India economic update
Milind S. KothariManaging Partner
BDO India LLP
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Amit Kumar SarkarPartner & Head – Indirect Tax
On 1 July 2017, the most anticipated and path-breaking business reform in the history of India i.e. the Goods and Service Tax (GST) was launched. Touted as a tax for new India, a digital India, it doesn’t just promote ease of doing business but also shows the way forward as ‘way of doing business’.
The GST regulation is slated to put an end to tax terrorism and the Inspector Raj by making sure that all grey areas are eliminated. As an immediate follow up of implementation, the logistics sector rejoiced as the time taken to move goods across India through multiple states declined by 30% as state barriers and multiple check points disappeared.
It is said that the Indian story under Prime Minister, Mr. Narendra Modi’s leadership is being noticed by one and all. The message is reaching the right people and although admittedly, India still is a difficult place to do business, it boasts of 7%+ GDP growth rate, stable government and leadership, good macro-economic indicators and massive reform agenda being pursued.
Inviting foreign investors to invest in insurance, defence, rail roads have been significantly positive steps. However, while the money is coming, a lot of execution has to occur for these reforms to translate from Central Government to each of the states.
While GST stole the limelight as the leading story, the Ministry of Petroleum and Natural Gas notified the open acreage licensing policy towards end June. Under this policy, exploration blocks shall be awarded on continuous basis through e-bidding in a transparent manner. This policy should rev up competition in the upstream oil sector and address the pressing need to shore up investment in oil exploration. Now, private companies will be able to bid for enhanced oil recovery (EOR) contracts in line with best global practices.
The Modi Government continues its fast tracking of cleaning up parallel economy. Following the planned strategy to eradicate black money that started a couple of years ago, the momentum has been incessant in the past 9 months, starting from the massive demonetization drive, followed up with implementation of GST and now on the agenda, political funding, which has been one of the root causes for the flourishing parallel economy. According to the Finance Minister, the government is planning to take major steps to cleanse the entire political funding in India and would become a subject matter that would be taken up on top priority.
After the recent abolition of Foreign Investment Promotion Board (FIPB), the pending foreign investment proposals are to be distributed to relevant ministries for approval. The Department of Industrial Policy and Promotion (DIPP) will distribute them to the relevant ministries and has drafted Standard Operating Procedures (SOPs) for processing FDI proposals with a mandate to process applications within 8-10 weeks. The abolition of FIPB is expected to increase the ease of doing business and draw more foreign investment. Currently, 90% of India’s FDI inflows are through automatic route.
Unified Payments Interface (UPI) - the digital payment instruments launched by RBI missed the first quarter target of 40 million, clocking only 26 million transactions. Overall digital transactions, which in many cases doubled after demonetization, has corrected and is expected to attain a new normal of around 30-40% growth over transaction volumes last year. The Government is aggressively promoting digital payments and new initiatives such as BHIM (Bharat Interface for Money).
The RBI sought to address the colossal issue of Non-Performing Assets (NPAs) and mandated a dozen such accounts to be taken to Bankruptcy Courts. The Internal Advisory Committee of the bank selected these cases that total about 25% of the gross NPAs for immediate reference under IBC from amongst the top 500 exposures in the banking system. For other bad loans that do not fall in this category, banks will have 6 months to come up with a resolution plan, failing which they would also land up in the Bankruptcy Courts.
Meanwhile, the Security and Exchange Board of India (SEBI) heeds the rules of acquisition to make it more attractive for investments to buy distressed companies from banks amid the renewed push by the government and RBI to resolve bad loans. In the ensuing changes to the rules the requirement of open offer obligation has been waived off for new investments and the pricing is to be as per RBI prescription. Further, the new rules provide for a 3-year lock-in for new promoters to shield small investments. The saga of resolving the mountain of NPA promises to dominate news for a considerable time.
India’s economic story would continue to be inspiring and interesting!
