India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner & Leader/ Transaction Tax
Saumil G ShahPartner/ Cyber Security
The pandemic's incessant march continues unabated in India with the per day count of infections touching an all-time high on successive days in August and September 2020. While the rest of the world is either beginning or preparing for a second wave, India is, arguably, still grappling with the first wave that continues full throttle. The same is true of the economy which is bearing the brunt of its worst-ever performance.
April-June’s dismal GDP numbers released at the end of August, reported a sharp fall of 23.9%; the highest amongst the G20 economies. The overall economic parameters are an additional cause of concern. Except for agriculture, which expanded by 3.4%, other job intensive segments were severely affected. Construction and manufacturing shrunk by 50.3% and 39.3%, respectively. The bulk of the non-financial services sector, such as hotels and trade, shrank by 47%. Industrial production contracted for the fifth consecutive month in July. Thankfully, the pace of decline has slowed, indicating an increase in economic activity after the easing of lockdowns across the country. The capital goods sector, which is a crucial gauge of investment activity, contracted by 22.8% in July compared to a decline of 7% a year ago.
Against this backdrop of economic despair, the PM, Mr Narendra Modi's vision of India becoming a USD 05tn economy by the year 2025 looks like a distant dream. With an unprecedented downturn, the moot question remains, as to how to kick-start economic revival. Conventional wisdom suggests that before it is too late, India ought to be aggressively ‘spending’, even at the cost of risking higher inflation. Filling the big gap in infrastructure investment, estimated at USD 1.4tn, could be one answer to provide impetus to the economy. However, mobilising resources for the scale of investment required is a considerable challenge. A successful privatisation drive, which could provide the fuel, has been on the list for long. India has nearly 1,900 state-owned enterprises, but only 30 carry 80% of the total value.
It is welcome that the long list of pending reforms is getting the required attention. In the Parliament's ongoing monsoon session, the government introduced essential reforms in farm produce. The passing of two landmark Bills (soon to be law) by the Parliament aims to transform this critical sector that provides 40% of the total employment in the country. The first Bill is aimed at enabling the farmers to sell their produce to buyers from across the country at a price they deem to be fair and at a time of their choosing. It is envisaged that the freedom to sell at the farm gate will do away with transportation expenses and boost incomes. The second Bill is targeted to help farmers go for contract farming with agricultural trade firms, wholesalers, big retailers, and exporters. The provision of market linkages is envisaged to insulate the farmers from production and price vagaries while facilitating access to better technologies, technical assistance, insurance, and credit facilities. It is believed that contract farming will also encourage private investment in the financially starved sector and open the way for agro-based industries and better storage, thereby unshackling stagnation.
The government took another bold step in passing key labour reforms that were long-awaited. Three different labour codes on industrial relations, occupational safety and health, and social security were introduced in the Parliament. The codes propose significant changes that will allow more flexibility for industry while strengthening the workers' safety net. The endeavour of bringing transparency and accountability through the codification of labour laws is slated to bring ease of compliance to India's industry and provide an investment push.
While the short-term outlook looks bleak; India’s long-term hope remains intact. In this decade, India can aspire to gainfully employ nearly 90mn workers in non-farming activities. India needs an annual job growth of 1.5%, like the 2000s, and productivity growth of 6.5-7%, like the 2010s, to achieve this. The boost can come from global manufacturing and agricultural hubs, efficient power distribution and logistics models, and modernised retail trade ecosystems. To realise the potential, India should introduce efficient reforms in unlocking land for real estate and construction, making labour markets more flexible to help small and mid-size firms scale up, reform power distribution by slashing commercial and industrial power tariffs.
While most of the reforms can be rapidly enacted through policy or law; several others will require the government to implement initiatives and projects on the ground. Notably, the state governments have a pivotal role to play as nearly 60% of these reform measures are in their domain and implementation is at their discretion.
It has long been India’s dream to remain a top contender amongst the world's outperforming emerging economies. And to achieve this, it is time to act with urgency and boldness. There is a compelling need to put energy and momentum behind these reforms, even during the pandemic, to fulfil the aspirations of millions of job seekers.
