Passport to India Inbound investment trends and tips - Passport from India
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Passport to India Inbound investment trends and tips Passport from India Outbound investment trends and tips
Passport to India Inbound investment trends and tips
The state of M&A:
If there’s one thing foreign investors key reforms well into 2012. Many of P. Chidambaram to finance minister
have grown to understand about those actions had a chilling affect on and Paghuram Rajan as chief
India, it’s that it’s a long-term foreign investment. economic advisor to the finance
market. With strong demographics, ministry. Shortly after those
In one such action, India’s tax
skilled workers and growing appointments, the government
authorities claimed that UK telecoms
domestic consumption, India announced a host of economic
company Vodafone owed more than
continues to be featured on lists of reforms, including opening the
US$2 billion in taxes related to its
top investment destinations despite eagerly-awaited retail sector,
$11-billion acquisition of Hutchinson
fluctuations in sentiment based on postponing the implementation of
Essar, the third-largest mobile
its rates of regulatory reform and GAAR to 2016, and working toward a
phone operator in India. But because
growth. settlement in the Vodafone dispute—
the deal was done offshore, with
events that will help clarify India’s tax
“Investors know that being in India Vodafone purchasing its ownership
regime and ease foreign investors’
is a must, but they’re being more stake from Hutchinson’s Cayman
fears.
practical about actually operating in Islands subsidiary, Vodafone claimed
India,” says Ashok Lalwani, chair of it didn’t owe any taxes and the case “The new finance minister seems
Baker & McKenzie’s India Practice. ended up in court. focused on reversing the recent
“They are realizing that it’s a long trend in foreign investment and has
In January 2012, the India Supreme
haul and a patience game.” taken a number of actions in a short
Court ruled in Vodafone’s favor
time to get the attention of foreign
During the global economic crisis, and held that the transaction was
investors,” Lalwani says. “The pace at
India’s strong capital controls and not taxable in India. The Indian
which M&A activity picks up depends
tight foreign exchange measures government responded by proposing
on how well the Indian government is
helped the country’s banking system a retroactive tax on indirect share
able to sustain the rate of reform.”
remain strong, saved the economy transfers and introducing General
from free fall and positioned India as Anti-Avoidance Rules (GAAR), setting The Economic Survey that the
the most important FDI destination off a significant drop in foreign Indian government released in
after China. While that presented a investment. In 2012, the total value of February 2013 suggests a “cautiously
prime opportunity for India to become cross-border deals fell to $17.2 billion optimistic” view, with projected GDP
the shining star of emerging markets, from $42.3 billion the year before. growth rates of 6.1 to 6.7 percent for
the ruling Congress government’s 2013 to 2014. The government has
However, the winds of change appear
reaction to political maneuverings by also embarked on global roadshows
to be sweeping the Indian subcontinent
the opposition resulted in a period to woo foreign investors, which also
following the appointment of
of policy paralysis and flip-flops on augurs well for M&A activity in India.
Biggest investment opportunities:
1. Retail
With 1.2 billion people, India is home to one of the fastest growing retail markets in the
Population world. Until recently, India’s retail sector was closed to foreign investment to protect
1.2 billion the nation’s large population of small shopkeepers and farmers. But after years of
debate, the government agreed in September 2012 to open the sector to multi-brand
GDP growth: retailers like Wal-Mart. Although viewed as a major win for foreign retailers, the
5.3% (2012) reforms come with restrictions. Single-brand foreign retailers must source 30 percent
6.9% (2011) of their goods from local companies while large multi-brand retail operators must
9.6% (2010) partner with Indian companies, are limited to 51 percent ownership, and can only open
stores in the 53 Indian cities with populations greater than one million.
Average deal size:
US$100 - $200 million 2. Insurance
In further efforts to boost India’s slowing economy, the government has proposed
Major players increasing the foreign investment cap in the insurance industry. For years, foreign
Foreign multinationals from the investors were limited to 26 percent ownership despite industry demands to increase
UK, US and Japan the FDI limit to expand the sector with much needed foreign capital. In October 2012,
Ease of doing business ranking the Indian government agreed to increase that limit to 49 percent, which could lead to
a new wave of investment once the bill is approved by parliament.
