 1.7 1.7 Euro 2.6 2.6 U.S. -6-4 -2 0 2 4 6 8 10 Source: IMF forecasts (%) 2017 2016 The International Monetary Fund (IMF) predicted that India would retain the status of the fastest growing large economy until 2020 3

Macroeconomic Overview Economy size of USD 2.4 trillion Total Foreign Direct Investment of USD 250+ billion since April 2000 A jump of 4 ranks in the Ease of Doing Business ranking in the last year Labour force by Occupation: Services 31% Industry 20% Main Industries: Software Agriculture Construction Pharmaceuticals Life sciences Textiles 4

India An Insight Top performing states as per World Bank s report on Ease of Doing Business in India 29 States 7 Union Territories Gujarat Andhra Pradesh Jharkhand Chhattisgarh Madhya Pradesh Rajasthan Odisha Maharashtra Textile, Ports IT/ ITES, Biotechnology Minerals Steel, Power Auto, Cement, Tourism Glass wares, Leather Chemical, Aeronautical Pharmaceuticals, Oil and Gas Population 1.26 billion A competitive environment among states encouraging overall economic and inclusive development 5

Why Invest now in India? A Land of billion opportunities 6

Flagship programs/ mission Investment initiatives undertaken by India Foreign direct investment Undertaken relaxation of policy in 15 sectors Further reforms proposed under budget 2016 17 Foreign portfolio investment Focus on simplifying the registration process Global European Global Make in India India as a manufacturing destination Investors include German SMEs, Safran and Schindler Digital India Establish branches and R&D centres for foreign tech firms EU-India Agenda for Action-2020 Endorsed at the Brussels summit (2016) To strengthen partnership Startup Europe India Network (SEU-IN) Launched in Jan 2016 to connect the European and Indian start-ups EU-India Broad-based Trade and Investment Agreement Under negotiation since 2007 7

Flagship programs/ mission How does it benefit Dutch Investors? Make in India 25 growth sectors identified viz. IT, automobile, pharma, infrastructure, renewable energy etc. 10% capital subsidy Start-up India Tax holiday for 3 years Capital gains tax exemption Self-certification scheme EUR 1332 million (approx.) corpus for funding of Start ups Focus: Small and Medium Enterprises 8

Flagship program/ mission How does it benefit Dutch Investors? Digital India Aims to enhance investment in the technology sector 3 core components: creation of digital infrastructure, digital service provision and digital literacy Smart Cites An opportunity for Dutch companies to collaborate with the Smart City project viz. development of adequate water supply, urban mobility, robust IT connectivity, sustainable environment, health and education 9

Flagship program/ mission How does it benefit Dutch Investors? Ease of doing business Applying for industrial license made online on 24*7 basis Single window E-biz portal No minimum paid-up capital Facilitation Cell created to guide, assist and handhold investors during the entire life-cycle of the business. Opportunities galore for Dutch investors especially for agriculture, telecom, city and waste management, construction, development etc. facilitated by Ease of Doing Business initiatives 10

Indian High Growth Sectors Food and Agriculture Infrastructure Renewable energy Indian food and grocery market world s 6 th largest Food retail market expected to reach USD 900 billion by 2020 Plans to set up 42 mega food parks in next 3-4 year 100% FDI in sectors such as horticulture, floriculture, animal husbandry etc. USD 1,000 Bn in 12th 5 yr plan Increasing private sector participation and Domestic Demand 100% FDI allowed Huge untapped potential Energy Security Climate Change Considerations 100% FDI allowed 11

High Growth Sectors Financial services Defence IT/ ITes Regulatory reforms Infrastructure Financing Insurance/ Pension Automatic < 49% Banking 74% FDI (up to 49% automatic) Liberalization of policies Evolution of private sector 100% FDI allowed Automatic < 49% if foreign investor brings state of the art technology IT exports expected to grow three fold Huge potential for remote infrastructure management, testing and knowledge services Emerging new trends Cloud, Green IT, etc. 100% FDI allowed 12

Trade missions from Europe to India Enhancing cooperation across sectors such as infrastructure, agriculture, smart cities, renewable energy and waste energy Enhancing imports from the Indian agro sector Exploring partnership options across IT, defence, renewable energy and aerospace sectors Maintaining export relationship in diamonds and extending it to clean technology, infrastructure and smart cities Netherlands Poland France Belgium June 2015 October 2015 January 2016 March 2016 April 2016 Germany UK Luxembourg Signing of multiple MoUs in the manufacturing, aviation security, and science and technology sectors Enhancing exports and understanding the banking and cybersecurity environment of India Signing of an MoU aimed at increasing bilateral trade 13

