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Market Entry and Company Incorporation
October 9, 2012
♣
presented byAjay Sethi FCA – Managing Partner, ASA & Associates
Mathias Niehaus CPA – Partner, optegra:hhkl
1www.asa.in
PRESENTATION OUTLINE
Segment I
India Tour
Location Search in India
Indian Partner – Why? How?
Avoiding Pitfalls
Segment II
Understanding Regulatory Compliance
FDI Norms – an Overview
Investment Strategy
Policy Framework22
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INDIA TOURSome Facts
33www.asa.in
Our Current Concerns
Growth Rate (Projected 9.0% v/s Outlook 5.5%)
Rising Inflation (touching double digits)
Dip in FDI (78 % dip in June ‘12 YOY)
Reforms in Slow Motion (resistance from coalition partners)
4www.asa.in
4Source – Department of Industrial Policy and Promotion as on September 2012 5
GDP
The Growth Story
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6
Inflation
www.asa.inSource – Department of Industrial Policy and Promotion as on September 2012
FDI INFLOWS (Top Ten Countries) (in USD million)
Rank Country 2010‐2011 2011‐12 Cumulative Inflows(Apr ‘00 – June ‘12)
% of total Inflows
1 Mauritius 6987 9942 65608 38
2 Singapore 1705 5257 17555 10
3 UK 755 9257 16314 9
4 Japan 1562 2972 12663 7
5 USA 1170 1115 10710 6
6 Netherlands 1213 1409 7652 4
7 Cyprus 913 1587 6603 4
8 Germany 200 1622 4880 3
9 France 734 663 2988 2
10 UAE 341 353 2301 1
7
Foreign Direct Investment – Country wise
www.asa.inSource – Department of Industrial Policy and Promotion as on September 2012
figures in US$ millionCumulative Inflows (April ‘00 – June ‘12)
8
Foreign Direct Investment – Sector wise
www.asa.inSource – Department of Industrial Policy and Promotion
Subsidy on diesel reduced
Bank rates increased
Multi brand retail allowed
Civil Aviation opened
Broadcasting (DTH) opened
9
Reforms Aimed at Accelerating Foreign Direct Investment (Sept 2012)
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21
Direct Tax Code (April 1, 2013 - doubtful)
New Companies Bill (awaited)
Indirect Taxes - Goods & Services Tax (April 1, 2013 - doubtful)
International Financial Reporting Standards (deferred)
10
Policy Framework – On the Horizon
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LOCATION SEARCH
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Key Index
Port
Automobile
Chemicals
ITMumbai
Bengaluru
Chennai
GUJARAT
UTTAR PRADESH
KARNATAKA
RAJASTHAN
MAHARASHTRA
TAMIL NADU
City
KERALA
ANDHRA PRADESH
Delhi /Gurgaon/Noida
Pune
HARYANA
12
Identifying a Good Location
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13
Key Index
Mumbai - Chennai Freight Corridor (Approved)
Delhi – Kolkata Freight Corridor Delhi – Mumbai Industrial Corridor
Dedicated Freight Corridors
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State
Important Industrial
Area(Dealing
Authority)
Approx Cost
(in € / sq mts)
Ease of Acquiring Land Key Factors
Haryana(North)
Udyog ViharManesarKundli(HSIDC)
440160100
Involves liaisoning. Authorities are vested with high discretionary powersLow Availability
• Fully developed industrial belt
• Auto components in close vicinity
Rajasthan(North)
NeemranaKhushkhera(RIICO)
35
Defined documentation and regular follow-ups required High Availability
• Semi developed industrial belt
• Within easy reach of Haryana i.e. an alternate
HSIDC - Haryana State Industrial & Infrastructure Development Corporation LtdRIICO - Rajasthan State Industrial Development & Industrial Corporation€ 1 = INR 70 (approx)
14
Industrial Areas – Sample study
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State
Important Industrial
Area(Dealing
Authority)
Approx Cost
(in € / sq mts)
Ease of Acquiring Land Key Factors
Tamil Nadu(South)
Orgadam, Sriperambadur, Hosur(SIPCOT, TIDCO)
29 and above
Land allotment discretionary, involves active liaisoningMedium Availability
• 3 key ports within radius• Facing South East Asia
(Thailand)• Some areas developed.
