India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Karan GuptaLeader - Corporate Finance
Rajesh AgarwalDeputy Mayor of London for Business
India’s ranking in the World Bank Doing Business survey for 2018 climbed a record 30 notches to 100, as a range of regulatory and policy reforms put in place by the Union and State Government over the past 3 and half years started delivering results. This only reinforces the reformist credentials of the present Government and also signals that change in economic narrative is gaining momentum. India got its highest ranking on protecting minority investors by rising to the 4th position from 13th last year as the country’s corporate law and securities regulations were recognized to be highly advanced. Of the 10 criteria considered for the ranking, starting a business, trading across borders, registering property and getting electricity connection still stand below expectation.
In end- October, the Government announced a major initiative by committing to the issue of ‘recapitalisation bonds’ worth US $32 bn over 2 years to strengthen the capital base of public sector banks. This announcement came in the backdrop of ‘twin balance sheet’ crisis; referring to simultaneous occurrence of over-indebtedness in the corporate sector and stressed balance sheets in these banks. The recapitalisation aims to stem the burgeoning stressed assets and spur long-term infrastructure lending for upcoming and stalled mega-infrastructure projects. This big bang move is intended to create employment simultaneously with economic growth revival from the current 3-year low of 5.7%
On the Infrastructure front, the beginnings of an upturn is noticeable with improving financials of infra companies, manifesting in decline in consolidated debt levels, shoring up of order book by nearly 3 times of last year levels. Urban infra focus in the airport/highway segment is seeing improved performance, complimented by overwhelming response on regional air connectivity. Interestingly, while once bankers would refuse to fund a hybrid annuity road project, now 42 out of 48 have achieved financial closure which is a reinforcement of confidence building measures by the regulators.
In another shot in the arm for the present Government is Moody’s upgrade of India’s sovereign ratings to Baa2 from its lowest investment grade Baa3, citing Prime Minister Mr. Modi’s government’s wide ranging programme of economic and institutional reforms. On the other hand, Standard & Poor kept its outlook as ‘stable’. Interestingly, the upgrade comes at a time when the combined fiscal deficit of the Centre and the States is poised to touch 7%, consequent to the bank re-capitalisation package, GDP growth is at the lowest in several quarters with uncertainty about the timing of recovery, banking system in serious stress and export growth being unsatisfactory over a longish period. However, Moody’s was guided by future prospects and not the current indicators. The twin argument that turned out positive, is the sustainability of India’s growth and reforms such as demonetisation, introduction of Goods and Services Tax (‘GST’), monetary policy framework etc. that have improved the potential for growth. India now ranks somewhere in the middle of 10 major emerging market economies in the world from being in the bottom 3 in the group, 5 years ago. The return to macro-economic stability would ensure that foreign direct investment would surge with lifting of investor sentiment.
The progress on 12 large mandates referred by the Reserve Bank of India resolution continues to make news as the initial window of 6 months is drawing to a close, by which these companies need to have a resolution in place. Taking cue from suggestions by bidders for these companies, the Government is seeking to tighten the Insolvency and Bankruptcy Code through an ordinance to ensure that willful defaulters and promoters of companies in loan over an extended period of time won’t be able to get their hands back on assets during the resolution process. This move, which has met with mixed reactions, is aimed at ensuring that attempts at backdoor entry in the guise of resolution are prevented under which the bankers take deep haircuts in recovery of loans granted.
One more news on reforms, is the recent announcement of setting up a task force to draft a new direct tax legislation within the next 6 months. The new legislation will be drafted keeping in mind the direct tax system in other countries, international best practices and the economic needs of the country.
As the dust settles down on the number of high-decibel news, India is set to go into the new year 2018 with lots of hope and caution from past experiences that haven’t delivered in the new narrative of India.
M&A in India
Between September 2017 to November 2017, around 125 M&A deals were announced / completed aggregating to approx. USD 33.04 billion (bn); dominated by domestic deals (88) followed by cross border deals (37).
In terms of sectors, Telecommunication Services saw the maximum deal value with deals worth around USD 12.18 bn, followed by Healthcare with USD 8.31 bn and Financials with USD 3.52 bn.
(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: Indiabulls Properties Investment Trust
Acquiring Company: Indiabulls Real Estate Ltd.
