India economic update
Milind S. KothariManaging Partner
M & A tracker
Rajesh ThakkarPartner & Leader/ Transaction Tax
Vineet RustagiPartner and Leader
Shared Services & Outsourcing
Amongst the major economies, India enforced one of the strictest lockdowns that precipitated into one of the sharpest economic declines in the April-June 2020 quarter with a ‘bottom-caving’ 23% drop in the GDP. But after that dismal performance, India's economic revival has been nothing short of a miracle. Consequently, several economic indicators are shooting past the pre-pandemic levels.
Much of the credit for the economic recovery could be attributed to the interventions of the Reserve Bank of India (RBI). The RBI provided a well-calibrated monetary response, singularly practical and anchored in bold reforms. The growth returned even without the devaluation of the currency, interest rate reductions, or eyepopping stimulus packages that continue to be the convention in developed economies. While the fiscal year ended in March 2021 with an overall GDP deficit of 8%; the projections for FY 2022 are robust, with expected GDP growth exceeding 12%. In its interim economic outlook report released in February, the Organisation for Economic Cooperation and Development (OECD) projected India as the fastest-growing economy, globally, in the coming year.
The India Union Budget announced on 1 February 2021, set the tone for a massive outlay for infrastructure investment; the need for which is large, urgent, and ever-increasing. On the back of an enormous push to the infrastructure and farm sectors, India is aiming to realise the dream of a USD 5tn economy, with the global equations on economics and politics realigning in its favour. The National Infrastructure Pipeline (NIP), a Government-led task force, has pegged the requirement of infrastructure investment at USD 1.5tn by 2025. The Budget launched a national monetisation pipeline of potential brownfield infrastructure assets, which would serve as a vital financing option for new infrastructure construction.
Interestingly, asset monetisation is lauded as the overall strategy for bringing about a paradigm shift in infrastructure augmentation & maintenance, and not just a funding mechanism. The financing of infrastructure assets, especially in the face of economic adversities, make for a compelling case. The Finance Minister, Ms Nirmala Sitharaman, announced the setting up of a Development Finance Institution (DFI), with an initial capitalisation of USD 2.75bn and in three years, the expectation is to reach USD 41.5bn through leveraged finance.
India has had a long history of DFI's being set up, but most have ended up as failures. The Industrial Development Bank of India (IDBI) was conceived in 1964, followed by the setting up of the Industrial Credit and Investment Corporation of India (ICICI) and the Industrial Finance Corporation of India (IFCI). The ICICI and IDBI leaders threw in the towel in the 1990s, stating that there was no future in infra-lending and the IFCI faded into oblivion. With renewed attempts at setting up a DFI, one hopes that the taxpayer's money will be spared this time as previous failed attempts have cost taxpayers nearly USD 40bn in the past few years.
Renewed emphasis on privatisation of state-run enterprises was also a vital plank of the Union Budget. This exercise, over the years, has followed a lengthy process that often led to delays, and hurt the overall objective of raising resources. The strategic disinvestment policy unveiled in the Budget broadly classifies state undertakings into strategic and non-strategic sectors. For the former category, the policy defines that there ought to be a bare minimum presence of the public sector undertakings, and the remaining units will be privatised or subsidiarised with other companies. In the non-strategic sectors, such enterprises will either be privatised or closed.
One of the mainstays of the Indian economy is the services sector that contributes to more than 50% of GDP. This sector continues to underperform, still reeling from the impact of the pandemic. However, the silver lining is that the Indian IT industry is back on the growth trajectory and is likely to contribute USD 194bn revenue. Nearly 4.47mn people are directly employed by this sector. The contribution of IT exports is expected to touch USD 150bn in global revenues. A Gartner report highlights, that pandemic related consequences, have shifted the tech-equilibrium of various industries. It has catalysed greater levels of digitalisation of internal processes, supply chain, customer and partner interactions, and service delivery. It is expected that this year, Indian IT companies will transition from providing a support role to being the business.
As the country gets ready to brace the second wave of infections, with the numbers touching an all-time high in a few states, and given the vaccination program's current limitation in reaching millions across all age groups; the pandemic could well become a spoilsport one more time. As we begin the long Indian summer, the surprising economic recovery may just lose momentum if these twin aspects are not handled well.