New under process
Gujarat(West)
Sanand, Mehsana(GIDC)
Upto 29
Transparent process; strict adherence to conditions High Availability
• Important future port on 2 freight corridors
• Facing Middle East & Europe market
• Industrial area under development
SPICOT - State Industries Promotion Corporation of Tamil Nadu LtdTIDCO - Tamil Nadu Industrial Development Corporation LtdGIDC - Gujarat Industrial Development Corporation€ 1 = INR 70 (approx) 15
Industrial Areas – Sample study
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Demand-Supply scenario, Competition analysis, Distribution networks?
Quality of Infrastructure (water, power, land, roads, quality of labor)?
Logistics and easy access to resources taken into consideration?
If land is required, have you considered future expansion plans?
Have you considered various Municipal Level Taxes?
Have you considered effect of Social Security Schemes?
16
Initial Feasibility & Location Study
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Retail
Logistics
Healthcare
Food Processing
Defence Supplies
Real Estate Development
17
A Few Promising Sectors
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INDIAN PARTNER
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Pros
Operating Infrastructure
Ready Distribution Channel
Government Dealing
Labor Management
Cons
Management and Control
Dilution of Profits
Protection of Technology, Trademarks and Trade
Names
2919
Why an Indian Partner?
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Indian partner looks at a business horizon of 3-5 years to measure the
returns on investment
The Indian partner will aim at faster turnaround in negotiations, basically, a
‘top-down’ management approach
You should discuss in detail, management control issues viz. appointment
to the board of directors, chairman of the board, appointment of CEO, MD
and CFO, issues arising from future change of control, non-compete, etc.
20
Understanding Your Indian Partner
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Financial health of Joint Venture (JV) partner
Ongoing litigation or contingency
Market Reputation and reach of partner
30
Lack of published information and
credit rating makes this the
most critical issue in JV
21
Credit Worthiness Check of Partner
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3122
Sources
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Median EBITDA Multiples (All Sectors)
Source: Mergermarket
Source: Capital IQ
23
Rationalising Valuations
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Source: Mergermarket
Announced Date Target Company Bidder Company Stake Acquired
Deal Value EBITDAUSD (mn) Multiple
SELECTED DEALS 2011 & 2012 01-09-2012 JSW Ispat Steel JSW Steel 53.30% 1,350 7.2401-08-2012 Genpact Bain Capital 30.50% 1,004 10.8510-01-2011 Patni Computer Systems iGate Corporation 83.60% 1,213 7.4821-03-2012 Mahindra Satyam Tech Mahindra 57.40% 921 9.1021-05-2012 Thomas Cook Fairbridge Capital 77.00% 141 11.7923-11-2011 Neo Structo Construction Bilfinger Berger NA 80 8.3607-01-2011 APW President Systems Schneider Electric 75.00% 19 6.6201-08-2012 PVR L Capital Eco 11.10% 10 6.54
SELECTED DEALS 2006 28-08-2006 Matrix Laboratories Mylan Inc 71.50% 723 401-12-2006 Gemini TV Sun TV Network NA 603 23.0130-01-2006 Ambuja Cements Holcim 20.00% 564 14.6404-04-2006 MphasiS BFL Electronic Data Systems Corp. 51.70% 342 21.7910-03-2006 Spice Communications Axiata Group Berhad 49.00% 179 12.2814-05-2006 Zuari Cement Ciments Francais 50.00% 54 18.6222-11-2006 Geojit Financial Services BNP Paribas SA 33.40% 46 16.6614-09-2006 GPI Textiles Avenue Capital Group 40.00% 33 15.5004-12-2006 Adani Retail Reliance Industries NA 22 30.6107-09-2006 Capgemini Business Services Capgemini 51.00% 11 30.98
24
Rationalising Valuations
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3225
Joint Venture - Documentation
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Term Sheet – Some Key Guidelines
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Shareholding structure has a major bearing on the quality of management, its ability to decide and respond to business dynamics.
