India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner /Transaction Tax
Tax & Regulatory Services
Ashish GangradePartner/ Government Advisory
In the recently concluded General elections, the incumbent, Bhartiya Janata Party (‘BJP’), led by Prime Minister, Mr. Narendra Modi clocked a thumping victory, with clear majority. This paves way for him and his team to lead India for a second 5-year run. The ensuing political stability, unprecedented in the modern world, should provide opportunity for introduction of a slew of new policies and reforms to transform the Indian economy.
In the immediate, the new government has a heavy task on hand, with tax revenues dipping sharply, which could spiral into a cut in capital expenditure to contain fiscal deficit. India faces some serious systemic and structural deficiencies in its economy. For instance, the slow-down in the credit off-take has been falling and private investment has not just stalled but declined significantly, impacting growth and new job creation.
Several areas in the economy require urgent fixing, one that seems to be screaming for attention is the need for recapitalisation of banks, without impacting the fiscal deficit. It is estimated that Indian banks need USD 215 bn to overcome their bad loan problems and resume lending. The least disruptive way is, if the central bank (Reserve Bank of India), which possesses excess capital bails out the banks with additional infusion of capital. The ailing banking sector could also breathe a new lease of life if, capital rich non-banking financial companies (‘NBFC’) are allowed to merge with these institutions. Conversely, the brewing crisis in the NBFC space is itself causing ripple effect on the lending to housing and consumer goods sector, stunting consumption.
One of the achievements of this government in their first tenure was the introduction of Goods and Services Tax (‘GST’). While the implementation of this law was slow and sticky, the larger challenge is for the government to expand the taxpayer base. Moreover, real estate and petroleum products are still outside the GST net and their absence results in breakage of the credit chain and adds to the cost of the business. The expectations are that the government would push hard on changes in GST with the expectation of propelling tax collections.
Another landmark reform that was introduced in the previous innings of this government was the introduction of the Insolvency and Bankruptcy Code to deal with chronic bankruptcy. However, the timelines for resolution under this law have been tardy, which defeats the very objective i.e. speedy resolution. A slew of changes are expected such as introduction of pre-packs, a practice prevalent in the western world, which would receive judicial sanction through an expeditious insolvency process. Another area where the law is expected to deliver is cross-border insolvency provisions which are currently non-existent. It is expected that a well-defined framework would provide answers as to how judicial insolvency orders passed in foreign jurisdictions, would apply to Indian assets.
On the trade front, exports could remain a question mark due to growing global protectionism and India’s fundamental lack of comparativeness in many sectors. A strong focus on competitiveness and productivity as a country-wide initiative is much needed. While the government did an enviable job focusing on improving its position on the World Bank’s Ease of doing business, the drag on competitiveness such as land, labour, capital and power, need significant reforms to bring India into the contention for becoming a manufacturing destination, of reckoning in the light of competition from other fast-growing emerging economies.
As Mr. Narendra Modi takes oath to become the Prime Minister yet again, hopes are again sky-high, that his team will wield the magic wand to infuse new life in the Indian economy, bringing jobs to the youth and prosperity that would spread through all sections of its teeming millions.
M&A in India
Between March 2019 to May 2019, around 140 M&A deals were announced / completed aggregating to approx. USD 9,716.74 mn; dominated by domestic deals (92) followed by cross border deals (48)
In terms of sectors, Financial Service sector saw the maximum deal value, with deals worth USD 5,495.67 mn followed by Information Technology sector with deals worth USD 1,520.61 mn and Industrial sector with deals worth USD 1,455.35 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: Stater N.V.
Acquiring Company: Infosys Consulting Pte Limited
Deal Value (in mn USD): 144.04
- In March 2019, Infosys Consulting Pte Limited (Infosys), a wholly owned subsidiary of Infosys Limited, acquired a 75% stake in Stater N.V. from ABN AMRO Bank N.V. for USD 144.04 mn (INR 9.94 bn) in an all-cash deal.