132 (out of 185 countries)
3. Aviation
Corruption ranking
94 (out of 174 countries) To revive India’s troubled airline industry, the government modified its FDI rules to
allow foreign airlines to own up to 49 percent of Indian carriers. While many airlines
Sources: have struggled with profitability in recent years, Indian carriers have faced even greater
World Bank, Transparency International challenges such as higher fuel prices and poor airport infrastructure. By opening
the sector, the government hopes to attract more expertise in airline management,
technology and training that could capitalize on increasing demand for air travel from
India’s rising middle class. Foreign carriers who invest in the sector, however, are
subject to conditions such as keeping the airline registered in India and having the
company chairman and at least two-thirds of the board of directors be Indian citizens.
1 | Passport to India4. Manufacturing
With a large working population, strong emphasis on education and low labor costs,
India is increasingly gaining recognition for manufacturing high-value goods that require
engineering precision and quality, such as auto components and textiles. As the Chinese
government becomes more selective in screening FDI projects and wages in China continue
to rise, neighbors like India are likely to become more attractive to foreign investors.
5. Pharmaceuticals
India’s rapid economic growth, low cost manufacturing and workforce of skilled
chemists has led to blockbuster deals involving multinational pharmaceutical People used to think you could
companies looking to lower their R&D costs by purchasing Indian drug companies, just open any company in India
such as Abbott’s US$3.7 billion purchase of Piramal Healthcare’s generic drug unit. and make money. Now they are
In response to the foreign buying spree, the Indian government amended its foreign being more strategic and more
investment rules in November 2011 to require government approval for FDI in existing
realistic. Investors know that
Indian pharmaceutical companies. A year later, the government implemented a new
policy to cap the prices of 348 leading drug brands to keep them affordable for Indian
being in India is a must, but
consumers. The new policy, which could cut drug makers’ profits in half, will likely they’re being more practical
slow foreign investment, along with recent adverse court decisions on intellectual about actually operating in India.
property rights, such as the Supreme Court’s rejection of Novartis’ attempt to win They are realizing that it’s a long
patent protection for Glivec, its cancer drug. haul and a patience game.
Ashok Lalwani
Greatest challenges for foreign investors: Chair of
Baker & McKenzie’s
1. Bureaucracy India Practice
India is a highly bureaucratic society and foreign investors need a large number of
federal, state and local approvals to acquire or open and operate a local business.
Navigating through this matrix of approvals takes time and patience.
2. Corruption
Bribery is common in India and foreign companies must conduct careful due diligence
to ensure they don’t violate anti-bribery laws such as the FCPA or UK Bribery Act,
especially considering there’s been a significant rise in investigations involving India.
3. Multiple surprises during deal negotiations
At the beginning of a transaction, Indian businessmen often don’t put all of their cards
on the table. They sometimes don’t even tell their own lawyers everything, so as you
move through a transaction, there may be some surprises. You have to know that ‘yes’
could actually mean ‘no’ or ‘I’ll think about it,’ and you often have to go back and redo
what you thought you had already negotiated. It doesn’t just happen once, but multiple
times during the course of a transaction. “Things are often disclosed on a need-to-
know basis as a deal reaches certain stages,” Lalwani says. “But it’s all part of the
dance and people should be prepared for the long haul.”
4. Lack of certainty in business contracts
In India, contracts are not considered definitive like they are in Western markets. Many
Indians view contracts more like working documents, with wrinkles that will be ironed out
later. It is not uncommon for Indian parties to sign agreements with terms they know they
may not be able to fully comply with. They expect that if something does arise, they can
resolve it later, which can lead to conflicts down the road with their Western counterparts.
Tips for increasing chances of M&A success:
1. Bring in advisors early
Deal making in India can often look like this: the company principals negotiate on
their own, come to an agreement and then call on the lawyers to memorialize what
they have decided. But in a complicated market like India, certain terms the principals
have agreed to may not be possible or there may be a better way to structure a deal to
achieve what they want to accomplish. To avoid delays and unnecessary detours, it’s
important to involve advisors early.