Deal Value (in mn USD): 212.35
- In October 2017, Indiabulls Real Estate Ltd. (‘Indiabulls’) through its subsidiary Brenformexa Ltd. acquired Indiabulls Properties Investment Trust (‘Trust’) from Farallon Capital Management LLC (Farallon) for a total consideration of USD 212.35 mn.
- Indiabulls Properties Investment Trust is a real estate investment service provider company. The Trust operates through two segments; commercial segment, which develops, leases and manages the commercial space, and residential development segment, which develops and sells residential property. The company is based in Singapore.
- Indiabulls is engaged in the developing of real estate projects and allied activities. It develops residential and commercial real estate projects, including luxury office and commercial spaces, residential developments, and special economic zones. The company was founded in 2006 and is based in Gurugram, Haryana.
- As a part of the transaction, Farallon will sell 321,776,468 units at a price of INR 43.22 each to be paid in following instalments:
- INR 6.03 billion in cash immediately;
- INR 4.64 billion within one year from Offer date; and
- INR 3.24 billion within two years from the Offer date.
- The two deferred payments would not carry any interest payout.
Target Company: Symbiomix Therapeutics LLC
Acquiring Company: Lupin Ltd.
Deal Value (in mn USD): 150
- In October 2017, Lupin Ltd., through its subsidiary Lupin Inc., acquired Symbiomix Therapeutics LLC for a cash consideration USD 150 mn.
- Symbiomix Therapeutics LLC is engaged in formulation of drugs and active pharmaceutical ingredients under brand name Solosec. It offers product such as Bacterial Vaginosis, clinical trials etc. The company was founded in 2012 and is based in Newark, New Jersey.
- Lupin Ltd. is a pharmaceutical company and is engaged in formulation of drugs and active pharmaceutical ingredients (APIs), generics, biotechnology, novel drug discovery and development, drug delivery systems and specialty pharmaceuticals.
- As a part of the transaction, the buyer made an upfront payment of USD 50 mn and other time-based payments.
- Post-transaction, Symbiomix Therapeutics LLC would operate as a subsidiary of Lupin Ltd.
Target Company: Flightraja Travels Pvt. Ltd.
Acquiring Company: Ebix Inc.
Deal Value (in mn USD): 74.9
- In October 2017, Ebix Inc. acquired Flightraja Travels Pvt. Ltd. for a total consideration of USD 74.9 mn.
- Flightraja Travels Pvt. Ltd. owns and operates online web portal via.com. The Company is a leading distributor of transportation ticketing, accommodation reservation, packaged tours, corporate travel management, travel ancillaries, retail and financial services.
- Ebix Inc. (formally Delphi Systems Inc.) is engaged in offering software and e-commerce solutions to the insurance industry.
- As a part of the transaction, IndoUS Venture Partners I LLC, Sequoia Capital India III LP and Sequoia Capital India Growth Fund I LP sold their entire stake in the Company.
De coding the Fintech Industry
Front line Fintech organisations are changing from being sharply focused to recreating the lines of the Financial Services industry. Fintech could be the potential platform that will help achieve global financial inclusion. Financing of new Fintech businesses has expanded at a CAGR of 41% in the course of the most recent four years, with over USD 40 billion (bn) in aggregate investment.
Focused innovations are disrupting the space specifically in the areas of payments, lending, investment management, transaction processing, crowdfunding etc. driven by technology trends such as AI, Blockchain, Smart Algorithms, Machine Learning etc. Imagine a living environment, where technology backed systems will manage your finances on the go and leading money managers will supervise or mentor you to take suitable budgetary decisions in the light of information from AI and mobile exchange.
The influence that Fintech is creating in India is even larger. Technology driving innovation, distribution & financial inclusion have brought about a radical change in traditional financial services thereby driving the emergence of fintech platforms. 60% of Indians are unbanked and 90% of small businesses have no links to formal financial institutions* The only way to reach out to this segment is through technology which not only drives penetration & adoption but also brings down the cost of servicing the customer significantly.
