India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Tax and Regulatory Services
Jeff CaoHead of Asia Pacific
London & Partners
The year 2018 has begun on a firm note for the Indian economy with the first month setting an anticipatory mood as the Finance Minister prepared to unveil the last full Budget before the next general elections slated for 2019. With weak election success in the home state of Gujarat in December last year, the current BJP government is wary of election results in other key states that would have an influence on the outcome of the 2019 elections. The theme of the Budget was expected to be moderate ; tilting towards farmers, the economically underprivileged and welfare subjects like health and education that seem neglected constituencies.
Even before the Budget was announced on February 1, 2018, the Prime Minister, Mr Narendra Modi delivered the keynote address at the World Economic Forum at Davos. To the global business community, he pitched India as a predictable, transparent, stable and progressive nation. He highlighted that India is set to become a 5 trillion dollar economy, also the third largest consumer market in the world by 2025. Further, the global rating agency, Moody’s has upgraded India’s rating on account of its economic reform and it now ranks 3rd in WEF list of most trusted governments in 2017.
He based his development agenda on 5 pillars : a change in existing systems, use of technology to transform governance and deliver public entitlement & services, significantly upgrade physical infrastructure, a need to upscale and improve the rules governing economic activity and lastly, inclusive economic development.
The Chief Economic Advisor (CEA), Mr Arvind Subramaniam released the Economic Survey 2017-18 that as per convention, precedes the announcement of the annual budget by the Finance Minister in the parliament. The survey spelt out that the real GDP growth is expected to touch 6.75% for the year as a whole, that may rise to 7-7.5% in 2018-19, establishing India as the world’s fastest major growing economy.
Among emerging macro-economic concerns, policy vigilance would be necessary, especially if high international oil prices persist or elevated stock prices correct sharply provoking a sudden stall in capital flows.
The agenda for the next year is already set : stabilizing the GST ; completing the twin balance sheet actions, cracking the long-standing exit problem ; complementary reforms to shrink unviable banks and allow greater private sector participation. Over the medium term, 3 areas of policy focus stand out - Employment: finding jobs for the young and burgeoning work force especially for women, Education: creating an educated and healthy labour force and Agriculture: raising farm productivity while strengthening agriculture resilience. India must continue improving the climate for rapid economic growth and strengthening of only two truly sustainable engines – private investment and exports.
The Budget 2018 unveiled by the Finance Minister covered most of the economic concerns highlighted in the Survey and was heavy on the theme of addressing farmer’s concerns with introduction of minimum support price, large investment in infrastructure to spruce up ailing railways, improving connectivity by increasing road coverage and airports to deliver a 5-fold increase in the number of flights. Most important was the health initiative that intends to cover nearly 500 mn poor and vulnerable Indians, providing health cost cover of INR 5.00 lacs (US $ 7,600). This could be path breaking if successive governments would commit resources to this cause and the implementation of this initiative is a success.
In the backdrop of global cues and the growth momentum of the Indian economy, sprinkled with challenges, the stage is getting set for critical elections that should give the Modi government, another mandate of 5 years to govern India and take it to its destination of being one of the most formidable economies in the world.
M&A in India
Between November 2017 to January 2018, around 141 M&A deals were announced / completed aggregating to approx. USD 13,604.7 million; dominated by domestic deals (92) followed by cross border deals (49)
In terms of sectors, Oil & Gas saw the maximum deal value with deals worth around USD 5,778.41 million, followed by Utilities with USD 2933.36 million and Information Technology with USD 2000 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: MX Player
Acquiring Company: Times Internet Limited
Deal Value (in mn USD): 200
- In January 2018, Times Internet Limited acquired a majority stake in MX Player for $200 million in ‘all cash’ deal.
- MX Player operates as a media player. It supports multi-core decoding, high definition video player, subtitle and all type/s of media files. The company is based in Seoul, South Korea.
- The acquisition would help Times Internet to launch its Over The Top (OTT) Video Service. The OTT Video Service is expected to launch in coming months.
Target Company: MedPlus Health Services Private Limited
Acquiring Company: Promoters of MedPlus Health Services Private Limited
Deal Value (in mn USD): 100
- In December 2017, Mount Kellett Capital Management through MKCP Direct Investments (Mauritius) IV Limited., TVS Shriram Growth Fund-IA, India Venture Trust Fund IA, sold their entire stake in MedPlus Health Services Private Limited to Promoters of the company for total proceeds of $100 million (INR 6.45 billion) in a buyback transaction.
