FDI

INTO INDIA

OECD PRINCIPLES

OECD principles

Foreign Direct Investment When a firm invests directly in facilities to produce and/or market a product in a foreign country. FDI refers to an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor. Foreign direct investor A foreign direct investor is: An Individual An incorporated or unincorporated public or private enterprise A government A group of related individuals A group of related incorporated and/or unincorporated enterprises which has a direct enterprise

OECD principles

Direct Investment Enterprise It can be defined as an incorporated in which foreign investor owns 10% or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise. Subsidiaries, associates and branches A direct investment enterprise may be an incorporated enterprise- a subsidiary or associate company- or an unincorporated enterprise branch). Direct investors may have direct investment enterprises which have subsidiaries, associates and branches in one country or in several countries.

Special Transactions

Acquisitions Direct investment flows -- shares and loans made by the direct investor as well as new issues and redemptions. If an inward direct investment enterprise owned by Country A is taken over by a concern in Country C, OECD recommends that the host country should record this as disinvestment by A and a direct investment as C. Loan guarantees Subsidiaries may borrow funds which are guaranteed by the direct investor. These loans are not part of direct investment as there is no flow of funds, nor is any actual liability incurred.

Special Purpose Entities

It includes the following: Holding companies Conduits Tax haven Corporations Base Companies Look- Through Companies Finance Subsidiaries Regional Headquarters

Structure & Function of SPEs

SPE may be structured in number of ways including separate legal entities and branches of legally constituted entities. SPE formed out of separate legal entities are in most cases wholly owned subsidiaries, and may be directly held by ultimate parent company or by an intermediate holding company of MNE (multinational enterprises) SPE that are financing subsidiaries are principally engaged in raising funds or allocating funds from one unit of MNE to another.

Location of SPE

SPE are usually located in tax havens as it offers tax advantages for investment financing and tax sheltering for income from the provision of services. Some of its characteristics are as follows Relatively low rates of tax High level of bank or commercial secrecy Modern communication facilities Absence of currency control Absence of requirements to file financial statements with Regulatory or statistical agencies It also helps to achieve other corporate objectives such as hedging forex risk, minimizing currency control.

Manufacturing SPEs

In case of enterprise performing manufacturing activity, its not difficult to see direct investment. However, tax authorities have found that some enterprises have disguised their actual activities by operating rudimentary assembly plants so as to pass for manufacturing concerns. United States, Canada etc., collect information on capital expenditures of direct investment enterprises abroad.

Other types of SPEs

It is unusual to associate SPEs with manufacturing activities, but the real SPEs are merchandising, insurance, or other financial or shipping companies. Determining the centre of their economic activities. if a Canadian company incorporates a subsidiary shipping company in Singapore, flies a flag of convenience of another country, and directs the activities from Belgium, to which country should Canadian Direct Investment abroad be attributed?

Merchandising SPEs

Merchandising companies in tax haven countries are sometimes found to be the instrumentalities of transfer pricing. Prosecutions launched by taxation authorities in Canada have revealed that Canadianbased MNEs have made use of these types of SPEs to book income in tax haven countries.

Banks

Tax havens are popular locations among banks and the more obvious reasons are the strict bank secrecy requirements, the absence of reserve requirements and the availability of modern communications. Only investment in shares, permanent debt/ loan /capital and fixed assets are the operations to be included in direct investment.

Financing Subsidiaries

The financing subsidiaries set up by the MNEs in various jurisdictions are of another type. The best known and best documented of these are the Netherlands Antilles finance affiliates of United State parent companies. In 1984, the United States direct investment position with the Netherlands Antilles constituted a negative asset position of $25.1 billion.

Holding Companies

A major category of SPEs consists of holding companies whose function is to hold investments in other corporations. These are considered financial corporations even though the investments that they hold may be in other industries such as manufacturing, mining, or merchandising. More often holding companies do not have any fixed assets in their countries of incorporation. Their physical presence in their country of incorporation may amount to no more than a set of files located in the offices of lawyers, accountants or banks. These files contain information on their incorporation, ownership and financial positions.

FDI

Entry into India

The Entry Process

Investing in India

Automatic Route General rule Inform RBI within 30 days of inflow/issue of shares Pricing: FEMA Regulations Unlisted CCI Listed SEBI Allotment within 180 days Cap of Rs. 600 Crore (approx SGD 222 million)

Prior Permission By exception Approval-FIPB

Decision generally within 4-6 weeks

The Entry Process: Automatic Route

All items/activities for FDI investment up to 100% fall under the Automatic Route except the following: All proposals that require an Industrial Licence. All proposals in which the foreign collaborator has a previous venture/ tie up in India. All proposals relating to acquisition of existing shares in an existing Indian Company by a foreign investor. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.

The Entry Process: Government Approval

FIPB Approval For all activities, which are not covered under the Automatic Route Composite approvals involving foreign investment/ foreign technical collaboration Published Transparent Guidelines vs. Earlier Case by Case Approach Downstream Investment

The Entry Strategy

Forms in which Business can be conducted in India Wholly owned subsidiary Joint Venture Company Branch Office Project Office India Presence: Liaison Office

Joint Venture

Any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective. Nature of joint venture will depend on its own facts and on the resources and wishes of parties. New business Existing business Company law, partnership law and/or contract law - taxation, intellectual property, etc.

Joint Venture (Contd)

Rationale: To limit capital investment required and exposure to risks. To reduce manufacturing costs & other overheads by achieving economics of scale. Parties may have complementary skills or resources. Established distribution/ marketing set up of the Indian partners. Established contacts of the Indian partner which help smoothen the process of setting up of operations.