M&A in India
Between August 2020 to September 2020, around 99 M&A deals were announced of which 55 M&A deals were completed. The aggregate value of deals announced is USD 6,142.70mn; dominated by domestic deals (63) followed by cross border deals (36)
In terms of sectors (considering only closed deals), Consumer Discretionary sector saw the maximum deal value, with deals worth USD 330mn followed by Utilities sector with deals worth USD 108.68mn and Consumer Staples sector with deals worth USD 82.84mn
Significant Deals completed between August 2020 to September 2020
Target Company: WhiteHat Education Technology Private Limited
Acquiring Company: Think and Learn Private Limited
Deal Value (in Mn USD): 300
Sector: Consumer Discretionary
- Think and Learn Private Limited acquired WhiteHat Education Technology Private Limited for USD 300mn (INR 22.47bn) in an all-cash deal
- As part of the transaction, Omidyar Network India Advisors Private Limited, Owl Ventures and Nexus Ventures sold their entire stake in the target company
- The deal will help Think and Learn expand its offerings with coding emerging as a key skill. It will also accelerate its expansion plans in the US, where WhiteHat is already operational
- Think and Learn will make significant investments in the technology platform of WhiteHat Jr, operated by WhiteHat Education Technology Private Limited, as well as for product innovation and expanding the teacher base
- Post transaction, WhiteHat Education Technology Private Limited shall operate as a wholly owned subsidiary of Think and Learn Private Limited
Target Company: ACME Solar Holdings Limited (100 MW Solar Assets)
Acquiring Company: Amplus Energy Solutions Private Limited
Deal Value (in Mn USD): 108.68
- Amplus Energy Solutions Private Limited acquired two solar assets with a total capacity of 100 MW from ACME Solar Holdings Limited for USD 108.68mn (INR 08bn)
- ACME Group is one of India's fastest-growing companies in the solar energy sector having a portfolio of 5 GW and Amplus Energy Solutions Private Limited is a member of Petronas and owns and manages a portfolio of 650+ MWp of operational and under construction distributed solar assets across India
- This deal is ACME's second asset sale to date and involves the sale of 100% economic interest in the SPV holding of two solar power plants
Target Company: Vitalic Health Private Limited
Acquiring Company: Reliance Retail Ventures Limited
Deal Value (in Mn USD): 82.84
Sector: Consumer Staples
- Reliance Retail Ventures Limited acquired a 60% stake in Vitalic Health Private Limited for USD 82.84mn (INR 6.20bn)
- As part of the transaction, Sistema Asia Fund, Bennett Coleman and Tanncam Investment Company sold its stake in the company
- Besides 60% stake in Vitalic, Reliance Retail Ventures Limited also acquired 100% stake in its subsidiaries, Tresara Health Private Limited, Netmeds Market Place Limited and Dadha Pharma Distribution Private Limited
- As per the agreement, Reliance Retail Ventures will further acquire an equity stake in Vitalic, through a mix of secondary purchase and primary investment, to increase its stake to at least 80% stake by April 2024, with an option to increase to 100%
- This investment is aligned with Reliance's commitment to providing digital access for everyone in India. The addition of Netmeds enhances Reliance Retail's ability to provide good quality and affordable health care products and services and also broadens its digital commerce proposition to include most daily essential needs of consumers
- Post transaction, Vitalic would operate as a subsidiary, while its subsidiaries would operate as a wholly owned subsidiary of Reliance Retail Ventures Limited
Significant deals announced between August 2020 to September 2020 but are not completed
Target Company: Future Enterprises Limited (Retail, Wholesale, Logistics and Warehouse Business)
Acquiring Company: Reliance Retail Ventures Limited
Deal Value (in Mn USD): 3,342.16
Sector: Consumer Discretionary
- Reliance Retail Ventures Limited, through its subsidiary Reliance Retail and Fashion Lifestyle is acquiring the retail, wholesale, logistics and warehousing businesses of Future Enterprises Limited for a total consideration of USD 3,342.16mn (INR 247.13bn)
- The acquisition makes a strong strategic fit into Reliance’s retail business
- The deal will also strengthen the position of Reliance Industries Limited’s retail unit
- As a part of the transaction, Future Enterprises will first merge Future Retail Limited, Future Lifestyle Fashions Limited, Future Consumer Limited, Future Supply Chains Solutions Limited and Future Market Networks Limited into Future Enterprises Limited and subsequently, Future Enterprises will sell the retail and wholesale business to Reliance Retail and Fashion Lifestyle Limited, a wholly owned subsidiary of Reliance Retail Ventures Limited. Future Enterprises will also sell the logistics and warehouse business to Reliance Retail Ventures