- MedPlus Health Services Private Limited owns and operates pharmacy retail chain. It is into the businesses of pharmacy under the brand name of MedPlus Pharmacy, online medical store under the brand of MedPlusMart, pathology lab under the brand name of MedPlus Pathlabs, optical store under the brand name of MedPlusLens, medical and surgical supplies under the brand name RiteCure. The company was founded in 2006 and is based in Hyderabad, Telangana.
- The promoters received debt funding from Goldman Sachs to pay-out to the sellers.
Target Company: Aerserv LLC
Acquiring Company: InMobi Technologies Private Limited
Deal Value (in mn USD): 90
- In January 2018, InMobi Technologies Private Limited acquired Aerserv LLC for a total consideration of $90 million (INR 5.7 billion) in a cash and stock deal.
- Aerserv LLC is a mobile video advertising and monetisation solution. Aerserv LLC operates in California, United States of America.
- The acquisition would help InMobi to enhance monetisation for publishers globally and further enhance InMobi Exchange, a premium mobile programmatic platform, to boost firm’s video ad capabilities, help it expand its presence in the United States of America, it would also help to build itself as the world's largest independent mobile ad network and would help InMobi increase monetisation of its existing set of clients by 25-30%, besides helping secure new clients.
Target Company: Prestige Projects Private Limited
Acquiring Company: Prestige Estates Projects Limited
Deal Value (in mn USD): 50.67
- In December 2017, Prestige Estates Projects Limited acquired 66.66% stake in Prestige Projects Private Limited from Rising Straits Capital Investment Advisory Private Limited for the total consideration of $50.67 million.
- Prestige Projects Private Limited incorporated in Bengaluru, Karnataka is engaged in the business of construction and development of real estate projects and has acquired land at Sarjapur in Bangalore.
- The acquisition would help Prestige enter the affordable housing segment in a big way and to grow its profitable revenue base and further strengthen its market shares in the micro-market.
- Post-acquisition, Rising Straits Capital Investment Advisory Private Limited completely exited its investment in the company as a result of which Prestige Projects Private Limited operates as a wholly owned subsidiary of Prestige Estates Projects Limited.
Target Company: HDFC Realty Limited & HDFC Developers Limited
Acquiring Company: Quickr India Private Limited
Deal Value (in mn USD): 55.7 (39.79 for HDFC Realty Limited & 15.91 for HDFC Developers Limited)
- In December 2017 & January 2018, Quikr India Private Limited acquired HDFC Realty Limited & HDFC Developers Limited from Housing Development Finance Corporation Limited (HDFC) for a total consideration of $39.79 million (INR 2.55 billion) & $15.91 million (INR 1.02 billion) respectively, in an all stock deal. As a part of the consideration, HDFC Developers Limited will acquire the stake in Quikr India Private Limited.
- HDFC Realty Limited is engaged in providing real estate consulting services, land valuation and advisory services. It offers residential services including primary sales, selling properties, leasing: commercial and retail leasing, consulting and valuation services, land and building valuations, sale of land and asset unlocking strategies, land purchase and pricing advisory and capital markets services. The company was founded in 1987 and is based in Mumbai, Maharashtra, with additional offices in Dubai, London and Singapore.
- HDFC Developers Ltd. owns and operates an online platform and application, HDFC RED which offers real estate solutions. It offers home search and discovery for home seekers and home loan. The company was incorporated in 1981 and is based in Mumbai, Maharashtra.
- The transaction also takes HDFC a step further in engaging with customers at the start of their real estate purchase cycle.
- HDFC Developers will further strengthen Quikr's existing leadership in classifieds whereas the brokerage business will help the two partners bring closure to enquiries generated from consumer demand and this would further enable Quikr to strongly benefit from recent regulatory changes in real estate sector.
The statistics and analysis demonstrated through the Economic Survey reflected some rewards from reforms put through in earlier years, as well as challenges, to achieve the desired inclusive economic growth. The tax policy support was expected to be instrumental in adding mileage to the larger exercise of ease of doing business, increase in foreign direct investment, enlarging the tax base and collection of tax revenue for fiscal management. In this backdrop, the Finance Minister has presented the budget today, outlining measures in tax domain.
This budget has made tangible headway turning promises into realities in terms of bringing down corporate tax rate to 25% covering a large chunk of domestic small and medium sector enterprises. The Finance Minister has also provided measures to address the tax hurdle relating to twin-balance sheet challenge i.e. non-performing assets of lenders and loss-making companies. The provisions of setting-off loss and tax on book profit have been relaxed, however the budget is silent on taxation of loan waivers and valuation of shares for capital gains.