Investing into India 14

Investing into India Preferred Financing Options Preferred Financing Options Strategic Portfolio Debt Investor Group Funding Option Holding Companies JV Partners FDI Equity shares Compulsorily Convertible Preference shares/ Debentures Foreign Institutional Investors Qualified Foreign Investors Listed securities Foreign Equity Shareholders/ Group companies Multilateral Agencies External Commercial Borrowings Bonds Rupee Denominated Bonds Mode of entry Greenfield Investment Acquisition Joint Venture Normally invest in Capital markets Financing Loans 15

Investing into India FDI and commercial loans FDI inflows in India Europe accounted for one quarter of the FDI inflow to India during April 2000 June 2015 India is amongst the top ten countries for attracting the highest FDI (2014 and 2015) FDI inflows by top six countries in the EU b 4.5 3.6% 9.6% 12.6% 16.8% 21.1% 36.3% 6.8 6.7 4.5% 4.4% 7.2% 7.9% 3.9% 8.4% 13.4% 14.8% 41.6% 29.4% 19.1% 45.3% 2012-13 2013-14 2014-15 Switzerland Cyprus France Germany UK Netherlands CAGR FY12 14 21.8% 36.8% 10.5% (0.9)% 14.4% 15.8% 36.1% The Netherlands accounted for the largest amount of FDI inflow to India in FY14 Commercial loans to India EIB financed amount on projects m 200 190 Finance amount by sector, 2011 YTD 2016 SMEs 16.8% Transport 16.8% 500 100 Energy 66.4% 200 2011 2013 2014 2015 YTD 2016 100% = 1,190 m Projects under appraisal (2010 YTD 2016) worth 561 million 16

Investing into India Preferred forms of business presence Modes of Business Operation Setting up of a business presence Different forms of business presence such as: Company/Joint Venture/ Wholly owned subsidiary Branch office/liaison office/ Project Office Limited Liability Partnership (LLP) Technical collaboration Imparting technical knowhow Providing technical assistance in research, training Consultancy services 17

Investing into India Preferred Investment Jurisdiction Amounts in USD in million as on 31 March 2016 Share of Top Investing Countries Mauritius/ Singapore Mauritius Singapore 95, 910 45, 880 33% 16% United Kingdom 23, 108 8% Japan 20, 966 7% Indian Co. USA 17, 943 6% Netherlands 17, 314 6% Impacts India- Singapore tax treaty as it is co-terminus with Mauritius tax treaty Taxation rights of capital gains accorded to India Service Permanent Establishment, Fee for Technical Services clauses introduced 18

Structuring Options Post India Mauritius Treaty amendment Investors exploring other jurisdictions such as Netherlands, Sweden, France, Korea, Spain etc. Dutch Co The Netherlands India Capital Gains tax exempt on transfer of shares in an Indian Company, subject to conditions Indian Company Indications to move from residence based to source based taxation Possibility of renegotiation of India Netherlands tax treaty? 19

Alternative Options Limited Liability Partnerships Dutch Company Designated Partners Benefits Foreign Investment Policy significantly relaxed Repatriation of profits Interest on Capital Enables tax free profit repatriation Dividend Distribution Tax of 20.36% Indian LLP Simpler compliances Dutch taxation aspects for consideration: Characterization of profits repatriated from Indian LLP Characterization of interest on capital Eligibility to avail Dutch participation exemption? 20

Recent Tax Updates 21

Recent Tax Updates Indirect transfer Draft Computation Rules released US Sale of shares of Dutch SPV Dutch SPV Buyer Overseas India India Company Transfer of shares or interest to be taxable in India if directly or indirectly, its value is substantially derived from assets in India substantially derived at least 50% and exceeds EUR 1.3mn (approx.) Draft rules for computation of Fair Market Value, proportionate taxation released 22

Other Tax Updates No requirement of Permanent Account number Place of Effective management (POEM) General Anti- Avoidance Rule (GAAR) Rationalisation of tax measures Foreign Companies may provide alternative documents to avoid higher withholding tax rate Applicable from 1 April 2017 Applicable from 1 April 2017 Legal framework to be provided for paperless assessment Penalty provisions rationalized; Immunity provisions on payment of tax and interest and no appeal 23

Other Tax Updates Foreign companies Filing of tax returns in India Stringent penalty provisions introduced on nonfiling of tax returns Penalty 50% of tax payable without giving credit of taxes deducted in India Consultative process of policy making Public comments invited for major policy changes e.g. rationalisation of tax measures, POEM etc. Advance Pricing Arrangement Tax certainty for 9 years possible Roll back possible 24