The law broadly recognizes the following power thresholds for shareholders:
3427
Shareholding Structure
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10 Per Cent & Above - Minority Control
Calling an extraordinary general meeting on requisition - Section 169
Demand for Poll during voting - Section 179
Investigation of affairs of company - Section 235
Prevention of oppression of minority shareholders and to preventmismanagement of the company - Section 399
35
Less than 10 per cent
deprives the above rights
28
Shareholding Structure
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51 Per Cent & Above - Simple Majority
Section 79 – Issue of shares at a discount specifying the maximum rate, subject to sanction of Company Law Board
Section 81(4) - Issue of further shares with Government’s consent where special resolution is not passed
Section 94(2) - Alteration of share capital
contd
3629
Shareholding Structure
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51 Per Cent & Above - Simple Majority
Declaration of Dividend - Section 205
Adoption of Annual Accounts & Director’s report - Section 210
Appointment of external auditor - Section 224
Appointment of Director, Managing Director – Section 256, Section 269
37
Shareholding 50:50– High Chances of deadlock in case of
disagreement amongst the partners; all of
above powers compromised. 30
Shareholding Structure
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75 Per Cent & Above - Absolute Majority
Issue of further shares to persons other than existing members -Section 81(1A)
Alteration in the Memorandum of Association & Articles of Association -Section 16 & 31
Changing the registered office address of the company from one state to another - Section 17
Change in the name of the company - Section 21
contd
3831
Shareholding Structure
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75 Per Cent - Absolute Majority
Buy-back of shares - Section 77A
Reduction of share capital - Section 100
Winding up a company by Court - Section 433(a)
Voluntary Winding up a company - Section 484(1) (b)
39
Virtual control of the company; suitable for
technology providers or where customers have
global commitments and firm order available
32
Shareholding Structure
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AVOIDING PITFALLS
33www.asa.in
Reserved Matters – An important tool
Alteration of the structure of issued capital
Issue of shares and other securities
Transfer of shares
Change in constitution of the Board of Directors
Hiring key Managers
Declaration of any dividend, other distribution
4034
Shareholding Structure
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• Arms’ Length price (ALP) - Any income arising from an international transaction between associated parties to be computed having regard to ALP. ALP means the price which is applied in a transaction between persons other than associated enterprises
• Associated Enterprise (AE) - Participation in management or control or capital of other enterprise. Directly through intermediaries
35
TRANSFER PRICING - Ensuring that transactions between group companies are at market price?
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Germany payment? supply of goods
India
servicingwarranty etc.
Holding Company
Wholly Owned
SubsidiaryCustomer
Transfer Pricing Issue – what should be the
profit margin of the Wholly
Owned Subsidiary?
Advanced Pricing
Agreements
36
TRANSFER PRICING - Determining the appropriate pricing for group companies transactions
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• Does the India Liaison Office (LO) sign direct contracts in India ?
• Is the LO deeply involved in price negotiations?
• Are the employees of the LO paid incentives on sales?
• Does the LO raise Purchase Orders on the Head Office?
An affirmation to any of the above –LO
regarded as a Permanent
Establishment (PE) of the parent company in
India. This is a high risk of exposure to
taxation
37
Liasion Office (LO) – The PE Trap
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Whether the credit in respect of
Dividend Distribution Tax
(DDT) of INR 17 is available in the Parent Country?