M&A in India
Between May 2017 to July 2017, around 105 M&A deals were announced/ completed, aggregating to approx. USD 1.25 billion; dominated by domestic deals (74) followed by cross border deals (31).
In terms of sectors, Financials saw the maximum deal value with deals worth around USD 531 million, followed by Information Technology with USD 283 million and Industrials with USD 124 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: IFFCO-Tokio General Insurance Company Ltd.
Acquiring Company: Tokio Marine Asia Pte Ltd.
Deal Value (in mn USD): 389.8
- In July 2017, Tokio Marine Asia Pte Ltd. acquired 23% stake in IFFCO-TOKIO General Insurance Co. Ltd. from Indian Farmers Fertiliser Cooperative Ltd. (IFFCO) and Indian Potash Ltd. for $389.80 million.
- As a part of transaction, Indian Potash Ltd. sold 1.36% stake for $23.05 million and Indian Farmers Fertiliser Cooperative Ltd. sold 21.64% stake for $366.75 million.
- IFFCO-Tokio General Insurance Company Ltd. is engaged in providing insurance offering motor insurance, health insurance, home insurance, micro and rural insurance and speciality insurance.
- Tokio Marine Asia Pte Ltd., a company based in Singapore, is engaged in providing insurance services. It offers non-life insurance, life insurance, general insurance etc. Tokio Marine Asia Pte Ltd. operates as a subsidiary of Tokio Marine Holdings Inc.
- Post transaction, Indian Farmers Fertiliser Cooperative Ltd. would hold 51% stake and Tokio Marine Asia Pte Ltd. hold 49% stake in the company.
Target Company: ItzCash Card Ltd.
Acquiring Company: Ebix Inc.
Deal Value (in mn USD): 120
- In May 2017, Ebix Inc. acquired 80% stake in ItzCash Card Ltd. for a consideration of $120 million.
- As a part of the consideration, Ebix paid $76 million as upfront payment and $44 million as earn-out payable over three years from closing of the deal.
- ItzCash Card Ltd. is engaged in providing payments solutions. It offers a multipurpose stored value card of various denominations to make online transactions in India. The firm offers consumer solutions such as card and money transfer, e-wallet. The company was founded in 2006 and is based in Mumbai, Maharashtra.
- Ebix Inc. is engaged in offering software and e-commerce solutions to the insurance industry based in Atlanta, USA.
- As a part of the transaction, Intel Capital India Technology Fund, Matrix Partners India I LLC, and Lightspeed Venture Partners VIII LP sold their entire stake in the company and earned a return of 3 to 5 times on their investment.
- Post transaction, Ebix would hold 80% stake and Essel Corp. would hold 20% stake in the company and ItzCash Card Ltd. would operate as a subsidiary of Ebix Inc.
Target Company: Ciber Inc., North America and India Operations
Acquiring Company: HTC Global Services Inc.
Deal Value (in mn USD): 93.00
- In June 2017,HTC Global Services Inc. acquired North America and India operations of Ciber Inc. (‘the unit’) for the total consideration of $93 million and other liabilities.
- The unit represents the North America and India Operations of Ciber Inc., the provider of information technology consulting services. The unit is headquartered in the USA.
- HTC Global Services Inc., a company based in the USA, is the information technology (IT) and business process outsourcing (BPO) service and solution provider. Its clientele base includes industries such as automotive and manufacturing, banking and financial Services, government, insurance, media and publishing, healthcare, retail and education verticals.
- As a part of the deal, HTC would takeover company’s North America and India operations (Hyderabad and Bengaluru) and would add 3,500 employees to the workforce via an asset purchase agreement.
Target Company: Quality Needles Pvt. Ltd.
Acquiring Company: Healthium Medtech Pvt. Ltd.
Deal Value (in mn USD) : 69.65
- In June 2017, Healthium Medtech Pvt. Ltd. acquired Quality Needles Pvt. Ltd. for $69.65 million in an all-stock deal.
- Quality Needles Pvt. Ltd., based in Uttar Pradesh, is a manufacturer of surgical needles. It offers variety of surgical suture needles since 1984.