Other Tax Updates Equalisation Levy Country by Country Reporting New Patent regime Payment to non residents for online advertisement, provision of digital advertising space etc. to get impacted Introduced by a separate code in the Finance Act Not part of the Income tax Act Three-tiered Transfer Pricing documentation structure introduced by Finance Act 2016, in line with BEPS Action Plan 13 Royalty income to be taxed at concessional rate of 10%, subject to conditions No Minimum Alternate Tax on such income 25

Key Regulatory updates (1/2) Modern Bankruptcy and Insolvency law Liberalisation of Foreign Direct Investment scheme Ease in winding up of a Company and in recovery of debts Time limit of 180 days proposed for completion of the process Major relaxations (investment limit, investment route) in most of the sectors viz. agriculture, insurance, stock exchange, defence, telecom, media etc. Real Estate Bill passed Major step towards reviving the real estate sector to attract more foreign investment New Intellectual property policy Encouragement for IP creation and registration further supported by tax incentives 26

Key Regulatory updates (2/2) Ind AS reporting framework New Companies Act A step closer to being IFRS compliant A significant move to improve the appeal of Indian companies to foreign investors Reduced compliances Increased focus on Corporate Governance Goods and Services Tax Defense Procurement Policy Lower cost of doing business A move towards making export competitive Prices expected to come down, benefit for companies as consumption may increase. An important step towards clarifying the various ambiguities in the defense sector 27

India Netherlands Social Security Agreement India Netherlands SSA was signed on 22 October 2009 and came into effect on 01 December 2011. It provides for following benefits: Detachment Exportability of pension Avoidance of double social security contributions Benefit available for a period of 5 years Mandatory to obtain a Certificate of Coverage from the respective authorised agencies of India and Netherlands The benefits acquired under the legislation of one country will be exportable to the other country 28

Deal flow 29

Actual deal flow into India: Questions 1 How many M&A deals (European acquirer and Indian target) were done in 2014 and 2015? 2 Is the trend rising, declining or stable? 30

Actual deal flow into India E2I deals Number of completed deals (2005 15) 119 112 101 90 93 86 76 79 76 80 84 EBITDA Multiple (2005 15) 24.8x 18.6x 20.7x 22.7x 25.3x 15.5x 15.9x 15.2x 12.7x 15.5x 6.7x 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 B2I deals Number of completed deals (2005 15) EBITDA Multiple (2005 15) 5 13 5 9 3 11 9 6 8 7 14 2.2x 50.7x 9.2x 4.1x 7.4x 1.7x 12.3x 6.7x 32.0x 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Benelux region accounted for 15% of the E2I deals in 2015 31

Actual deal flow into India Key sectors E2I deals B2I deals Healthcare 5% Energy and Power 7% Technology 8% Telecommunication, Media and Entertainment 9% Financial Services 13% Financial Services 20% Services 20% Others 3% Industrials 24% Chemicals and materials 15% Consumer 16% Services 5% Healthcare 6% Energy and Power 8% Technology 13% Telecommunication, Media and Entertainment 3% Financial Services 10% Others 5% 2005 2015 Industrials 20% Consumer 40% Energy and Power 10% Technology 10% Services 20% 2005 2015 Financial Services 10% Industrials 10% Industrials 21% Consumer 16% Chemicals and materials 13% Chemicals and materials 10% Consumer 30% Industrial and consumer sectors continued to dominate deal activity in Europe as well as Benelux 32

Wrap-up 33

Key Takeaways Indian economy, backed by sound policy reforms and increased investor confidence, on an exponential growth trajectory Competitive environment among states encouraging the overall economic and inclusive development Flagship programs such as Make in India, Digital India, Smart Cities etc. leading the path of unprecedented investment and business opportunities Liberalisation reforms in various sectors helping in overall balanced economic growth 34

Key Takeaways Ease of doing business initiatives vis-à-vis easy entry, streamlined business ecosystem and faster exit scheme Increased Investor interest in exploring alternative jurisdictions such as Netherlands in the light of India Mauritius tax treaty amendment Further clarity on evaluating tax impact on indirect transfer of shares thereby avoidance of tax disputes like Vodafone Clear intent of tax authorities to rationalize tax measures and ease out burdensome tax compliances 35

Questions 1 What else could be done? 2 What could India do to attract more capital? 3 Which form of financing the growth is preferred? 36

Thank you 37