X – India
Parent Company
X – German Company
Government Treasury
IndiaGermany
INR 17
INR 83
Net Profit 133
Tax on Profit 33
Distributable Profit 100
Amount in INR
38
Repatriating Profits – The issue of Dividend Distribution Tax
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Segment II
Mathias Niehaus Partner, optegra:hhkl
39www.asa.in
Most laws originate from British Laws
Procedure Driven
Failures to comply usually leads to penalty and sometimes prosecution
Stacked in favor of labor(blue collar staff)
Fine reading and interpretation is the norm
40
Understanding Regulatory Compliance
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13
Pre 1991
1991
1997
2000
2000-10
Allowed selectively up to 40%
Up to 74/51/50% in 112 sectors under theautomatic route 100% in some sectors
Up to 100% under automatic route in all sectors except a small negative list
More sectors opened, Equity caps raised in many other sectors, procedures simplified
FDI up to 51% allowed under the automatic route in 35 priority sectors
41
Evolving FDI Policy
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12
Social focus becomes high priority
Infrastructure becomes prime focus with guided government expenditure e.g.Delhi Mumbai Industrial Corridor
Streamlining archaic laws viz. Items reserved for Small Scale Industries (abolished) Fringe Benefit Tax (abolished) Goods and Services Tax (concept laid) Direct Tax Code (placed for public opinion) New Companies Bill (set in motion)
Look East Policy set in motion through Free Trade Agreement (FTA) with Korea, Thailand, etc
Stronger Corporate Governance – E-governance project of the Ministry of Corporate Affairs
YEARS 2006-2012
42
Aiming for Inclusive Growth
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FDI Norms – an Overview
43www.asa.in
Lotteries, gambling and betting
Atomic energy (but India likely to buy half a dozen nuclear plants in the near future)
Retail shops (but foreign companies can open single-brand shops)
Real Estate Business
Tobacco Products
44
Inbound Investments - Industry out of Bounds
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Banking, Insurance and Finance Companies
Defence, Mining and Strategic Industries
Air Transport Services
Telecommunication
Single Brand and Multi Brand retailing
Arms and military supplied
Media, Broadcasting, Satellite
Security Agencies
45
Inbound Investments – Industries where Government Permission is required
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Sector/ Activity FDI Cap/ Equity Entry Route
Civil Aviation 49% Automatic
Multi Brand Product Retail 51% Approval based
NBFC 100% Automatic
Broadcasting49% (FDI + FII)74% (FDI + FII)
AutomaticApproval based
Power Exchange 49% (FDI – 26% + FII – 23%)
FII – AutomaticFDI – Approval based
Defence 26% Approval based
46
Inbound Investments – Industries with Cap on Investments
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The rest of the field is open
47www.asa.in
There are thousands of firms in many industries
Family-owned enterprises often run into management crises, look for
saviors
The market for skilled personnel is at last getting organized
State governments compete to attract enterprises
Investing has become easier now
48
Investment Strategy – Why India
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Going alone makes more sense now
Government interference in industry has declined, so a partner is not
necessary as intermediary
The market for skilled personnel has become organized, so it is
possible to recruit management
It is also now possible to buy running companies
49
Investment Strategy – Subsidiary
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If you still prefer joint ventures
The top 100 Indian firms have more choice today and are more difficult to
attract
But there are thousands of mid-sized companies (technologically strong)
and smaller companies (mostly family-managed) which are still available
But put in place a management structure which gives you an effective
voice
50
Investment Strategy – Joint Venture
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INDIA
Head Office Representation
Local Subsidiary
DistributionChannel
Liaison Office
Project Office
Branch Office Wholly Owned Subsidiary
Joint Venture
Importer
C&F Agents
Franchisee
German Corporate
Limited Liability Partnership
1051
India Entry - Mode of Investment
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Corporate[CO]
Liaison Office[LO]
Project Office[PO]
Branch Office[BO]
Limited Liability Partnership (LLP)
Characteristics Share capital owned by parent company
No commercial activities allowed
Temporary site office, specific projects
Commercial activities allowed
Commercial activities allowed
Status Shareholders Foreign Company
Foreign Company
Foreign Company
Partnership
