India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Cdr Gautam NandaLeader - Aerospace, Defence & Security
Associate Partner - Government Advisory
BDO India email@example.com
Lt Gen Subrata Saha,PVSM, UYSM, YSM, VSM ** (Retd.)
Director General SIDM
The key economic parameters are showing stress signs that require to be fixed by the present Government. The Indian rupee has been steadily sliding for some time now and to stem this, the RBI has expended over US $ 21 billion from reserves since April 2018, Another key performance index, inflation, is soaring at 6.4%; the highest since mid-2014, however, the solace is moderating crude prices that could allay some fears arising out of this. On the flipside spiralling inflation could mean another interest rate hike from the RBI in its next policy review. However, it is time to take a hard look at the efficiency of the monetary policy for inflation targeting.
On the global trade front, the US is driving a wedge in the world with the latest being negotiations with EU with the outcome being touted as pledging to open negotiations on zero tariffs and non-tariff barriers; nearly wrecking more than 70 years of North Atlantic collaboration. With the global economic landscape becoming more difficult, it is imperative for India to face the world with a more active & smart trade policy. India is now the world’s sixth largest economy but remains a small player in global trade. For the next leap forward to become the world’s third largest economy, shrinking back to protectionism as others are doing is not the answer for India.
India’s share in global merchandise exports accounts for 1.7 per cent of global trade. India’s global exports share is much lower when compared with other export-oriented economies like China (13.2 per cent) South Korea (3.1 per cent), Mexico (2.3 per cent) and Singapore (2.1 per cent). A more competitive exchange rate policy and improving logistics along with regional trade arrangements should help India reach US $ 1 trillion of export of goods and services by 2025.
On the other hand, the Free Trade Agreements India has signed, are not popular including the 15 nation Regional Comprehensive Economic Partnership (RCEP). The seven FTAs are not imperative for India’s expectations to double its economy’s size by 2025. Despite multiple import duty hikes by the Government in the first half of 2018, India hasn’t broken the rules of the WTO yet. However, as soon as higher import duties against the US kick in on 04 August, India would effectively be breaching the WTO mandated ‘bound rates’ for the first time.
The malaise in the Indian banking system continues to be in the news; nearly 24 lenders including SBI and PNB, 19 private sector banks and 32 foreign banks have signed an Intra Creditor Agreement (ICA) to speed up the resolution of stressed assets in the range of INR 500 mn to INR 5 bn under consortium lending. It also includes 12 financial intermediaries like LIC, Power Finance Corporation and Rural Electrification Corporations. The framework authorises the lead bank to implement a resolution plan in 180 days. The ICA replaces the joint lenders forum and prevents minority lenders from blocking resolution plans under the major bankruptcy reform, Insolvency and Bankruptcy Code, 2016.
The Finance Minister, Mr Piyush Goyal announced an alternative mechanism for resolving bad loans. The new plan – Project Sashakt actually took off in time to prevent this toxic loan from moving to resolution under the IBC. This was in the preface of the RBI (the Central bank) order in February 2018, directing the banks to start the resolution process for any large account which was overdue and gave them a maximum 180 days to come up with a resolution i.e. by end August 2018. The RBI push apparently did not sit well with the government; the Power Ministry requested the RBI to make an exception to the ailing power sector which accounts for bulk of the bad loans in the pipeline that are hurtling towards the IBC process. Even as Project Sashakt details are yet to emerge, it could turn out to be a rescue job undertaken too late in the day with all the projected formalities to be done by end-August, when the RBI deadline to take a fresh set of bad loans to IBC kicks in. In the meanwhile, the fate of the 12 large cases referred for resolution under IBC in June 2017 continue to flounder with hardly any resolution sailing through with most stuck in litigation in some stage or the other.
As the monsoon session of the Parliament winds up, many hopes are pinned on the next session in winter of 2018 for final set of reforms before warming up to the heat of central elections next year.
M&A in India
Between May 2018 to July 2018, around 131 M&A deals were announced / completed aggregating to approx. USD 11,304.25 mn; dominated by domestic deals (87) followed by cross border deals (44)
In terms of sectors, the Material sector saw the maximum deal value with the top two deals amounting to USD 4,200 mn and USD 2,580 mn, followed by Healthcare with USD 1,068.20 mn and Information Technology with USD 1,000 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: Marine Infrastructure Developer Private Limited
Acquiring Company: Adani Ports and Special Economic Zone Limited
Deal Value (in mn USD): 277.05
- In June 2018, Adani Ports and Special Economic Zone Limited acquired 97% stake in Marine Infrastructure Developer Private Limited from Larsen and Toubro Limited, USD 277.05 mn (INR 18.92 bn)
- As part of the transaction, Adani Ports and Special Economic Zone Limited entered into a Share Sale and Purchase agreement with Larsen and Toubro Limited, Marine Infrastructure Developer Private Limited and L&T Shipbuilding Limited.