2. Conduct background checks
When partnering with Indian companies, it’s critical to know exactly who you are dealing
with. You need to conduct due diligence upfront to uncover the reputation and financial
standing of any major partners. “There are not many secrets in India and things get
around quickly,” Lalwani says. “If you talk to enough people, you’ll find out everything.”
3. Build personal relationships with your business partners
India has a strong relationship-based culture, which also sets the tone for how the
locals conduct business. It’s important to get to know your partners on a personal
level first so that you have a solid foundation for your business relationship.
2 | Passport to IndiaCurrent trends
INDIA INBOUND DEALS TARGET INDUSTRIES IN INDIA
(BY DEAL VALUE 2008-2012)
No. of deals Billions
350 $20 Consumer Products Consumer Staples
$18 3% 3%
300 289
Media and Entertainment Retail
$16
3% 1%
250 237 $14
222 218
200 188
$12 Technology
$10 5% Energy and Power
150 26%
$8
Real Estate
100 $6 5%
$4
50
$2 Industrials
$0
8%
2008 2009 2010 2011 2012 Telecom
Materials 16%
8%
Number of deals
— Total value US$ Financials
10% Healthcare
12%
WHO’S INVESTING IN INDIA WHO’S INVESTING IN INDIA
(BY DEAL VALUE 2008-2012) (BY DEAL VOLUME 2008-2012)
Russia 1% Russia 1%
South Africa 1% South Africa 1% United States
United Kingdom 27%
33%
Other Other
26% 35%
Singapore Mauritius*
6% 10%
Japan France
18% 5% United Kingdom
United States Japan 8%
17% Singapore
7%
8%
*Foreign buyers often route their investments to India through this African island nation to take advantage of a tax treaty the two countries established in the early 1980s that enables
capital gains from M&A transactions to be taxed in Mauritius, which has a much lower tax rate than India.
Source: Thomson Reuters
The road ahead
Following the liberalization of sectors like retail, insurance and aviation to foreign investment, M&A activity in India is
expected to rise as long as the government continues to take actions that restore confidence among foreign investors.
There is also a large cache of private equity money on the sidelines waiting to be invested.
© 2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the
common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm.
Similarly, reference to an “office” means an office of any such law firm.
This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
3 | Passport to IndiaPassport from India Outbound investment trends and tips
The state of M&A:
The heady days for India outbound M&A began in 2006 when Tata Steel bought
Corus Group for US$12 billion, catapulting the Indian steel company to one
of the top five steel makers in the world. Two years later, India’s Tata Motors
bought Jaguar and Land Rover from Ford Motors for $2.3 billion. Then Indian Population
telecom giant Bharti Airtel bought Zain Africa for $9 billion, expanding its 1.2 billion
network into 15 African countries.
GDP growth:
In the last few years, however, Indian conglomerates have taken a step back 5.3% (2012)
after this string of headline-making overseas purchases. Since the third- 6.9% (2011)
quarter of 2012, outbound M&A activity has picked up again, although on 9.6% (2010)
a more measured, conservative level.
Average deal size:
“Acquisitions by Indian companies are much smaller than they used to be US$50 million
five years ago, when multibillion-dollar deals were commonplace,” says Major players
Ashok Lalwani, chair of Baker & McKenzie’s India practice. Large Indian conglomerates
Because of increasing demand for natural resources, particularly coal, and mid-market companies
energy is the most active sector for outbound deals as Indian oil, gas Source:
and mining companies seek assets in other resource-rich countries like World Bank
Australia, Indonesia and South Africa. In November 2012, Oil and Natural
Gas Corporation purchased a minority stake in ConocoPhillips’ oil field in
Kazakhstan for $5 billion—the largest natural resources acquisition by an
Indian company ever.