Tax Rate 30% + + Non Taxable 40% + + 40% + + 30% ++
Control Board of Directors
Parent Company
Parent Company
Parent Company
Partners
Set-up FIPB Approval / Automatic Route (8-12 weeks)
RBI approval(8 weeks)
RBI approval(8 weeks)
RBI approval(8 weeks)
FIPB & ROLLP Approval
Closure ROC (12-15 months)
RBI(3-6 months)
RBI(3-6 months)
RBI(6-8 months)
(15-18 months)
RBI – Reserve Bank of IndiaFIPB – Foreign Investment Promotion BoardROC – Registrar of CompaniesROLLP – Registrar of Limited Liability Partnership
1152
India Entry – Alternate Entity Comparison
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Liaison Office (Companies exploring business opportunities in India)
Pro – Ease of setting-up and shutting-down
Con – Limited scope of operations
Branch Office (Research & development companies)
Pro – Simple structure with less compliances
Con – Approval is discretionary and taxability is high
53
Investment StrategyInbound Investments – Entry Options
(Unincorporated Entity)
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Project Office (Companies involved in one time turnkey or installation projects)
Pro – Ease of setting-up
Con – Applicable only in specific cases. Tax litigation possible
Limited Liablility Partnership (Corporate structure with benefit of limited
liability and flexibility of partnership)
Pro – A corporate structure without the Dividend Distribution Tax (DDT)
Con – Regulations Untested
54
Investment StrategyInbound Investments – Entry Options
(Unincorporated Entity)
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Forms of Corporate
Public Private
Minimum Capital (approx.) EURO 8,600 EURO 1,700
Members – MinimumMaximum
7 2
NA 50
Minimum Directors 3 2
Listing on stock exchange Permissible Not Permissible
Reporting requirements High Low
55
Investment StrategyInbound Investments – Entry Options
(Corporate)
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Company Incorporation
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AVOIDING PITFALLSWhile Setting-Up a Company
57www.asa.in
• Name should not resemble existing entity in India
• Similar names requires no objection certificate from pre-existing entities
• Specific words (such as ‘India’) have minimum prescribed government fee
• Name approval is valid for 60 days, reapplication thereafter
Future Litigation, risk of suspension of operations till the
requirements are met or the name is changed
58
Selecting a name for your Indian Company
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• State Stamp Duties must be considered while deciding the location
• The main object should be clear and specific to the main activity
• The Memorandum and Articles of Association must be drafted carefully, for
a Joint Venture (JV), the agreed terms must be incorporated therein
• Specific words have minimum prescribed government fee
• Name is reserved for 60 days, reapplication is required thereafter
Risk of JV Partner not abiding with the JV
Agreement!
59
Avoiding Common Errors
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Investments against issue of shares or convertible debentures or preference shares
Reporting to Reserve Bank Of India (RBI) must be done within 30 days from the date of remittance
Equity instruments should be issued within 180 days from the date of inward remittance else the amount should be refunded immediately
Non-compliance reckoned as a
contravention could attract penalty up to
3 times of the amount involved
60
Reporting to Exchange Control Authorities
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The shares or convertible debentures between resident to non resident Compliance with sectoral caps and relevant regulations Sales proceeds can be repatriated outside India, net of taxes
Pricing guidelines must be adhered to Listed companies –Securities Exchange Board of India (SEBI)
guidelines Unlisted companies - not less than fair value of shares determined by
a Merchant Banker or a Chartered Accountant as per the Discounted Free Cash Flow Method (DCF)
The Transfer should be reported to RBI within 60 days of
receipt of consideration
61
Acquisition of shares through a private arrangement
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Pre-incorporation expenses such as rent, feasibility study
Verification and certification by the statutory auditor
Foreign Inward Remittance Certificates of funds received from overseas promoters for the expenditure incurred must be arranged
The applications, complete in all respects, for capitalisation being made within the period of 180 days from the date of incorporation of the company
The applications, must be made
within 180 days from the date of incorporation of
the company
62
Pre-Incorporation Expenses
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THANK YOU
63www.asa.in