M&A in India
Between February 2021 to March 2021, around 115 M&A deals were announced of which 69 M&A deals were completed. The aggregate value of deals announced is USD 4861.81mn; dominated by 78 domestic deals (USD 1715.75mn) followed by 37 cross border deals (USD 3146.06mn).
In terms of sectors (considering only closed deals), Consumer discretionary sector saw the maximum deal value, with deals worth USD 464.39mn followed by the Consumer staples sector with deals worth USD 92.75mn and the Healthcare sector with deals worth USD 65.81mn.
Significant Deals completed between February 2021 to March 2021
Target Company: Bharti Telemedia Limited
Acquiring Company: Bharti Airtel Limited
Deal Value (in Mn USD): 430
Sector: Consumer discretionary
- Warburg Pincus India Private Limited, through its affiliate Lion Meadow Investment Limited sold its 20% stake in Bharti Telemedia Limited to Bharti Airtel Limited for USD 430mn (INR 31.26bn)
- The amount would be discharged primarily via issuance of 36,469,913 Equity Shares of Bharti Airtel Limited at a price of INR 600 (~ USD 8.25) each for a total of INR 21,881.95mn (~ USD 300mn ) and giving INR 9,378mn (~ USD 129mn) in cash to Warburg Pincus India Private Limited
- As per the agreement, Bharti Airtel Limited acquired 102,040,000 Equity Shares of Bharti Telemedia Limited from Warburg Pincus India Private Limited
- Post transaction, Bharti Telemedia Limited will become a wholly owned subsidiary of Bharti Airtel Limited
Target Company: Modern Food Enterprises Private Limited
Acquiring Company: Grupo Bimbo SAB de CV, Ready Roti India Private Limited
Deal Value (in Mn USD): 80
Sector: Consumer Staples
- Grupo Bimbo SAB de CV (Grupo Bimbo) and its Indian subsidiary Ready Roti India Private Limited acquired Modern Food Enterprises Private Limited from Everfoods Asia Pte. Ltd. for USD 80mn (INR 5.79bn)
- Everfoods Asia Pte. Ltd. had acquired Modern Food Enterprises Private Limited from Hindustan Unilever in April 2016 and relaunched the bread brand in June 2017 nationwide. Under Everstone Asia Pte. Ltd., Modern Food Enterprises Private Limited had built a strong leadership position in every market it operates through a widely spread distribution network
- Grupo Bimbo is the largest baking company in the world, operating in 33 countries, including India, and has a diversified portfolio of over 13,000 products and more than 100 renowned brands
- Post transaction, Modern Food Enterprises Private Limited operates as a subsidiary of Grupo Bimbo SAB de CV
Target Company: Saket City Hospitals Private Limited
Acquiring Company: Max Healthcare Institute Limited
Deal Value (in Mn USD): 64.25
Sector: Health Care
- Max Healthcare Institute Limited acquired a 42.8% stake in Saket City Hospitals Private Limited from KKR and Co. for USD 64.25mn (INR 4.88bn)
- As a part of the transaction, Max Healthcare Institute Limited purchased 12,600,000 Equity Shares of Saket City Hospitals Private Limited from Kayak Investments Holding Pte. Ltd., an affiliate of KKR and Co.
- The company had taken necessary approval of its Audit Committee, Board and Shareholders in their respective meetings
- The transaction was made with a view to make Saket City Hospitals Private Limited, a wholly owned subsidiary of Max Healthcare Private Limited
Significant deals announced between February 2021 to March 2021 but not completed
Target Company: The Capital Markets Company N.V.