- Healthium Medtech Pvt. Ltd., based in Karnataka, is engaged in similar business of manufacturing of surgical sutures.
- On March 31, 2017, Healthium Medtech allotted 11,965,193 Equity Shares at a price of INR 375.30 each to TPG Growth II Markets Pte. Ltd., 5,20,000 Equity shares of Quality Needles Pvt Ltd. at a price of INR 8,635.58 each.
- Post transaction, Quality Needles Pvt. Ltd. operates as a subsidiary of Healthium Medtech Pvt. Ltd.
India ushered into the goods and services tax (GST) regime, the biggest tax reform since independence—on 1 July 2017 to create one common market for 1.3 billion people. A single indirect tax regime has kicked into force in Asia’s third largest economy, dismantling inter-state barriers to trade in goods and services. It has been termed a potential game changer, undertaken by India in 70 years of independence, one that the government says is founded on the concept of “one nation, one market, one tax.”. Essentially, the $2.4 trillion economy is making a bold attempt to transform itself by removing internal tariff barriers and collapsing 17 central, state and local body taxes into a single GST.
Corporate and consumer expectations of the tax reform, that some economists say could add between 1 and 2 percentage points to India’s annual growth rate, are high. Policymakers are betting on GST to achieve various economic goals in one stroke—promoting the manufacturing sector, boosting exports by making production more competitive, creating more jobs, improving the investment climate, cutting down tax evasion and lowering the compliance cost to businesses.
Contingent on the time that the reform will take to be termed comprehensively successful, it would improve the ease of doing business in India - putting an end to a multi layered tax system, dismantling border check posts and eliminating the need for face-to-face meetings between executives and field officers of the tax department, will be contributing factors
For GST to achieve objectives, information technology (IT) will be key. A seamless migration to the promised ‘non-adversarial’ tax regime will depend upon the surgical efficiency of GST’s most critical component - the GST Network (GSTN). If GST is the body, GSTN is the soul. Electronic filing of invoices is central to the idea of GST which will be handled through the designated GSTN. It is a massive effort: a total of 8.3 million tax payers will e-file more than 3 billion invoices per month. For this to be successfully possible the technology infrastructure and digital innovation expertise will be pivotal to facilitate the transition to this massive e-governance project. GSTN will manage the official common portal providing three core services: registration, returns and payments.
To enable this IT readiness GSTN has appointed GSPs (GST Suvidha Providers) and ASP (Application Service Providers) which are licensed to interface with the GSTN. The area of focus for GSP/ASP’s is facilitating seamless filing of invoices coupled with robust information security, provide value-added services such as mobility, automation & analytics.
Organizations that will come under the purview of this new tax system have started expediting their preparations in order to be GST compliant.
With the subject matter expertise in indirect taxation & techno-functional exposure to business scenarios, BDO India has developed and introduced a managed services solution - EnableGST to help with a complete set of GST returns covering compliance as well as related areas of vendor reconciliation, ledgers, inter-company transaction credits and refund processing.
EnableGST is aimed at ensuring Complete Accuracy, Comprehensiveness, Customisation of services and Confidentiality of information, while discharging compliance requirements.
EnableGSTwill help customers automate data extraction from ERP and be displayed as registers for internal confirmation. The confirmed data will seamlessly be saved-submitted-filed with GSTN as statutory returns. EnableGST solution also covers retrieval of relevant data from GSTN for auto-population in specific returns and reconciliation.
- Extensive, configurable options to identify and extract GST-relevant data, reducing implementation time
- Scalability for future changes
- Simplified inter-company transaction credits allocation with pre-configurable default ratios for distribution,
- Advanced reports - Internal audit, compliance status etc
- Self-service tool for trouble-shooting.
EnableGST (software and data) does not require separate administration. It is cost-effective and has a rapid deployment model that does not require investment on new hardware. It is a model hosted on cloud, pay-per subscription with free upgrades.
