India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Shrikant KamatPartner – Indirect Tax
Akshay ChudasamaManaging Partner- Mumbai
As is the case in most countries, the fate of economic policies and reforms agenda is also driven by political compulsion, especially, when elections are around the corner. The political party in governance, chooses to take less risk of ruling out policies that would adversely impact election outcome. As the general elections are only 20 months away, the Prime Minister, Mr Narendra Modi, does not have anxiety on this count with the Opposition sinking to new depths. However, the state of the economy, despite overdrive of some of the initiatives, is a cause of concern. The residual impact of demonetization in November 2016 and introduction of Goods and Services Tax from 1 July 2017 has dislodged growth which would now seem to take long to return. The results of demonetization, in which nearly all of the old currency was returned to the central bank - the Reserve Bank of India, put at question the entire exercise for what it cost the economy. The expectation of gain of unaccounted money that would be drained out in the process belied hope.
The Gross Domestic Product (GDP) grew @ 5.7% in the quarter ended June 2017; the slowest in 3 years from 6.1% in the preceding 3 months raising concern over the state of the economy. Post implementation of GST, the largest impact has been to the exporters who are deeply impacted due to delays in GST refund and upfront payment of tax of inputs for exports.
To boost the economy, the Government would need to drive up consumer demand by taking a series of steps including reduction of fuel prices and cuts in the rates on consumer items in the short term. Another important priority for the Government would be revival of stalled private projects that will accelerate economic activities and positively impact balance sheets of public sector banks. In the current background of sub-optimal growth, the Government may not have any option but to pump–prime the economy in the next fiscal budget.
This government inherited a broken banking system with the overhang of non-performing assets of Public Sector Undertaking (PSU) banks showing a deep structural fissure in the economy. It also brings to fore that the logic of creating a grid of state-owned banks that were nationalized 50 years ago was bereft of economic justification. The rollout of the Insolvency & Bankruptcy Code has been promising, but it would take so much more, to bring the banks back to fulfilling capital adequacy norms when Basel III is mandated to be implemented by end of March 2018.
The challenge of job creation continues to be the top and most pressing priority for this Government with more than a million new entrants in the job market every month. It is true that India has had a stagnant manufacturing sector for several years. The labor laws have throttled growth in low-tech products where other competing economies have found significant growth opportunities. The only sector in India, demonstrating consistent growth is ‘Services’. The IT sector which has fed millions of jobs in the past, is unlikely to generate jobs of the size and magnitude that is now required. The other service sectors that could generate job opportunities are several such as hospitality, health-care, logistics and tourism but all these require education-plus-skilling and of course, investment, which has been lacking. The question of slowing growth could have several answers, however, at the center of the storm remains - high interest rates.
There is now an emerging consensus that the economy is in a downward spiral. The decline in real wages is not just a serious and undisputed indicator of the state of the economy but also a pointer to the stress in rural economy. Given that almost one-third of all rural workers and household are dependent on wage work, it will certainly affect the gains in poverty eradication that was achieved in the previous decade. The sheer size of rural casual workforce also implies that any attempt at reviving the economy will have to include the efforts to create employment and raise wages in rural areas.
As India ushers into the last quarter of the calendar year, it looks to seek a balance between stabilizing the changes that regulatory policies have effected and looking forward to embarking upon a steady growth trajectory.
M&A in India
Between July 2017 to September 2017, around 132 M&A deals were announced / completed aggregating to approx. USD 794.56 million (mn); dominated by domestic deals (80) followed by cross border deals (52).
In terms of sectors, Utilities saw the maximum deal value with deals worth around USD 278 mn, followed by Industrials with USD 177 mn and Information Technology with USD 87 mn.
(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: Sahrudaya Health Care Pvt. Ltd.
Acquiring Company: Medicover Forsakrings AB
Deal Value (in mn USD): 15.60
- In August 2017, Medicover Forsakrings AB (‘Medicover’) acquired 22% stake in Sahrudaya Health Care Pvt. Ltd. (‘Sahrudaya’) for a total consideration of USD 15.6 million.
- Sahrudaya, a company incorporated in Hyderabad, Telangana is engaged in providing healthcare services. It offers heart, lungs, vascular ailments and cardiology surgeries, interventional cardiology, endovascular interventions, pediatric cardiology and interventions, open heart surgery, blue babies, heart and lung transplants.
- Medicover, a company based in Budapest, Hungary, is a health insurance service provider. It provides medical insurance cover for basic healthcare and occupational medicine services, specialist and advanced diagnostic examinations and hospital treatment.
- Medicover has an option to increase its stake to 51% in Sahrudaya in next two years for INR 2.2 billion.
- The Sahrudaya acquisition by Medicover would help to expand operations across pan-India and overseas.
Target Company: Amneal Pharmaceuticals Pty Ltd.
Acquiring Company: Arrow Pharmaceuticals Pty. Ltd.
Deal Value (in mn USD): 13.52
- In August 2017, Arrow Pharmaceuticals Pty. Ltd. (‘Arrow’) acquired Amneal Pharmaceuticals Pty Ltd. (‘Amneal’) from Amneal Pharmaceuticals LLC for a total cash consideration of USD 13.52 mn.
