India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Jiger SaiyaPartner – Tax & Regulatory Services
With the present Government led by the Prime Minister, Mr Narendra Modi well into the fifth year of its rule, the general elections in India are most likely to be held in the second quarter of 2019.
Back in 2014, this government largely won the electoral mandate on the promise of bringing in a spate of economic reforms. On this important benchmark, the government delivered well on few promises such as transforming the investor sentiment to positive, softening of interest rate regime; key reforms like passage of Insolvency and Bankruptcy Code, Real Estate (Regulation and Development Act) and introduction of GST has further strengthened India’s business framework. This Government was also fortunate to benefit from lowering of crude oil prices nearly throughout its tenure with the result of the current account deficit as a percentage to GDP declining dramatically. For the ensuing elections, the expectation is that the present government will be voted to power, but with a lower majority.
The sudden rise of crude oil prices beginning May 2018 took everyone by surprise and threatened to cause a major dent on the economy this fiscal. The Indian economy continues its heavy dependence on imports for its demand for oil which makes it vulnerable on many counts at one go; looming fiscal deficit, inflation pressure, adverse foreign exchange ratio; India has much to lose. With the rise in crude prices, the Indian rupee lost substantially against the US $ as the import bill started mounting. Luckily with the reversal of prices since October 2018, the Indian economy suddenly finds its biggest macro-risk turning into a tailwind with oil prices at a near 12-month low and likely to remain subdued in the near term, providing the Government with a lot more breathing space. The depreciation of Indian rupee also got arrested, recovering nearly 5.50% from its peak.
On the major economic indicator -GDP growth, India’s economy expanded by 7.1% in the September quarter this year, slowest after accelerating in the preceding four quarters with a peak of 8.2% in the previous. The slowdown is attributed to deceleration in key service industries, slowing private consumption and a drag-down effect of exports. The Government may be compelled to put a brake on the spending spree in the later part of this fiscal year that ends March 2019 to stick to the promise of containing fiscal deficit target to 3.3% of GDP.
India’s ranking in ‘ease of doing business’ moved up to 77 from 139 in 2010. Importantly, India ranks as the 5th country to have made it to the top 10 countries with most improvements in the last 2 years. This would seem to result from dramatic improvement in trading across borders that reduces the cost of business, making it more competitive. The positive reforms that enhanced attractiveness included the elimination of Foreign Investment Promotion Board, a regulator and liberalisation of overseas investment threshold for retail, aviation and biomedical industries. The stated target, is to break into the top 50 in the near future. On another note, India ranks 11 on FDI confidence index, slipping 3 positions out of top 10, largely on account of implementation challenges for GST and all-round disruption caused by demonetisation.
In one of the biggest reforms initiated by this Government, the newly introduced Insolvency law helped directly or indirectly in addressing stressed assets or non-performing assets worth US 43 bn in the past 2 years with more than 9,000 cases that came up for redressal. However, the legislative intent of having all insolvency cases resolved within an extended time period of 270 days remains challenged with intense litigation in nearly every large case, causing a concern whether the new framework would deliver well over a sustainable period.
India Inc. as much as an average Indian watches on hopefully for the slated general elections, to bring in a government that is committed to solve recurring challenges with quick and efficient decisions, delivering on a singular promise to the people – of a growth driven competitive economy.
M&A in India
Between September 2018 to November 2018, around 96 M&A deals were announced/completed aggregating to approx. USD 4,392.90 mn; dominated by domestic deals (60) followed by cross-border deals (36)
In terms of sectors, Consumer Staples sector (Food, Beverage & Tobacco) saw the maximum deal value with deals worth USD 625.27 mn followed by Consumer Discretionary sector (Education Services & Cable Satellite) with deals worth USD 603.66 mn and USD 599.89 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: Wealth Advisors India Private Limited
Acquiring Company: IIFL Wealth Management Limited
Deal Value (in mn USD): 34.39
- IIFL Wealth Management Limited (IIFL Wealth Management) acquired Wealth Advisors India Private Limited (Wealth Advisors) for USD 34.39 mn (INR 2.54 bn).
- As a part of the transaction, IIFL Wealth Management acquired 53,433,822 equity shares at a price per share of INR 47.46 each.
- The acquisition would help IIFL Wealth Management to increase its client base and further its expansion into portfolio management and investment advisory business in the Southern Area and would further strengthen the reach and offerings for the high net worth clients and ultra-high net worth clients.