It has a robust backup and disaster recovery plan with data encryption and archiving as part of the product offering.
It is offered with custom integration tools for specific ERP systems helping in seamless integration, and ensuring flexibility to manage data transfer and compliance.
GST is likely to evolve and stabilize over several months. Corporates would require support teams for not just getting technical advice but making those changes with a solid configuration management process.
With EnableGST we endeavour to build, implement, configure & supportthe management of business and compliances with comprehensive knowledge of statutory changes through a sustainable and scalable technology solution built in line with the ecosystem of sound e-governance.
Radius is one of the leading real estate developers headquartered out of Mumbai with offices in UK, USA and UAE. Team Radius presents an exciting vision stemming from a work culture that fuels its success on innovation and state-of-the-art technology.
There are several conversations since last year, that are talking about the know-how of the biggest game changing policy reform for regulating the real-estate sector - Real Estate Regulation and Development Act (RERA). Now, that RERA has finally come into effect with 31st July, 2017 as the deadline of state implementation of RERA rules, it is pertinent to analyse what it all means, for patrons to be equipped with the right information to facilitate informed decision making.
While the short-term implications of RERA on the real estate sector are already prevalent in terms of drop in sales and new launches as developers are working towards becoming RERA-ready, the long term implications of greater transparency, a highly regulated environment which will increase ease-of-doing business is undeniably on the anvil. It will benefit the entire eco system and act as a catalyst in amplifying the growth of Indian real estate market.
Buyers before Developers: Consumer is King in the age of RERA
RERA reassures complete transparency in business, without any prejudices, creating reliability towards the sector. For instance, one of the foremost hurdles that homebuyers face while investing in a house is delayed delivery. With RERA becoming a reality, issues like project delays, project title clearance etc. will be addressed more effectively.
For facilitating a more transparent ecosystem, RERA warrants all developers to disclose requisite information regarding their projects like proposed plan, updated status/ progress of the project, completion date, amenities etc. on the company website. There is assured accountability at every stage of project completion for a homebuyer. Furthermore, even real estate brokers need to be registered with RERA to ensure full disclosures. Thus, homebuyers can today securely invest in a property with a RERA registered developer as due diligence is being taken into consideration by the government to protect their rights. This extremely high level of disclosure enables a level playing field in the ecosystem, making the developer responsible for such information with respect to sales and approved plans. Customers who are unsatisfied with the response from a developer can approach the regulator who will review the nature of grievance and may call upon the developer to perform the pre-agreed terms. Equally, the developer also gets a speedy way to disclose delays and reasons thereof.
RERA: A business imperative for growth
With the impression of developers applying unfair practices in the past, the sector needed an urgent image makeover. We believe that the sector is at an inflection point to grab an excellent opportunity to leap frog into a robust market. The Act lays down the foundation for the developer to access better, longer and sustainable capital. Pre-sales of un-approved flats is no longer an option. Clearly, pre-sales was a high risk product for home buyers wooed by relatively lower prices. This will change as only approved flats are allowed to be sold. Considering this, more capital is bound to flow in, to finance the land purchase and construction cost until approved plans are available for sale.
RERA will impact all stakeholders – investors, homebuyers and lenders alike. Now with most of the on-going and all new projects’ stakeholders – developers & brokers coming under the ambit of RERA, the scenario will become different and add credibility to the process. It will also elevate the quality of business operations to global standards which will fuel foreign investments. For decades, private equity investments have fuelled the fund requirements of developers. Highly unregulated policy environment has been one of the major setbacks for these funds to invest further in India. With RERA coming into play, we are already witnessing a sharp increase in interest from various institutional investors that is evident from the recent investments made by several foreign investment banks and private equity funds.
Given that a lot of buying is needed to absorb the supply in real estate, Radius Developers believes that these regulatory changes have become a business imperative to release the full potential of the sector and will drive the sustainable growth for the sector.
The views expressed herein are solely the author's. BDO India does not take responsibility for actions or decisions arising out of individual perspectives or opinions.