- Arrow, a company based in Australia, operates as a wholly-owned subsidiary of Strides Shasun Ltd, a listed company in India. Arrow is engaged in the business of manufacturing and supplying of pharmaceuticals.
- Amneal, a company based in Melbourne, Australia is engaged in offering pharmaceutical products including, inter alia, generic medicine and over the counter products.
- The acquisition would help to accelerate Arrow market reach, attaining a leadership position in Australian generics market share, accelerate market expansion strategy and customer footprint.
- Post transaction, Amneal operates as a wholly-owned subsidiary of Arrow.
Target Company: Brilliant Basics Holdings Ltd
Acquiring Company: Infosys Ltd.
Deal Value (in mn USD): 9.91
- In September 2017, Infosys Ltd. (‘Infosys’) acquired Brilliant Basics Holdings Ltd. (‘Brilliant Basics’) for a total consideration of USD 9.91 million, including earn-outs and employee retention amounts.
- Brilliant Basics, a company based in London, United Kingdom (additional offices in Norwich, Dubai, Hong Kong, Singapore, and Mumbai), is a digital service provider offering services like digital strategy and innovation, customer experience, employee experience, digital transformation, technology innovation, digital commerce & new business models.
- Infosys, a listed company incorporated in Karnataka, India is an information technology consultant providing business information technology (IT) services.
- This poses to be the eighth acquisition by Infosys, India’s second-largest software exporter.
- Post-acquisition, Brilliant Basics operates as a wholly-owned subsidiary of Infosys.
Target Company: ETL Factory Ltd
Acquiring Company: HCL Technologies Ltd.
Deal Value (in mn USD) : 9.07
- In September 2017, HCL Technologies Ltd. (‘HCL’), through its step down wholly owned subsidiary, acquired ETL Factory Ltd. (‘ETL Factory’) for a cash consideration of USD 9.07 million.
- ETL Factory, a company based in Edinburgh, United Kingdom, is engaged in providing software enabled services under the brand name - Datawave. It automates and industrializes the data for the enterprise and delivers data needed at a fraction of the time or cost whilst ensuring an increased level of control across all the assets as it moves around the data landscape.
- HCL, a listed company incorporated in Uttar Pradesh, India, is a software solutions company.
- Post-acquisition, ETL Factory operates as a wholly-owned subsidiary of HCL.
Mid-Term Review of the Foreign Trade Policy - It’s time for course correction
The Government of India announces the Foreign Trade policy once every 5 years and issues amendments to the policy on an annual basis (known in the trade as the ‘Annual Supplement’). The current policy was announced in April 2015 and will continue until March 2020. In that sense, this year’s Annual Supplement can be seen more as a ‘Mid-term Review’ of the current policy. It therefore offers the Government an opportunity to re-look at the ambitious target of achieving annual exports worth USD 900 billion in the wake of the demonetisation exercise undertaken in the last fiscal and the nation-wide implementation of Goods & Services Tax (GST) in the current financial year.
If one were to keep the macro-economic goals targeted by the policy unchanged, it would certainly require a deeper examination of the policy measures, so as to arrive at a precise diagnosis of whether we are on course or whether the policy document needs some course correction. This article not only offers a realistic analysis of the current policy but lends some practical solutions to the visible road blocks in India’s quest to increase it’s share in world merchandise and services exports to 3.5% from the present 2%.
Addressing Structural Defects
Except a few minor deviations, the current policy conforms to the traditional approach of earlier governments of incentivising traders on the basis of quantum of exports undertaken. This implies that, for anybody to have any reasonable expectations from the Policy, they should first be seen to be exporting goods or services. This means that there is very little incentive for businesses who look up to the Government for support to attain export competitiveness. This mindset, disseminated through the Policy provisions, explains why our export growth has not exceeded beyond the usual Year-On-Year rate of 10-15 percent even under the current policy upto its mid–term. What the policy therefore needs, is a strong dose of measures focussing on- value addition, employment generation, new product development & innovation, assistance on market access and achieving high global standards on technology and quality.
Impact of Demonetisation
Government of India announced demonetisation of currency notes of INR 1000 and INR 500 denomination from 9th November 2016. The most visible impact of demonetisation was witnessed on the Medium, Small & Micro Enterprises (MSMEs) in so far as it relates to engagement of contract labour and purchase of raw material / components / parts. Given that MSMEs employ a huge informal labour force on contractual basis and source their inputs from the unorganised sector, more than 75 percent of payments for these are in cash form. Therefore, the sudden announcement on demonetisation caused a drastic change in the procurement dynamics for MSMEs. It was clearly seen from available data that during the 6-9 months from the demonetisation decision, work clearly moved from MSME’s to larger and more organised firms. This further shrunk the share of MSMEs in the export pie in a generally depressed export market as witnessed from the data available for the penultimate and final quarter of the previous fiscal year (2016-17).
