India economic update
Milind S. KothariManaging Partner
BDO India LLP
M & A tracker
Transaction Advisory Services
In the second week of March, the present Bharatiya Janata Party ('BJP') Government at the Center, led by the Prime Minister, Mr Narendra Modi scored a massive political victory in the heartland state of India, Uttar Pradesh, securing more than 80% electoral seats. The BJP also formed the government in 3 more States, scoring little less than a perfect score with its loss in the state of Punjab, that went to the beleaguered Congress Party.
With this mandate, it would now seem a certainty that in the next General Election in the summer of 2019, the BJP would most likely get a second term. In the next 12 months, the elected representatives in the Upper House, Rajya Sabha would be recast in favor of the BJP, providing it a majority. This could have a huge impact in the ongoing reforms which will now receive a further fillip as the passage of key legislative changes could sail through with much more ease, in the wake of a weak opposition. India clocked a GDP of 7.1% in the first 3 quarters of this financial year with a last one that was crippled on account of the effect of demonetization. With the target to lift the GDP growth to 8% that the Finance Minister ('FM'), Mr Arun Jaitley is slated to chase, India may still retain the tag of fastest growing global economy.
The last day in the month of January saw the release of the much-awaited annual Economic Survey 2017 that highlighted the developments in the Indian economy and impact of the policy initiatives of the Government in the last one year. This year's Survey focused on the impact of demonetization, the quick fix needed to remonetize Indian economy, expediting the turnaround in the Indian banking system from the impact of voluminous Non-Performing Assets ('NPA's) coupled with asset rehabilitation. The Survey also proposed the concept of universal basic income as a social measure to reduce poverty in the country.
The very next day, the FM released the annual Union Budget 2017. The broad agenda in the Budget was 'Transform, Energise and Clean India'. Touted as a realistic and pragmatic Budget, it dealt with series of tax measures and reducing the revenue deficit in the wake of increasing public and capital expenditure. On the whole, the Budget was well perceived to drive India towards digitization, bring transparency, attract higher investments and at the same time addressing issues of the vulnerable sections of the society.
The update on the key tax reforms in the making, the Goods and Service Tax ('GST') is now in its final lap with the proposed introduction across India w.e.f. July 01, 2017. The GST Council is in the process of finalizing the taxation structures and rates. In the next 3 months, the Center, the States and entire economy would be deeply immersed to overcome the challenges of implementation of GST and its impact on the business and pricing of goods and services.
In the first 9 months of this fiscal year, India saw foreign direct investment ('FDI') jumping by 22% over the last year, crossing US$ 35.8 billion with services bringing the highest FDI, followed by telecom and trading. The total FDI this fiscal year is likely to exceed US$ 40 bn on the back of strong inflows inspired by political stability and vibrant economic growth.
In the latest overseas investment in India, the famed Tencent from China and auction website E-bay of USA made an investment of US$ 1 bn in India's largest e-commerce company, Flipkart valuing it at USD 11 bn. On the other hand, the recent entrant in telecom, Reliance-JIO, with an unprecedented greenfield investment of over US$ 25 bn has set this sector on fire with large players opting for consolidation to survive fierce competition from Reliance - JIO. In the latest, the global telecom giant Vodafone concluded a merger with the No 3 Telco Idea Cellular to form the largest Indian telecom service provider.
In surprising developments, with a leading US economy, pleasantly optimistic UK economy in the wake of Brexit, followed by growth in Eurozone and the world at large, a healthy global economic growth seems on the anvil. Complementing the global head-winds, the confidence in the Indian economic growth is moving towards an all-time high and with political compulsion out of the way, the Modi Government is clearly poised to deliver an economic marvel that has eluded India for the longest time, but is now very much imminent and possible.
M&A in India
Between January 2017 and March 2017, around 141 M&A deals were announced / completed aggregating to approx. USD 2.28 billion; dominated by domestic deals (94) followed by cross border deals (47).
In terms of sectors, Information Technology saw the maximum deal value with deals worth around USD 619 million, followed by Consumer Discretionary with USD 358 million and Healthcare with USD 336 million.
(Deals mentioned in the M&A Tracker do not include those with undisclosed deal values as well as those which have been announced but not closed)
Target Company : Mallinckrodt LLC, Spasticity and Pain Management Portfolio
Acquiring Company : Piramal Enterprises Ltd.
Deal Value (in mn USD) : 203.00
- In March 2017, Piramal Enterprises Ltd said on acquired a portfolio of drugs from UK-based Mallinckrodt LLC for USD 171 million
- The transaction also involves an additional USD 32 million payable depending on the financial performance of the acquired assets over the next three years
- Piramal, through a wholly owned critical care unit, is acquired drugs for spasticity and pain management from the UK biopharmaceutical company. The drugs include Gablofen, a severe spasticity management product which is marketed in the US, and two pain management products under development. Gablofen has also been approved for launch in eight European markets
- For the 12 months through September 2016, the acquired portfolio generated revenue of $44.6 million
- This transaction is a step further in Piramal's strategy to make investments, in both internal developments and acquisitions, to expand its presence in the global generic hospital drug market
Target Company : Luminous Power Technologies Pvt. Ltd.