Acquiring Company: Wipro Limited
Deal Value (in Mn USD): 1450
Sector: Information Technology
- Wipro Limited entered into an agreement to acquire The Capital Markets Company N.V. from Fidelity National Information Services Inc. for USD 1,450mn (INR 106.51bn)
- As a part of the transaction, Wipro Limited will acquire The Capital Markets Company N.V.’s holding companies Cardinal US Holdings and Cardinal Foreign Holdings and its Indian subsidiary Capco Technologies
- This acquisition will make Wipro one of the largest end-to-end global consulting, technology, and transformation service providers to the banking and financial services industry
- By combining Wipro Limited’s capabilities in strategic design, digital transformation, cloud, cybersecurity, IT, and operations services with Capco Technologies’ domain and consulting strength, their clients will gain access to a partner who can deliver integrated, bespoke solutions to help fuel their growth and achieve their transformation objectives
- The acquisition is subject to customary closing conditions and regulatory approvals and is expected to close in the quarter ending 30 June 2021
Target Company: ReNew Power Private Limited
Acquiring Company: SPAC RMG Acquisition Corporation II
Deal Value (in Mn USD): 1200
- SPAC RMG Acquisition Corporation II entered into a definitive agreement to acquire ReNew Power Private Limited for USD 1200mn (INR 86.92bn)
- The consideration comprises of USD 855mn, upsized, fully-committed private placement of common stock in ReNew Power Private Limited and USD 345mn of gross cash held in trust by SPAC RMG Acquisition Corporation II, subject to redemptions, anticipated net primary proceeds of approximately USD 610mn to fund the company’s accelerated growth strategy and pay down debt
- As a part of the transaction, ReNew Power Private Limited will merge with SPAC RMG Acquisition Corporation II and the combined entity would be named ReNew Energy Global PLC upon listing
- The entity would be valued at approximately USD 8bn
- The transaction would further bolster ReNew’s leading position in solar and wind energy generation for the Indian market, by funding medium-term growth opportunities, as well as paying down debt
- The completion of the proposed transaction is subject to customary closing conditions, including approval from the Competition Commission of India and of the stockholders of RMG II, and the transaction is expected to close in the second quarter of 2021
Shared services: An accelerator to business growth
Companies that still think of outsourcing solely for labour arbitrage, are often surprised to find that the outsourcing partners have matured into true providers of world-class services that offer business advantages as well as cost savings.
This realisation is changing expectations and is reflecting in the way contracts are being written. Earlier, contracts focussed on basic SLAs, like TAT, accuracy and cost reductions, whereas now, we see the trend shifting toward more holistic objectives of improving outcomes or aligning business goals based on efficiencies, and sharing risks and rewards.
In the quest for superior performance, a growing number of companies are now turning to shared services - a tactical technique that enables corporations organise financial and other transaction-oriented activities, to reduce costs and provide better service to business unit partners. Organisations are proactively balancing the scope of Shared Services Centres (SSCs), in terms of evaluating multiple functions and processes across the business, and consolidating to leverage capabilities and expertise. To make the right sourcing decision, the organisation must be clear about the objectives of its sourcing strategy. It is thus important to have a robust operating model, strong governance, and the support of sponsors/key stakeholders.
One key question that comes to mind is how do we derive value from shared services. The outsourcing industry began its journey by handling simple repetitive transactions, and gradually moving over to medium and complex ones. It considered various facets ranging from process efficiency, customer experience, financial impact etc. It compelled the management to embrace this approach to increase customer and shareholder value. Shared services models have transitioned appreciably from being bottom of the pyramid activities involving routine transactions, to more judgement-based activities.
The spectrum of service offerings in a finance & accounting SSCs expanded, when the following activities were added:
- Group consolidation accounting
- Group statutory accounting
- Tax compliance
- Fixed asset accounting
- Business unit management accounting and reporting
- Treasury and cash flow forecasting
- Budget and financial planning analysis
An SSC’s service offering evolved to adding value, with a clear distinction between the operational teams, the customer service teams and the Centres of Excellence (COE).
For instance, in a finance and accounting outsourcing process, the expectation moved from accuracy of invoice processing and timeliness to impact assessment on the ‘Operating Cycle’ and ‘Average Days to Pay’. The focus shifted to ‘Straight through Processing’ and reducing multiple touch-points thereby making the process efficient and transparent with the introduction of technology, that provided easy access to vendors to have the power of basic reporting, like knowing invoice statuses etc. Similarly, for the Accounts Receivable process, the focus shifted from ‘Ageing Analysis’ to ‘Reducing the Days Sales Outstanding (DSO)’. Setting up of COEs focussed on technology intervention, lean processes, transparency, accessibility, enabling a better experience.