In pursuing these deals, Indian companies face some challenges, including
Chinese bidders with deeper pockets and resource nationalism in countries
like Indonesia that limit foreign investment and harm the economics of the
investment. Because of these new realities, many Indian mining companies
have shifted their strategy regarding the types of investments they are
seeking.
“Companies are increasingly looking at more developed or operating assets
as it’s very expensive to develop a new mine and the related infrastructure
to get the minerals out of the country,” Lalwani says.
With the domestic economy picking up and the global economy showing
resilience, the outlook for outbound investment from India is expected to
improve in 2013. And as Indian companies continue expanding abroad,
they are becoming increasingly more adventurous than their Western
counterparts, investing in a wider range of countries, including frontier
markets in Africa and Latin America.
“After navigating their local market, which is one of the toughest in the
world, they are confident they can be successful anywhere,” Lalwani says.
“They have both the skills and the bravado.”
1 | Passport from IndiaBiggest investment opportunities for Indian companies: Acquisitions by Indian companies
are much smaller than they
1. Natural resources used to be five years ago, when
2. IT/Telecom multibillion-dollar deals were
3. Financial services commonplace.
Ashok Lalwani
Greatest challenges for Indian investors: Chair of
Baker & McKenzie’s
1. Post-merger integration India Practice
With all the focus on closing the deal, company executives often treat post-acquisition
integration issues like an afterthought. But completing a transaction is just the
beginning of the hard work of integrating the new business lines, products or services,
supervising a new workforce, harmonizing employee benefits and accessing new
compliance risks. Without a detailed post-merger integration plan, companies risk
failing to realize the value they were seeking when making the acquisition in the first
place.
2. Running a global operation
Like many companies expanding overseas, the general counsels of Indian
conglomerates often find it challenging to keep track of the multitude of diverse
and sometimes conflicting local rules and regulations they must comply with when
operating in various countries. As the company becomes increasingly global, it’s
harder to know whether the company’s policies and practices are in line with the
requirements of all the places where they do business. “They want to have systems in
place to ensure that they do what is required to stay in compliance,” Lalwani says.
Tips for increasing chances of M&A success:
1. Keep existing management in place for two years or longer after the acquisition
To maintain continuity, preserve important business relationships and avoid talent
losses, it’s a good idea for Indian companies to have the foreign owner or key
managers stay on for a few years to help smooth the transition. “You need a well-
thought-out integration plan that takes into account all of the cultural issues,”
Lalwani says.
2. Make sure the acquired company is incorporated into your global
compliance program
To avoid regulatory issues and realize the full value of the acquisition, it’s important for
Indian companies to gain an understanding of the compliance requirements related to
the acquired company and execute a plan to address those compliance requirements
quickly.
2 | Passport from IndiaCurrent trends
INDIA OUTBOUND DEALS
No. of deals Billions
200 183 $25
$20
150
134
118
$15
100 85 83
$10
50
$5
$0
2008 2009 2010 2011 2012
Number of deals
— Total value US$
WHERE INDIAN COMPANIES ARE INVESTING WHERE INDIAN COMPANIES ARE INVESTING
(BY DEAL VALUE 2008-2012) (BY DEAL VOLUME 2008-2012)
Brazil 2% United States
Indonesia 1% Nigeria Indonesia 3% 24%
South Africa 1% 25% South Africa 2%
Brazil 1%
China 1%
Other
25%
Other
43%
Turkey
6% United States
16%
Australia United Kingdom
8% Canada 13%
4%
United Kingdom Germany Australia
Venezuela Singapore
9% 5% 6%
11% 5%
Source: Thomson Reuters
The road ahead
After a string of blockbuster cross-border deals, Indian companies have begun taking stock of what they have and
becoming more strategic about what they target. They are likely to continue focusing their investments in the natural
resources and outsourcing sectors, as well as on acquiring new and complementary technologies to improve the
efficiency of their businesses.
© 2013 Baker & McKenzie. All rights reserved. Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the
common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm.
Similarly, reference to an “office” means an office of any such law firm.
This may qualify as “Attorney Advertising” requiring notice in some jurisdictions. Prior results do not guarantee a similar outcome.
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