Impact of GST
GST being a consumption based tax, levied on every stage of value addition, exporters are required to first pay GST on their procurements and claim refund of input stage GST. As the filing of GST returns (GSTR 3) on the GSTN portal has been deferred until end October 2017, exporters, for now, do not have any means to claim refund of input stage tax, given that all GST refunds are required to be processed only through the GSTN portal. Thus, a significant blockage of working capital is seen in the case of exporters, that has prompted a majority of them to defer their export deliveries by another month in the anticipation of resolution of this imbroglio by early October 17. Besides, the current duty exemption schemes such as Advance Authorisation scheme and Export Promotion Capital Goods (EPCG) scheme also need to be restructured as GST laws entail payment of Integrated GST (IGST) on all imports as against a total exemption from all duties in the earlier indirect tax regime, thereby further pushing the working capital requirements of the exporters.
Goods exporters are also seeking a new Duty Drawback scheme from the Government that will ease their cashflow crunch by not only enabling credit of the drawback to their bank account as soon as the export declaration (shipping bill) is filed, but will also factor the increase in the rates of tax under GST law by way of declaring a higher rate of drawback. Service exporters, on the other hand, are expecting total liberalisation of documentation requirement and fast rack refunds from the Government.
What to realistically expect from the mid-term policy announcement?
It is apparent that the policy goals of achieving 3.5 percentage of share in global export trade is unlikely to be achieved in the remaining period of the policy tenure, given the fact that Government has its hands full with addressing structural and procedural issues of exporters on GST refunds, to bring exports back on track.
However, this mid-term review can be treated as an approach to realign existing and new trade and investment agreements for enabling MSMEs meet the cost of complying with high international technical and quality standards. Bilateral trade agreements with large economies such as Australia, the European Union (EU) and the United Kingdom (post Brexit) and Multi-lateral trade partnership opportunities such as the Trans-Pacific Partnership Agreement should be viewed with all seriousness to not only enable Indian exporters to cater to an increasing demand for finished goods and intermediates in these regions but to also provide service exporters from India, easy access to these relatively newer markets. The mid-term policy document ought to prescribe a road map on how this is intended to be achieved by the government over the next two and half years.
If the above can be achieved through this year’s Policy related announcements, then the Policy objective of ‘Make in India’ will get a befitting boost to stay relevant rather than becoming a mere philosophy existing in the Policy document.
Dynamic Indian legal landscape
With the legacy of a century, Shardul Amarchand Mangaldas & Co, established in 2015, is one of India’s leading law firms rated by international organisations, law directories and professional journals. As a full service law firm, Shardul Amarchand Mangaldas is renowned in the business community for its ability to enable business, its innovative solutions, responsiveness and collaboration with its clients. The Firm continues its journey as “a young and wise firm” in its “Centenary Year of Excellence”.
Currently, the Firm has over 510 lawyers, including 91 Partners, offering legal services through its offices at New Delhi, Mumbai, Gurugram, Ahmedabad, Kolkata, Bengaluru and Chennai.
Legal practice as a profession, just as law itself, has been evolving and the Indian legal market in particular has seen more changes in the last 5 years, than it did in the last couple of decades. The legal sector opening up and the entry of foreign law firms, albeit in a phased manner, seems closer to reality today and is just one of the topics that the legal industry is buzzing with.
The advent of new legislations like the Real Estate Regulation Act (RERA), Goods and Services Tax (GST) and the Insolvency and Bankruptcy Code (IBC), and legal professionals continuing to deal with the changed Companies Act and demonetisation regime, has led to the need for a changed outlook for (and within) the legal practice. Specialisation coupled with full service abilities are key to having a holistic view of the laws and giving the necessary wherewithal to adapt to the needs of the economy.
The financial, real estate and the corporate sector in specific have been significantly impacted by changes in the legal framework. Some of them can be summarized as:
- The regulatory framework for payment banks and small banks in the wake of demonetisation has led to an exponential growth of the FinTech industry and players are coming out with innovative means to leverage alternate modes of financing like wallets, bitcoins, etc.
- The performance risk stigma attached with the real estate sector has significantly reduced with RERA coming into effect. Restrictions on use of funds, responsibility of delivery of project in a timely committed manner and significant penalties for failure to comply, are just few of the changes which will go a long way in bringing about the much required changes in the real estate sector.
- GST, which has been in the making for years, has finally seen the light of day and Corporate India continues to implement the changed tax regime in as smooth a manner as possible.
- Last but not the least, is the IBC. India has been plagued with non-performing assets and defaults across sectors. The financial system continues to be under significant pressure of resolution and recovery and the IBC in that perspective has come in as a saving grace, specifically on account of resolution being in a time bond manner. The onus being put on the Resolution Professional to effectively ensure that only commercially insolvent entities use this route is also helping towards the success of the IBC.
Law being dynamic, it has become a necessity today for legal professionals to go beyond the four corners and be Enablers. For a lawyer, being a partner to the client through having trust at the board level to being the key advisor in legal and compliance issues across the spectrum, including being the face of implementation at the court level, the transitions needs to be seamless. Use of technology and providing a one stop solution would be key to the growth of the profession in the years to come.