- The acquisition would enable the buyer to develop a container terminal operation to increase market share and provide containers, bulk terminal operations, and marine services, as well as to transform Kattupalli port into a multi-commodity port to handle cargoes like containers, automobiles, break bulk, general cargo, liquid cargo to further strengthen the Adani Group and project cargo, as well the group’s presence in East Coast.
- Post this transaction, Marine Infrastructure Developer Private Limited operates as a subsidiary of Adani Ports and Special Economic Zone Limited.
Target Company: MX Player
Acquiring Company: Internet Limited
Deal Value (in mn USD): 146.47
- In June 2018, Times Internet Limited acquired a majority stake in MX Player for USD 146.47 mn (INR 10 bn)
- The acquisition would help MX Player to build a digital first video streaming platform for millennial audiences, with thousands of hours of premium and exclusive content from leading content producers and publishers around the world. Also, it would help MX Player to launch it's Over the Top (OTT) Video Service.
- MX Player is investing aggressively into premium, original, digital first content, with an emphasis on high quality Hindi and regional production.
- MX Player operates as a media player. It supports multi-core decoding, high definition video player, subtitle and all type of media files. Post this transaction, MX Player operates as a subsidiary of Times Internet Limited.
Target Company: HNG Float Glass Limited
Acquiring Company: Trakya Cam Sanayii A.S
Deal Value (in mn USD): 88.85
- Trakya Cam Sanayii A.S acquired 50% stake in HNG Float Glass Limited from Hindusthan National Glass and Industries Limited for a total consideration of USD 88.85 mn (INR 6 bn)
- HNG Float Glass Limited founded in 2006, operating as a subsidiary of Hindusthan National Glass and Industries Limited, is engaged in manufacturing of float glass.
- Post this transaction, HNG Float Glass Limited shall operate as a subsidiary of Trakya Cam Sanayii A.S.
Target Company: Metallurgica Bresciana S.p.A.
Acquiring Company: Sterlite Technologies Limited
Deal Value (in mn USD): 54.29
- Sterlite Technologies Limited, through its wholly-owned subsidiary Sterlite Technologies S.p.A., acquired Metallurgica Bresciana S.p.A. from Compagnia Bresciana Investimenti S.p.A for a total consideration of USD 54.29 mn (INR 3.73 bn)
- The transaction would be funded with a mix of internal accruals and Euro debt instruments.
- The acquisition would significantly expand Sterlite’s market presence in Europe and bring new tier-1 customers, augment product portfolio and enhance flexibility and ability to better serve the European market.
- This acquisition aligns with the buyer's global supply chain strategy of having cabling facilities in close proximity to the key customers, to serve the needs for the next-generation network.
- Post this transaction, Metallurgica Bresciana S.p.A. operates as a step down subsidiary of Sterlite Technologies Limited.
Self Reliance, The New Command of the Indian Defence Sector
India is a growing economic, geopolitical and military power. Given its hostile neighbourhood and evolving world order that is dominated by countries that can flex their authority by virtue of their hard and soft power, it is imperative for India to make its defence sector sound, operationally effective, and address the immediate concerns of replacement of obsolete weapon systems with modern technology to compete with the best.
As per the latest report of SIPRI, India is the largest importer of arms in the word and accounts for 13% of the global total as almost 60% of its requirements are imported - Russia being the main supplier accounting for 68% of its imports followed by USA and Israel with 14% and 7.5% respectively. Faced with this high level of imports the Government of India (GoI) has made achieving self-reliance, a national priority. To facilitate and encourage investment into domestic manufacturing, the Indian Government launched the “Make in India” campaign in 2014 to focus on indigenisation that has resulted in the substantial growth of the defence sector.
India’s defence budget, as shown in the figure below, over the last 7 years has grown manifold to ~US$ 44.3 billion for FY 2018-19, which is around 2.2% of its Gross Domestic Product (GDP). Allocation of INR 9,734 crores towards Research & Development (R&D), which is an increase of 29% from the last year, has been primarily done to boost indigenous defence manufacturing.