Currently the Indian scenario is dominated by companies in the payments and lending segment with companies such as Paytm, MobiKwik, Bankbazaar, Faircent, iLend etc. although other segments, particularly personal finance, wealth management, lending and enterprise solutions are expected to gain ground in the coming year. Fintech companies under the category of personal finance can further be divided into three segments—insurance, investment and money management. The overall awareness of using online personal finance platforms has also increased; some of the key players in this space include Policybazaar which is an insurance aggregator, Coverfox (an online insurance broker) and mutual funds investment platform Scripbox. Most of the players are focused on single segments where the need of the hour is to have a full service platform- a one stop shop for all financial requirements of an individual, customized and made available over various stages of life. This would enable the investor to take well informed decisions with the right automated investment advisory platform without human bias / intervention. Companies such as “5nance” is one such player in the Indian space that has built a rich, device agnostic consumer experience enabling and empowering users to plan and manage their money efficiently, on the go.
There are other mainstream financial institutions in the country who are also rapidly embracing the disruptive nature of FinTech and partnering with new-age technologies to offer an effortless experience to customers. This helps them expand their portfolio of customer centric products and sharpens operational efficiency, making it effective to survive in a competing marketplace on the back of innovative products & solutions.
Over USD 5.56 bn was invested in Indian tech startups mainly in Fintech, Healthcare and Ecommerce during the period January-June 2017 (source: Indian tech startup funding report released by Inc42) with Fintech alone accounting for USD 2 bn.
India is a huge opportunity for a fintech investor today. The flourishing effect of Indian fintech start - up has been catalyzed by an increasing demand for digital financial products by consumers, rampant rise of connected devices, concept of owning and empowering a consumer and support of Venture Capitalists and HNIs both domestic and international. Strategic advisory and corporate finance have a strong role to play in handholding companies , helping entrepreneurs and investors navigate the entire M&A & Fund raising spectrum including pre & post investment support as well as explore Fintech partnerships through collaboration.
London and India have strong cultural and economic ties. In fact, nearly 40 per cent of the fastest-growing Indian companies investing in the UK are based in London and Indian companies employ nearly 50,000 people here.
India is also a key trade and investment partner for the capital and remains the second largest market for foreign direct investment into London.
We share common strengths in entrepreneurship, innovation and technology. Driven by new programmes such as the Digital India initiative, Indian cities such as Mumbai, Bengaluru and Delhi are developing thriving start-up ecosystems, supported by some of India’s most famous technology giants. There is a lot we can learn from each other and the opportunities for collaboration are strong.
According to recent research, India is set to become be the world’s third largest economy by 2030, and second by 2050*. Therefore, India presents a whole host of new opportunities for UK businesses.
That’s why the Mayor of London, Sadiq Khan, and I are leading a trade mission to India with eighteen of London’s most exciting technology businesses to help them open their eyes to the range of investment opportunities that exist in India.
Across Indian cities, as in London, we are seeing the convergence of technology with other industries, creating new opportunities for companies in fintech, digital health and smart cities – to name a few. As London’s Deputy Mayor for Business, and a former fintech entrepreneur, I can safely say that this convergence within innovation-driven sectors is emerging as a common area for India and London to partner on.
London companies looking to expand into the Indian market should be reassured that doing business in India is becoming easier.
In fact, according to the recent Ease of Doing Business (EODP) Index 2018, published by the World Bank group, India has jumped 30 ranks. Technology has played an important part in bringing about improvements to processes. Coupled with progressive reforms for tax and labour laws, the optimism levels for doing business in India have peaked.
In the same light, London remains a leading destination for Indian businesses looking to internationalise. While Brexit has created some uncertainty, the fundamental strengths of London as a leading business centre have not changed.
London’s status as a leading global financial services centre and Europe’s largest tech hub remains. We have also seen continued investment into London from some of the world’s largest companies with the likes of Facebook, Apple and Spotify recently making long term commitments to London.
We also recognise that Brexit, and the UK visa system, create concerns around access to talent. The Mayor and I have been clear that for London, retaining a qualified system of freedom of movement would be preferable. Regardless of Brexit, there is also a need to reform our global work visa system to ensure that it is easier, not harder for businesses to bring top talent to London.
We look forward to helping Indian and UK businesses explore the opportunities across our great cities. In addition to the trade mission we are working on a number of initiatives such as the IE20 programme to strengthen business links between London and key Indian cities. Most importantly, we want to show that London is open for business #LondonIsOpen.
* A 2017 report of one of the leading accountancy firms