Acquiring Company : Schneider Electric Industries SA
Deal Value (in mn USD) : 139.25
- In January 2017, Schneider Electric completed its acquisition of the remaining 26% stake in Luminous Power Technologies Pvt. Ltd., a leading power back-up and power solutions provider in India. This stake, combined with the 74% acquired in May 2011, gives the Group full ownership of Luminous Power Technologies Pvt. Ltd.
- Schneider Electric reinforced its position within the lucrative Indian Inverter and UPS market
- Luminous is a leading global company delivering high quality power products for home and commercial applications. The company's portfolio includes products and services in telecom infrastructure and renewable energy systems such as solar, wind and hybrid solutions
- Luminous is a strong brand with technical expertise in the power-backup and power-storage space
- The partnership enables Schneider Electric to leverage the strong Luminous brand and the know-how of the company to develop a strong home electrical business focused on Final Low Voltage (FLV) & Wiring Devices (WD) products through a vast retail network. Luminous also expands Schneider Electric's portfolio of products in Rural/BOP space
Target Company : Healthhelp LLC
Acquiring Company : WNS Holdings Ltd.
Deal Value (in mn USD) : 95
- In March 2016, WNS (Holdings) Limited, a leading provider of global Business Process Management (BPM) services acquired HealthHelp, an industry leader in care management
- HealthHelp works closely with both payors and providers to help improve patient outcomes and drive long-term sustainable cost savings for the healthcare industry. The company's solutions are delivered by combining a proprietary technology platform rooted in evidence-based medical research, high-end predictive analytics, and deep healthcare industry expertise
- HealthHelp provides benefits management across several key specialty healthcare areas, including Radiology, Cardiology, Oncology, Sleep Care, Orthopedics, and Pain Management. The company's approach is based on a non-denial, collaborative model which includes a peer-to-peer network of over 100 Medical Doctors and 11 university medical systems. HealthHelp's solutions are powered by a proprietary clinical decision support technology platform called ConsultTM
- With the acquisition of HealthHelp, WNS has taken a major step forward in strengthening its end-to-end Healthcare and Insurance BPM offerings. WNS plans to leverage HealthHelp's industry-leading capability in care management to address the needs of payor, provider and insurance organizations
Target Company : Techprocess Payment Services Ltd.
Acquiring Company : E-Billing Solutions Pvt. Ltd.
Deal Value (in mn USD) : 88
- In February 2017, Ingenico Group SA, through its subsidiary E-Billing Solutions Pvt. Ltd., acquired Techprocess Payment Services Ltd., which owns electronic payments platform Billjunction, for a total consideration of USD 88 million
- With the acquisition of TechProcess, With the acquisition of TechProcess, the Ingenico Group, a leader in the terminal market, is taking a major step in India, the fastest growing country in Asia. The combination of their assets places them in a unique position to benefit from India's shift towards electronic payment transactions and to strengthen our leadership in Indian instore and online payment acceptance
- TechProcess offers products and solutions in online payments gateway, National Automated Clearing House, bill payments and mobile payments
- Ingenico Group's leading position in the payment industry will help Techprocess accelerate its development and allow them to lead the offline-online convergence in India
GST Story - The last stretch
In the last few years, India has witnessed tremendous growth with an increased focus on ease of Doing Business in India, making it one of the fastest growing economies in the world and a preferred investment destination.
However, the tax structure in India, especially Indirect taxes, which are transaction based levies and form part of the end-price of goods and services consumed in the economy, has remained complex as ever. Multiplicity of taxes, complex laws, variation in the tax rates and an unfavourable credit regime have often been cited as concerns.
This is largely a result of the Federal structure, where both Union and State Governments parallelly tax goods and services through different enactments. Enormity of the problem can be gauged from the fact that there exist about 35 different indirect taxes, which are being imposed by the Union and State Governments. The interplay of these taxes further adds to the complexity, leading to tax evasions, uncertainty and disputes with tax authorities, resulting in higher compliance costs.
It has been hence felt that a simpler tax regime which is easier to understand and is uniform across geographies will contribute further to economic growth. Goods and Services Tax ('GST'), which is set to be implemented from July 1, 2017, is a welcome step in that direction.
GST is a value-added tax levied at the point of consumption on all supplies of goods and services within the economy, where both the Union and State Governments would tax transactions. GST is set to replace most of the existing indirect taxes levied on goods and services and is expected to bring in uniformity, consistency and simplicity in the Indirect tax regime, leading to reduction in the compliance costs.