Similarly, in Payroll, though paying salaries on time was an underlying expectation, there was a paradigm shift in customer expectations; now to have access to cognitive analytics about the employee, compliance adherence and the variances over previous months.
With the advent of Robotic Process Automation (RPA) and analytics, Digital Transformation has become key to derive and maximise value, leaders need to revisit the strategic assumptions about their shared services organisations. SSCs can support core business operations with SMAC-based technologies and offer stakeholders exciting new service models that drive continuous improvement and process innovation in an era of unprecedented change.
The success of an SSC unfolds when a true partnership is created between Partners. It does truly require the alignment of business leadership, culture and SSC delivery teams, to come up with an integrated solution that focuses on value creation and accelerates business growth.
The influence of technology to enhance the delivery of shared services
Shared services has emerged as an attractive business model with targeted outcomes like achieving economies of scale and improved business performance. To reap the advantages, businesses globally, are moving towards adopting shared service models at strategic, tactical, and operational levels.
VFS Global very early in 2009, moved its accounting function to an outsourcing model. We had around 20 staff on an outsourcing vendor’s rolls at that time managing basic accounting activities. This number increased to over 100 staff in 2019 due to an increase in business activities and their complexities.
Outsourcing of the accounting function provides significant advantages such as cost-saving, increased quality of service, improved focus and efficiency on critical business areas, and better regulatory control and compliance. For global organisations specifically, taking this approach provides a wide range of benefits including the development of best practices and standardisation of procedures across the company. This standardisation also helps in putting in place enhanced automation, delivering further advantages in cost and efficiency.
Generally, the Shared Services Centre (SSC) approach is most frequently adopted by finance and accounting departments. A shared services accounting unit can take care of repetitive high-volume processes such as capturing invoice data and subsequently entering that data into business systems. Key benefits that SSCs provide to the finance and accounting function are:
- Control, standardisation, and optimisation
- Increased productivity
- Agility and scalability
- Better customer service
- Compliance and controls
A shared services accounting unit that involves humans to process invoices rather than machines nullifies the benefits it is supposed to provide. In practice, it could end up creating even more inefficiencies as it forces the Accounts Payable (AP) team to clean up the mess. The control an organisation gains from centralising invoice processing will not be of much value if its accounting SSC is delaying or missing payments, delivering inaccurate reports, or creating an untraceable workflow.
The development of shared services models are not only observed in accounting but have also advanced to other streams like HR, IT, Payroll processing etc.
Artificial Intelligence (AI) can be a game-changer for shared services accounting.
When paired with automation, cognitive invoice processing can prevent inefficiencies in accounting SSCs quickly and easily. Additionally, it can transform AP teams from a meagre transactional function to a function that saves cost and drives efficiency.
A shared services accounting unit that uses Robotic Process Automation (RPA) to capture data can serve an organisation more efficiently than the one that uses a manual data entry approach. Robots can take care of the tedious clicking, copying, and pasting, while the AI component of the SSC’s invoice processing operations ensures that the RPA is capturing data accurately. The system requires human operators to quickly validate the extracted data, however, cognitive AI learns through each validation and gets more precise and predictive.
Improvements in data quality ensure high-quality AP reporting and analytics across departments. And because the shared services accounting team has RPA and AI handling data capture, businesses won’t have to deploy valuable resources and exorbitant budgets on validating their work. This opens a world of opportunities for AP teams to provide strategic support to the finance function’s core competencies.
In addition to boosting productivity, AI-enhanced RPA enables shared services accounting to:
- Ensure timely payment
- Maintain strong vendor-customer relations
- Process nearly 100% of invoices according to service-level agreements
- Simplify financial accounting and audits through improved reporting
At the end of the day, a shared service accounting unit’s performance is determined by the quality of its processes and only competent execution will ensure its success. It is also observed that now due to the largely adopted work from home culture across the globe and cost arbitrage, global MNCs are moving their operations to India and other low-cost countries that have demonstrated advantages to both customers and SSC partners.
It is critical to note that the size of an organisation plays an important role in these decisions as SSCs may not be a viable proposition for small-sized organisations.
From all other perspectives, outsourcing and automation of accounting services to third parties who have adequate capabilities and technology advancements and automated workflows go a long way in creating more business value and leveraging overall costs for an organisation.