* Growth rate in comparison to Budget Estimates for preceding year
Indian defence budget over last eight years (figures in thousand crore INR)
While on one hand it can be noted that the government has prioritised the defence sector financially, on the other hand it has also been reforming stringent policies and incorporating provisions to make the defence ecosystem more welcoming to private industries, start-ups & innovators, MSMEs, etc. To lower entry barriers, the government has taken several policy initiatives like: -
- Raising the Foreign Direct Investment (FDI) cap to 49% on the automatic route
- Improving the ease of doing business in defence manufacturing
- Relaxing norms of industrial licensing and defence exports
- Bringing flexibility in fulfilling of offset obligations
- Providing a level playing field for domestic manufacturing
- Strategic partnership of global OEMs with India’s private industry for indigenous manufacturing of major platforms like submarines, helicopters, combat vehicles and fighter jets
Recently amendments have been made to the Defence Procurement Procedure (DPP) 2016, to refine and simplify the processes for enhancing efficiency and reducing timelines. To alleviate certain problems being faced by the industry, the Ministry of Defence (MoD) has proposed modification to offset guidelines to include additional avenues for offset discharge. Further, as a major boost, the MoD has also simplified ‘Make II’ procedures to enable greater participation of industry in acquisition of defence requirement — currently there are 25 projects that have been identified with a positive industry response.
The future of the defence sector looks promising considering the innate potential that our country has to deliver technological innovation and creative solutions. Despite our ‘over-dependence’ on defence imports for the time being, the ‘Make in India’ vision has propelled us in a new direction. Though it is true that this transformation from being overly dependent to becoming independent cannot be witnessed in the short-term, the initiatives undertaken by the GoI are a step in the right direction.
Defence Manufacturing Sector and Society of Indian Defence Manufacturers (SIDM)
The Indian Defence Industry is going through an interesting phase with `Make in India' initiative motivating entrepreneurs to innovate and produce for India, and finally graduate to exporting. The Government of India is expected to spend $100 billion on procuring defence equipment over the next decade - growing at an annual rate of 10-15%. Global majors are making beeline to get a share of the pie, a trend evident from the huge response to the Requests for Information (RFIs), floated under Strategic Partnership policy. The Defence Industrial Corridors are also expected to shape the overall defence eco-system and will encourage the Indian as well as foreign industry to participate in the sector, including MSMEs to make the most of the resultant offsets accruing from the contracts.
Defence is a technologically dependent domain and businesses in the sector, throughout the world are based on cutting-edge technologies with advanced exotic materials forming the most significant component. Indian private industry, which is a late entrant to the global supply chain, has not been able to overcome the challenge of A&D materials science yet, as well as the exacting quality requirements for manufacturing world class products. An ecosystem of Research and Development (R&D), efficient manufacturing processes, development of relevant talent pool is required for the market to not be limited to meet the Indian defence requirements alone but to move towards exporting to clients outside India, while being part of the global majors’ supply chain.
The Indian defence manufacturing sector is facing multiple challenges on policy, structural and operational fronts and is finding it difficult to wade through the monopsony. Indian industry is wary to invest their capital in creating infrastructure as well as R&D without an assurance for orders and certainty of volumes through long-term contracts and an efficient and transparent procurement process. The Government of India, on its part, has been trying to address the issues of the industry by updating the procedures and evolving new methodologies to support the growth of defence manufacturing sector including promulgation of Strategic Partnership policy, simplification of Make-II procedure, proposed additions of avenues to discharge offset obligations, recent amendments in DPP 2016. To this effect Society of Indian Defence Manufacturers (SIDM) is playing a yeoman’s role.
Society of Indian Defence Manufacturers (SIDM) is a not-for-profit defence industry association that has been raised by the Confederation of Indian Industries (CII) to catalyse the industry to become an effective contributor to India’s National Security and a trustworthy global partner. SIDM works closely with the Government of India, Ministry of Defence (MoD) and other related offices, towards creating an enabling environment to support industry growth. SIDM is interfacing with experts from the armed forces, academia and industry to get the right operational and scientific drive for developing capabilities. SIDM provides advice on strategy, innovation, indigenisation, opportunities in emerging technologies, global linkages, policy advocacy, market research, education and skill development. Furthermore, SIDM regularly organises events facilitating one on one interactions to promote understanding of issues and problems being faced by both the users and the manufacturers. SIDM has grown to have the ears of the industry as well as the Government and bridges the existing gap between the industry and the end user. It works with the larger perspective of making the Prime Minister’s vision of Make in India a reality, by facilitating collaborations and bringing strategic directions to the industry to establish the required ecosystem which would enable a transition to predictive systems.