- Post-transaction, Wealth Advisors would operate as a subsidiary of IIFL Wealth Management and its employees would become part of IIFL Wealth Management, entitled to agreed employment benefits.
Target Company: Stelligent Systems LLC
Acquiring Company: Mphasis Corporation
Deal Value (in mn USD): 25
- In November 2018, Mphasis Corporation (Mphasis) acquired Stelligent Systems LLC from Hosting.com Inc for a total consideration of USD 25 mn (INR 1.8 bn) including employee retentions.
- The acquisition would provide Mphasis the access to the strategic proposition in Cloud DevOps and DevSecOps within Amazon Web Services (AWS) Ecosystem.
- The new unit known as Mphasis Stelligent will be part of the Mphasis’ Digital Business and would jointly focus on enterprise customers.
- Post this acquisition, Mphasis is likely to strengthen its cloud-based offerings in Cloud DevOps and DevSecOps within AWS Ecosystem.
- Post-transaction, Stelligent Systems LLC operates as a subsidiary of Mphasis Corporation.
Target Company: Zamil Infra Private Limited, Solar Power Assets (Gujarat)
Acquiring Company: Sindicatum Captive Energy Singapore Pte Limited
Deal Value (in mn USD): 16.39
- In October 2018, Sindicatum Captive Energy Singapore Pte Limited acquired Solar Power Assets of Zamil Infra Private Limited for a total consideration of USD 16.39 mn (INR 1.2 bn).
- The asset represents a solar power asset of Zamil Infra Private Limited. The asset is a 20-megawatt (MW) engineering, procurement and construction (EPC) project at Gujarat.
- Sindicatum Captive Energy Singapore Pte Limited is engaged in the operation of renewable energy projects. It is engaged in the development of 300 megawatts (MW) or more bagasse co-generation capacity.
- Post-transaction, Zamil Infra Private Limited, Solar Power Assets (Dahisar) operates as a subsidiary of Sindicatum Captive Energy Singapore Pte Limited.
Target Company: Appland AB
Acquiring Company: OnMobile Europe BV
Deal Value (in mn USD): 15
- OnMobile Global Limited, through its subsidiary OnMobile Europe BV (OnMobile), acquired Appland AB (Appland) for USD 15 mn (INR 1.11 bn).
- This acquisition reflects the increasing importance of OnMobile's strategy to become a leader in the fast-growing mobile games market and expand its games footprint to all continents.
- The combination of OnMobile and Appland would provide immediate business value and innovation to the customers and would help Appland to create the future of mobile entertainment, as well as to expand the business operations of OnMobile group into mobile games subscription market.
- Post-transaction, Appland AB operates as a step-down subsidiary of OnMobile Global Limited.
Target Company: Dolvi Minerals and Metals Private Limited
Acquiring Company: JSW Steel Limited
Deal Value (in mn USD): 14.86
- In October 2018, JSW Steel Limited, acquired the remaining 60.004% making it total 100% (i.e. existing stake of 39.996 % plus an additional stake of 60.004%) stake in Dolvi Minerals and Metals Private Limited (Dolvi Minerals) for the total consideration of USD 14.86 mn (INR 1.09 bn).
- JSW Steel Limited has acquired the equity stake in Dolvi Minerals as a part of the backward integration for JSW Steel Limited. As Coke is the key raw material for manufacturing of steel, and Dolvi Minerals has a 100% subsidiary, Dolvi Coke Projects Limited (DCPL), which is setting up a Coke Oven Plant, they shall supply Coke to Dolvi Minerals of JSW Steel Limited.
- Post-transaction, Dolvi Minerals would operate as a wholly owned subsidiary of JSW Steel Limited.
Perspectives in global mobility in the backdrop of BEPS
The extent of globalisation is leading to heightened interdependence between world economies. Business expansion demands surpassing borders to explore virgin or underutilised markets resulting in shrinking geographical boundaries further. As an outcome there is greater talent mobilisation as the world is cashing in on its dearest commodity – Human Capital.
Global mobility is often influenced by factors involving geo-political situations. Whether a country has immigration-friendly policies or protectionist government measures restricting influx of skilled workers into the country, are key considerations for global mobility programs, ref. the UK immigration laws in the light of Brexit or US President Trump’s administration affecting migration to the US. There hence is a realised need for nurturing skilled workforce within a country, to be equipped to deal with varying situations. India has abundant youth population (approx. 34.8% of the total1), that the Indian Government aims to ready through its ‘Skill India’ campaign. Considering the growing millennial workforce, organisations need to frame their global mobility strategies in the backdrop of global tax and regulatory environment.