- The buyer will take over certain borrowings and current liabilities related to the business. After this transaction, Future Enterprises Limited will retain the manufacturing and distribution of FMCG goods and integrated fashion sourcing and manufacturing business and its insurance JVs with Generali and JVs with NTC Mills
- As a part of the transaction, Reliance Retail will also invest USD ~162mn (INR 12bn) in the preferential issue of equity shares of Future Enterprises Limited for a 6.09% stake and ~ USD 54mn (INR 04bn) in warrants convertible into equity shares, which when converted upon payment of balance of 75% consideration will result in further 7.05% stake
Target Company: Greenko Energy Holdings
Acquiring Company: Orix Corporation
Deal Value (in Mn USD): 980
- Orix Corporation, styled as ORIX, is a Japanese diversified financial services group headquartered in Japan. Orix has entered into a framework agreement to acquire more than 20% stake in Greenko Energy Holdings for USD 980mn (INR 71.95bn)
- As a part of the transaction, ORIX will integrate its entire wind power generation business in India, into Greenko in exchange for Greenko’s new shares
- The transaction is expected to be completed by the end of the year subject to the investment committee’s approval after completing due diligence and other required legal procedures
Strengthening virtual walls
Cyber threats globally continue to evolve at a rapid pace, with a rising number of data breaches each year. A report by RiskBased Security revealed that over 27bn records were exposed between 01 January 2020 and 30 June 2020, exceeding the total number of records exposed during the entirety of 2019, by more than 12bn records.
In the pre-COVID-19 era, most employees worked from offices, where Local Area Networks (LAN) were adequately secured. Attacks post COVID-19 have seen an upsurge. Cyber attackers are increasingly seeking to exploit vulnerabilities in an organisation’s security infrastructure that the shift to remote working has exposed. Organisations are also witnessing a change in cyber-crimes i.e.it is now extremely organised and collaborative with rising incidents of phishing attacks, social engineering attacks, blockchain complexities, lack of Security Operations Centres (SOCs) resources, remote worker endpoint security, etc.
To cope with the high risks, right risk assessment frameworks should be in place to identify threats early and is therefore important to build a cyber-resilient culture i.e. a state of maturity in which all employees make conscious efforts to behave in ways that protect the organisation against cyber threats; and in which they are supported by appropriate mechanisms to inculcate the required behavioural changes. It requires establishing policies and processes that help an organisation to survive and continue to execute its long-term strategy in the face of evolving security threats. The strategy should consider:
- Adapting business and IT systems to next-generation threats
- Updating your security governance strategy
- Creating a resilience-conscious culture
- Embracing emerging technology and trends
The concept of ‘Zero Trust’ is also emerging as a preferred remedy for addressing WFH risk concerns. It enables employees to access their work regardless of location or machine, but with strong authentication and controlled privileged access. Under this model, the identity and access system does not just authenticate the user, but interrogates the machine, the network signal, the data being accessed, and whether the applications being used are patched and updated.
The average cost of cyber liability insurance coverage has increased by 30% or more each year for the past several years and hence organisations have also started including cyber insurance as part of their budgets. Cyber insurance helps businesses hedge the potentially devastating effects of cybercrimes.
While we need to secure data within the organisation, we also need to focus on security breaches and data thefts that can occur from third parties. Third-party vendors that need access to Personally Identifiable Information (PII) and/or the internal network, should be classified as ‘critical assets’. If a data breach occurs at their end, it could cripple the entire network. In response to cybersecurity breaches along third-party supply chains, organisations are creating third-party risk management policies and procedures.