Clearing the air on the much speculated capital gains tax for investors in stock markets (including FIIs), the Government has introduced a 10% tax on capital gains above INR 1 lacs. Quite positively, the gains till January 31, 2018 have been protected, but the flip side of this move is retaining the securities transaction tax. It’s a question to ponder – how does this play alongside the aim of the Government to improve its score on foreign investment numbers? As in earlier years, this budget is no exception to overruling judicial precedents, further raising anxieties on tax certainty.
On the international taxation front, the Government has spearheaded addressing the challenge presented by digital business models, by introducing ‘significant economic presence’ test to tax non-residents in India. The revenue-based and user-based factors have been adopted to ascertain where value creation is undertaken. Alongside Equalisation levy, the Government seems to have made up its mind to ring-fence the digital economy for tax purposes. Further, India has also expanded the agency PE definition to prevent artificial avoidance of PE, adopting another BEPS recommendation.
The announcements in support of the agricultural sector, employment generation, healthcare, etc. are noteworthy, however the budget was short on specific policy measures for strengthening the start-ups and real estate sector. The individual tax rates have remained unchanged, signaling to some extent a disappointment to common the man, especially after the pain caused by demonetisation. The benefits granted to salaried class seem to be nominal.
The FM seems to have not given any direction or indication on the GST front, which could have helped investors form a view, specially in relation to products and services so far kept out of GST levy. Changes from the GST perspective can only be made by the GST council and therefore this budget is rightly silent on this aspect.
Minor changes have been made from customs perspective, aligning rates of some of items while some of the procedural aspects are intended to be aligned with free trade agreements.
All in all, there is a perception of direct tax proposals not living upto expectations. More could have been done, but hopes would now have to wait for one more year.
Over the last decade, we saw a remarkable growth in India. According to the latest figures from the IMF, India has now established itself as the world’s fastest growing economy. Such growth has not only created new opportunities for India to trade with the rest of the world but has also led to the creation of a new wave of scaling businesses with a global mindset.
India and the UK have longstanding cultural and economic ties. The latest developments in India’s economy have helped to further strengthen the trade and investment relationship between the two regions, opening doors for the Indian companies looking at London as a destination to internationalize.
London remains a leading global business centre and an apt destination for Indian companies looking to go global. With favourable time zones, Europe’s largest tech ecosystem and a world-class financial hub – London should be the first port of call for Indian businesses looking to grow outside of India.
Boosted by Modi’s initiatives such as Digital India, Startup India and London’s common strengths in entrepreneurship and innovation, India’s tech sector continues to be the largest sector for growth in FDI. Likewise, London’s world-class universities and diverse talent pool has helped to attract significant amount of Life Sciences and Healthcare companies from India.
London & Partners, the Mayor of London’s official promotional agency has been helping Indian businesses to set up and grow in London .Together, with BDO, we have been helping Indian businesses to capitalise on this opportunity, providing expert advice and support during their global growth journeys. Most notably this has been done with the India Emerging Twenty Programme (IE20), of which the third edition was launched during the Mayor of London’s trade mission to India in December 2017.
In 2015 we launched the first edition of this successful programme that aims to identify 20 of India’s most innovative and high-growth companies with global aspirations
The programme encourages applications from promising Indian businesses looking to globalise. The top 50 companies will have the opportunity to pitch their business to a panel of senior business leaders. Last year’s judging panel featured many prominent figures including Kiran Mazumdar-Shaw, Chairman and Managing Director for Biocon. Last year’s itinerary took place during London Tech Week - Europe’s largest tech festival, also born out of London & Partners. The companies networked with entrepreneurs, key business services as well as high profile business pioneers.
This year’s edition will offer the winning businesses a unique London business package to enable them to set up and scale their business in London with ease. The package will help the IE20 winners to immerse themselves in the London business community, including free office membership for six months along with marketing and PR support.
The programme has been a huge success since its inception and has seen a 56% increase in its applicants last year as compared to the previous year. One of 2016’s winners, Vijay Ganesan, Business Development Manager at LatentView Analytics said: “IE20 helped us with recognition and credibility among prospective clients.” Most recently, Bengaluru-based IE20 winner RxPrism Health Systems committed to invest ₹12 Crore ($2 million) to set up an innovation hub in London.
As India’s economy continues to experience rapid growth, we see lots of opportunities to help some of India’s high growth businesses expand internationally. London provides a perfect springboard for Indian companies looking to expand into Europe and beyond. We look forward to welcoming more Indian businesses to London and our message is clear – London is open to business, trade and talent from India and the rest of the world.