In 2015 the Organisation for Economic Co-operation and Development (OECD) released reports under the BEPS (Base Erosion and Profit Sharing) Project that aimed to counter tax avoidance by multinationals and promote tax transparency. In wake of the ensuing changes, there is a need for global organisations to appreciate the implications of BEPS Action Plans on their global mobility programs and policies.
International assignments typically include, Long Term (ranging from 1 to 3 years) and Short Term assignments (ranging from 6 months to a year). However, owing to global sourcing strategies for fulfilling business need, organisations see a remarkable increase in the Short Term Business Visitor (STBV) population where visits are generally less than 6 months. These STBVs may carry risk of Permanent Establishment (PE) creation in the host country. Hence, PE risks need to be evaluated in terms of the roles and responsibilities of an employee. The employee’s activities have to be understood in detail i.e. whether these activities are ‘auxiliary’ in nature or an essential part of the company’s core activities. These need to be in an employee’s work or elucidated contract. BEPS Action Plan 13 also asks for employee reporting through Country-by-Country Reporting (CbCR), needing companies to have robust documentation illustrating the employee activities clearly.
Recently implemented tax transparency measures and increased information exchange across administrations has compelled organisation’s to assess their overall value-chain. This would also involve understanding significant people functions in order to assess contribution of each part of the organisation to the overall value chain. Organisations may also need to consider cross-charging employee costs or relative value contributions to map economic benefits to relative contributions in the value chain.
Apart from the expatriate taxation, it is also for organisations to consider aspects around global mobility, including social security implications, direct and indirect tax implications and immigration-related compliances in the home and host countries. Employee rewards programs such as Employee Stock Options, Restricted Stock awards, etc. also need to be taken into account in order to be compliant from tax and regulatory aspects of both home and host countries.
Technology is a key driver in global mobility programs influencing the way organisations work. It helps bridge the gaps created by disseminated talent spread across various locations of an organisation. Smart tech is enabling organisations in tracking and monitoring employees, helping in timely adherence to compliances such as tax filings in both home and host countries, immigration compliances and more. Organisations are increasingly deploying technology tools for integration and seamless access to relevant data.
Clearly, the demand for globally mobile employees will be surging in the times to come. Organisations must plan their mobility programs strategically, aligning business and employee needs in order to make it mutually enriching and successful.
1 As per the report ‘Youth in India 2017’ by the Government of India (Social Statistics Division)
Brexit: as one door closes, another one opens:
On 29 March 2019, the United Kingdom (UK) is scheduled to end its membership of the European Union (EU). The free movement of people principle which allows EU nationals to enter, and remain, in the UK (and vice versa) is expected to continue under the terms of a transitionary arrangement. However, once the transition period ends, EU nationals will be subject to a new immigration regime in the UK; a regime that looks to be very different.
Although the minutiae of the new immigration regime has not yet been finalised, we do have significant recommendations made to the UK government by their primary policy advisers as well as subsequent statements by both the Home Secretary and the Prime Minister that provide a clear indication of the direction of travel for the new regime.
As one door narrows, another one widens. While much has been made of the impact of post-Brexit immigration on EU nationals in the UK, less has been made of the potential opportunities that will arise for those travelling to the UK from outside the EU, from countries such as India.
The UK government do not think there is an economic benefit to offering EU nationals preferential immigration treatment over non-EU nationals. It looks increasingly likely that the UK government will extend the current visa system for skilled workers to encompass EU nationals as well as non-EU nationals. In doing so, there may well be a softening of the criteria and thresholds which apply under that system which could create greater opportunities for skilled workers from India to enter the UK to work.
Currently, over half of all skilled worker UK visas are granted to citizens of India, which is five times more than the number of workers from the US who are the second most common nationality travelling to the UK for work. The UK government is currently exploring recommendations that it remove the cap that currently applies to the number of visas issued each year, as well as reducing skill level and advertising restrictions that currently limit the number of visas. Given that the government is focused on skilled workers and that the vast majority of these visas are issued to Indian nationals, the fact that EU migration has typically been low-skilled could mean potentially the number of visas granted to Indian nationals from 2021 will dramatically increase.
Since 2.5% of the population of the UK is Indian, the symbiosis between these two countries is very clear. Looking at the sectors that non-EU nationals are being sponsored in – IT, Healthcare, Engineering - and the correlation between these sectors also being the main growth areas in the UK, the opportunities for both the UK and India post-Brexit offer hope in a situation that has otherwise offered precious little.