GST will subsume at least 18 existing Indirect taxes resulting in a common market across India. Further, it will bring in seamless flow of input credits, leading to reduced tax cascading. This will lower the prices of goods and services in the longer run giving boost to the 'Make in India' movement.
Dual control by the Union and State Governments should result in better compliances. Also, there would be lesser rewards on evading taxes, considering the smoother flow of input credits. This will encourage suppliers to comply better, leading to buoyancy in revenue collections. It is estimated that introduction of GST may lead to increase in GDP by upto 2 percentage points.
However, this transformation can be quite disruptive, if the industry does not gear up for change management and meet the challenges that the new regime may usher in.
The concept of taxation may shift to 'supplies' instead of sale or manufacture of goods or provision of services, i.e. transactions such as stock-transfers or free supply of goods and services, which were hitherto not taxable, may be subject to GST. This would require recalibration of supply-chain models and review of procurement and sale strategies to optimize the tax costs. Further, there may be an increase in the cost of services or inter-state supplies of goods due to increase in the tax rates. All this would lead to a stress on the working capital requirements for any business that would need to be managed.
Also, the policies regarding discounts, job work or contract manufacturing, make or buy etc., may need to be realigned to ensure that there are no adverse tax impacts.
Information Technology ('IT') systems, including the Enterprise Resources Planning (ERP) packages currently being used by businesses would need to be re-calibrated to meet the requirements of GST and capture changes made in the business model or policies of the enterprise to facilitate a smooth transition.
Considering that there are only three months in the implementation of GST, the time may be too short for the Industry to bring in all the above changes and would require a herculean effort on the part of all stakeholders including the Government, the Industry, the tax experts and IT solution providers.
A Banking Perspective
DBS Bank is the largest bank in South East Asia by assets and among the larger banks in Asia. It has market-dominant positions in consumer banking, treasury and markets, asset management, securities brokerage, equity and debt fund-raising in Singapore and Hong Kong. The bank's strong capital position and impressive credit ratings earned it Global Finance's "Safest Bank in Asia" accolade for six consecutive years, from 2009 to 2015
Indian Micro, Small and Medium Enterprise (MSME) sector, with over 51 million units, has emerged dynamically at the heart of a region which is an important driver of global economic growth. Organized MSME (~36 million) alone provides livelihood to 80 million people at a comparatively lower capital cost. This sector contributes 45% to the total manufacturing output and 40% to the exports from the country. However, the lack of adequate and timely access to finance coupled with poor infrastructure and inadequate market linkages constrain the sector from propelling to its actual growth potential. Digital and use of technology provides a unique opportunity to SMEs to excel.
Recent demonetization affected around 86% of the total currency in circulation and led to some disruption. While from a banking perspective, this led to increased customer inflows and increased liquidity and some interest rate reductions during the period, there was a demand slowdown for the SMEs. However, the situation is predicted to change. Also, there is migration of opportunities from the unorganised to the organised SMEs.
Demonetisation played a bigger role in reducing people's dependency on cash and cash related transactions. There is a surge in the digital economic grid with millions of new subscribers and users entering the digital bracket every day for their basic cash transactions. Most of the money transactions have become trackable and taxable with the usage of digital wallets, mobile wallets, debit and credit cards. There is an increase in the number of digital cash users with wallet players on boarding over 10 million customers in a single month in November. There was a surge in Unified Payment Interface (UPI) transactions from 0.3million to around 4.2million in February with a 20-fold increase in transaction amount (though smaller base to start with).
With Goods and Services Tax (GST) coming into effect in the near future, the tax regime in India is on the verge of further disruption. In the current sales tax landscape, a business with multi-state operations, needs to pay taxes pertinent to various states. This increases transaction costs for MSMEs and locks up the money that can be used in key day-to-day operations. GST proposes one tax policy for the whole nation. This policy will help in streamlining processes and will aid in the formation of one normal market for all merchandise in India. Hence, MSMEs will not be compelled to price the same item differently across states.
GST also brings together an electronic reconciliation of payables and receivables for SMEs in order to claim input credit. SMEs must also invest in integrating payment capabilities with their Enterprise Resource Planning (ERP) tools to eliminate duplication of efforts, improve efficiency and automate reconciliation. Training the employees and encouraging them to leverage latest technology is also vital to move up the value curve and focus on closing the big gaps in productivity improvement.
Opportunities are knocking the door of the Indian economy. In order to seize them, companies should set themselves up for significant transitions. In summary, though the immediate aftermath of demonetization looked chaotic and turbulent, there has been a quick stabilization in the banking sector. The situation is sure to improve for the better and the less cash economy will continue to expand. Increased usage of digital including usage of ERP software integrated with banking platforms can prove to be beneficial. Banks (such as DBS) and SMEs who are able to harness technology and adapt to these changes have the potential to outperform.