- The partnership would strengthen Infosys’ position as a leading technology and business process management provider across the mortgage services value chain, improving the experience and operational efficiencies, and would further enhance the company’s strategy to help clients navigate their digital transformation journeys.
- Post transaction, Infosys holds 75% stake in Stater N.V and ABN AMRO Bank N.V., holds the remaining 25% stake in Stater N.V.
Target Company: Wibmo Inc.
Acquiring Company: PayU Payments Private Limited
Deal Value (in mn USD): 70
- In April 2019, PayU Payments Private Limited (PayU) acquired Wibmo Inc. (Wibmo) for USD 70 mn (INR 4.85 bn).
- The acquisition of Wibmo would enable PayU to build a robust digital payment ecosystem capable of harmonising transaction processing on both issuing and acquiring side, to deliver a seamless payment experience and industry-leading success rates in online and mobile payments.
- As a part of the transaction, Wibmo and PayU businesses will continue to run separately while both the teams will work together to build unique business solutions from the platforms.
- Post transaction, Wibmo Inc. would operate as a wholly-owned subsidiary of PayU Payments Private Limited.
Target Company: Babji Realtors Private Limited
Acquiring Company: Prestige Retail Ventures Limited
Deal Value (in mn USD): 52.44
- In April 2019, Prestige Retail Ventures Limited acquired 51% stake in Babji Realtors Private Limited for USD 52.44 mn (INR 3.64 bn), thus making it a wholly owned subsidiary.
- As a part of the transaction, CapitaLand Limited sold its stake in Babji Realtors Private Limited.
- Both, Babji Realtors Private Limited and Prestige Retail Ventures Limited are engaged in real estate development activities.
Target Company: SPS Steels Rolling Mills Limited
Acquiring Company: Shakambhari Ispat and Power Limited
Deal Value (in mn USD): 48.84
- In April 2019, Shakambhari Ispat and Power Limited (Shakambhari) acquired SPS Steels Rolling Mills Limited (SPS Steels) for USD 48.84 mn (INR 3.40 bn).
- As a part of the deal, Shakambhari made a payment of, USD 35.90 mn (~INR 2.5 bn) to financial creditors, payment of USD 1.23 mn (~INR 85.6 mn) to operational creditors and infusion of USD 11.69 mn (~INR 813 mn) as working capital in the company. Shakambhari would also pump USD 0.02 mn (~INR 1.50 mn) in modernising the SPS plant and setting up a captive power plant.
- With this acquisition, Shakambhari aims to expand the ‘Elegant Steel’ brand of SPS Steels beyond the eastern region.
- Post transaction, SPS Steels would operate as a subsidiary of Shakambhari.
Sustaining today for a better tomorrow…It all starts here
The Sustainable Development Goals (SDGs) are a set of 17 global goals put together by the UN in 2015. These SDGs form a cohesive and integrated compendium of global aspirations, the world commits to achieving by 2030. The goals address the most pressing global challenges of our time, calling upon collaborative partnerships across and between countries, to balance the three dimensions of sustainable development — economic growth, environmental sustainability, and social inclusion.
India has played an important role in shaping these goals and following through from these, our country’s development goals are drawn in sync with these globally adopted SDGs. The expression “Sabka Saath, Sabka Vikas” which essentially means “collective efforts, inclusive growth”, and the recently coined a new slogan “NARA” (“National Ambition & Regional Aspiration”) have been popularised by our Honourable Prime Minister, Mr. Narendra Modi, and are key to India’s development agenda. To implement these goals in India, the government has launched various initiatives across states, that are being closely monitored by NITI Aayog.
However, given the size and diversity of our nation, it’s important for the private sector to join hands with the government and work collaboratively to achieve these national targets, thus, contributing towards achieving global goals. Businesses have a huge role to play as they can be the engine of sustainable economic growth that is driving innovation, providing employment and bridging the financing gap. Traditionally, companies in India have been using their profits to engage in CSR activities, as mandated by the government. In recent times, the focus is increasingly shifting towards sustainability. Currently, CSR is a mandate, that is guiding the corporate sector to dedicate a percent of its net profit for social cause, whereas SDG’s and sustainability in general provide guidance on how companies can arrive at their business goals while engaging in responsible business practices.