The corporate user’s current security awareness level is mostly limited. In the wake of COVID-19 based attacks, employees need to be informed on accounts, sessions, remote maintenance, software updates, security of home network routers and integration of home-based printers, among other aspects.
Improving security is not a one-time project, but a program of continuous improvement. Practical changes can reduce the risk exposure while also minimising unnecessary disruptions and fire drills during crisis. It is time for cybersecurity leaders to re-visit their security measures and focus on deploying new processes and technologies to fortify their digital architecture going forward.
Cybersecurity is no longer a ‘good-to-have’ but is now a ‘must-have’.
The ‘Cs’ of Change
The pandemic struck the world as a life-changing lesson for individuals and businesses across all walks of life. Given the short span, businesses both large and small across industries quickly shifted priorities to focus on continuity, sustainability and people safety. No matter the level of disaster preparedness, the sophistication of continuity plans or digital transformation undertaken, businesses were caught unaware and were required to look at alternate mechanisms to cope with the pandemic.
Given the hustle to ensure safety and health of people, without a blink, businesses moved to remote operations, extending their secure servers and cyber environments, to now allow all employees to access data remotely. This became challenging for companies on two counts: employees weren’t accustomed to working from home for a continued period thus lacking basic infrastructure that could be deemed secure, and the other, companies predominantly invested in securing their data servers at defined physical offices, but with the change that the pandemic brought, companies now had to ensure the security of data exchanges over multiple individual home offices spanning across regions, making it more complex to maintain data security.
Given that data is crucial for sound decision making, its availability, security and integrity became a question of great significance. Businesses were faced with a catch 22 situation of providing secure and uncompromised data 24/7, while their employees now operated remotely through unsecured personal networks.
Three key areas that helped businesses navigate this ordeal can be looked through:
- Securing digital assets and ensuring accessibility: Proofing systems with necessary firewalls and data processes and providing relevant stakeholders access to critical data.
- Investing wisely: Investing in infrastructure as well as licensed software and tools not as a measure to deal with the current situation but as a choice for long-term sustainability. This minimises entry points of threat actors and ensures updates and patches are automated regularly and pushed through secure systems.
- Focusing on people: Continuous training and communication with employees highlighting cyber issues and its impact, the need for safe cyber habits for themselves as well as the organisation.
A classic case of proactiveness and preparedness would be the stock-markets which have managed to seamlessly run their operations undisrupted, throughout the pandemic. Strategic foresightedness with the right investments at the right time and right implementation, future-proofed their operations to securely run even in complete shutdown of physical infrastructure, thus crowning the power of cloud computing as the future of business continuity.
As good business leaders, managements must prioritise investments in the following areas to improve efficiency and ensure business continuity in times of crisis:
- Technology: Managements will have to substantially swell budgets for technology investments and implementations.
- IT & Cybersecurity: On an average, businesses would increase their IT budgets by 3-5% y-o-y, given the situation experts now expect a 15% jump over previous spends on cybersecurity.
- Digital transformation: Accelerate the need for digital transformation for operational efficiency and better customer experience.
- Data Security: Focus on data security, storage, accessibility. Securing data is pivotal and hence investing in secure devises, tools, platforms and collaborations, should be priority.
- Policies and Processes: Invest in creating solid cyber policies, strategy and governance plans, roadmaps for application modernisations, risk assessment strategies etc.
- BCP/ PR plans: Adequately update and test plans, and conduct audits for alertness and effectiveness.
- People: People dependency will always continue even with the deployment of effective processes, thus hiring and training the right people to execute the right jobs is key.
- Cloud transition: It is never too late to transition to cloud computing; the benefits are manifold and helps businesses reduce downtime and ensures better recovery.
- Artificial Intelligence (AI): AI is going to play a great role in cybersecurity and will certainly help overcome challenges in the future.
While ensuring security of the data that we use, storage and consumption is the responsibility of every user. Businesses will need to sensitise their people with right cyber habits, which will go a long way in creating secure cyber walls that threat attackers will be unable to exploit.
The pandemic has imparted a community realisation that legacy ways of working are going to be a thing of the past and businesses will have to move to managed remote working and secure borderless workspaces as primary operating models.