Where should one start?
‘Baselining and Disclosure’ are the initial steps organisations must consider when they decide to embark on their commitment towards sustainability. Disclosing the impact an organisation and its operations have on its stakeholder community, environment and society at large, gives them a mechanism to understand where they stand. Disclosure further enables organisations to develop robust and viable strategies in line with how it can proceed towards being more sustainably responsible. This serves as a yearly scorecard to focus on key problem areas, while also acting as a tracker for continuous improvement. In order to accommodate steady and continuous growth without destroying the environment, it is crucial that organisations plan sustainably while focussing on their business expansion.
There are various standards available that companies can use for reporting such as Business Responsibility Reporting (BRR) in India, Global Reporting Initiative (GRI), Integrated Reporting (IR) and Environmental, Social and Governance Reporting (ESG) internationally.
India is one of the oldest civilisations in the world and historically has had a long-standing culture of living in harmony with nature. Sustainable development mandates just the same - efficient and economical use of available natural resources and inclusive growth. These goals are the outline to accomplish a better and more sustainable future for all.
As India moves forward, it is paramount that the government, businesses, and civil community, contribute to help the world secure a sustainable future in its true sense, which is, – “MEETING THE NEEDS OF THE PRESENT WITHOUT COMPROMISING THE ABILITY OF FUTURE GENERATIONS TO MEET THEIR OWN NEEDS”.
The UN’s Goals on Sustainable Development can transform our world, with India leading the way.
In 2015 the World’s governments committed to a set of 169 global targets under 17 broad Sustainable Development Goals (SDGs), to be achieved no later than 2030.
These SDGs are a transformative agenda to tackle the world’s most pressing socio-economic and environmental challenges. This blue print designed for a better world, provides the private sector with a powerful framework to translate global needs and ambitions into business solutions; helping accelerate these transitions and presenting businesses with more opportunities.
Consumers, customers and investors alike look for businesses to be transparent and to act on a range of issues that sit at the heart of the SDGs. Business is key, as an engine of employment & economic growth, a driver of innovation, and as a source of finance.
In 2017 the Business & Sustainable Development Commission estimated that delivering the SDGs would open up market opportunities, approximating USD 12 tn, in four economic systems: food and agriculture, energy and materials, cities and mobility, and health and wellbeing.
An increasing number of companies are using the SDGs as a strategic lens for business decision making. This is critical, because companies that have a clear understanding of their SDG interactions, will be better placed to unlock new opportunities, manage risk, and consolidate an enduring license to operate.
India is at the epicenter of the transformations that the SDGs call for.
Today India is home to almost one quarter of the world’s people without access to electricity or to the internet, to those who are malnourished, and to those who die prematurely from air pollution. A third of those living on under USD 1.25 a day are Indian. Almost two thirds of those without access to a toilet are Indian.
Yet the transformations called for in the SDGs are already under way, in India.
India is the world’s third largest market for solar energy. 60% of all its PET waste is already recycled. It is committed to building 100 smart cities for its people and has created new bank accounts for 300mn of its citizens over the last three years. It has 770mn mobile phone users and over 1bn of its people have biometric identities. The new government has committed an investment of USD 1.4tn o build infrastructure the country requires. By 2030 India will be the world’s most populous country, with the highest proportion of global middle-class spending, and will also account for a quarter of the world’s additional energy demand.
Leading companies, with Indian businesses at the forefront, are realising that engaging in the SDGs, and aligning their businesses with delivering on the goals, is not a cost. Rather, with the right level of application and problem solving, SDGs are presenting significant benefits to businesses - from reduced costs, more secure work forces and resilient supply chains, to opening up new markets and product lines.
The success depends on, a channeled focus on core business operations, collaboration with other companies, government & communities, and improving how companies measure & value what their social & environmental impacts and dependencies are.