The Entry Strategy: Joint Venture Company

Advantages Limited liability Market Penetration Local Partners Expertise and Experience Vital Considerations Choice of Joint Venture Partner Due Diligence

The Entry Strategy: Joint Venture Company

Vital Considerations (Contd.) Clearly defined agreement Terms of the Shareholders Agreement should be reflected in the Articles of the Company. Share Transfer Restriction in a Public Limited Company Disproportionate voting Rights: Veto Non-compete

The Entry Strategy: Branch Office

Purpose/Viability of a Branch Office Represent the business interest of foreign company For the purpose of execution of the Project Project Office is in the nature of a Branch Office set up for a particular project.

The Entry Strategy: Branch Office

Permissible activities for a Branch Office

Export/Import of goods Professional or Consultancy Services Carrying out research work in which the parent company is engaged Promoting technical or financial collaborations between Indian Companies and parent or overseas group companies

The Entry Strategy: Branch Office

Permissible activities (Contd.) Representing the parent company in India and acting as Buying and Selling Agent Rendering Technical Support to the products supplied by parent/group companies. Foreign Airlines/ Shipping Companies Issue: Project/ Branch Office Permanent Establishment

The Entry Strategy: Liaison Office

Liaison office for Promotion of business interest; spreading awareness of companys products; explore opportunities; work as channel of communication etc. Cannot carry on any commercial, trading or industrial activity or earn any income in India Is required to maintain itself out of inward remittances received from abroad through normal banking channels.

Exit Issues

Transfer of shares from non-resident to non-resident does not require RBI approval for pricing Transfer of shares from non-resident to resident does not require any FIPB Approval, though pricing has to be as per the RBI norms Pricing as per FEMA listed and unlisted securities RBI permission not required if sale through Stock Exchange Mauritius Route: Capital Gain Advantage

Investment by NRI/ OCB

Investment by NRI/OCB is treated as FDI. In some sectors like housing and real estate development, FDI is not permitted., however, NRI are allowed to invest. In aviation sector investment by NRIs upto 100% and 49% for others Investment made by the NRI/OCB is fully repatriable except in the case of infra structure & construction projects-- has a 3-year lock-in period on original investment and 16% cap on dividend repatriation.

Repatriation

Investment and return are freely repatriable, except where the approval is subject to specific conditions such as lock in period on original investment, dividend cap, foreign exchange neutrality etc as per the notified sectoral policy.

Inbound Acquisitions

Flavour of the season with a good number of deals ringing the bells of some of the finest Indian fast-growing corporate Heidelberg's purchase of 51 per cent stake in Mysore Cements, EDS Corp's acquisition of 52 per cent stake of MphasiS BFL, Holcim taking up stake in Gujarat Ambuja Cement.

M&A in India

Carefully planned and executed, Cutting through a wide spectrum of tax and regulatory issues:exchange control, income-tax, capital market regulations and so forth. Tax perspective it would be important to structure these transactions into the country in a tax efficient manner, taking into account manner of funding, and choice of the holding company jurisdiction."

Investment Abroad

Investment-contribution to the capital or subscription to the MOA of a foreign entity, signifying a long term interest Setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS)) in the overseas entity Does not include portfolio investment.

Why Indian Cos Look Beyond the Border

Attain the size factor expand assets Gain access to new customers Acquire skill set enhancement Obtain access to valuable natural resources Help achieve lower costs and better price control M&A essential for Indian Companies to go global - capturing Synergies

Eligibility

Resident corporate entities Partnership firms registered under the Indian Partnership Act, 1932 (Indian Party) are eligible to make direct investment abroad in JVs/ WOSs.

Legal and Regulatory Indian Issues

FEMA ODI permitted in Joint Ventures and WOS Not permitted in Real Estate and Banking Automatic Routes Limit Financial Commitment (equity/loan/guarantee) up to 400% of net worth Condition Permitted in Bonafide business activities only Investment not permitted in Portfolio management Regulators (Indian and Foreign) approval for Financial Services

Legal and Regulatory Indian Issues

Computation of Networth: EEFC balance- not reckoned for net worth limit ADR/ GDR proceeds not reckoned for net worth limit 100% of guarantees given by Indian Co reckoned for investment limit Sources of funding: Forex from banks Capitalisations of export proceeds Utilisation of proceeds of ECB /FCCB Swap of Shares Other Cases RBI approval

Cross border M&A Key Considerations

Identification and Commercial Legal and Regulatory Financing Tax Acquisition Structure Key considerations Other Issues

Identification and Commercial Considerations

Identifying the target Strategic need Source of Information Selection process Advisors/Bankers Selection and Role Due Diligence

Identification and Commercial Considerations (Contd)

Valuation Negotiations Takeover bids Preliminary Documentation Confidentiality Contractual Arrangements

Legal and Regulatory Applicable Laws

Company Law Exchange Control Regulations Competition Law Takeover regulations Tax regime and treaties Other Regulations Sector regulators

Financing

Internal Reserves Equity funding Public offer in India ADR/ GDRs Debt funding Bank debt Secured debt Mezzanine debt Seller financing LBO - debt Deferred consideration Earn out clause

Tax

Consideration of tax laws: India Host Country Tax treaties Direct tax Revenue Operating arrangements Revenue vs. Capital Expenses Interest - Double dip Utilisation of tax losses Dividend repatriation tax Indirect taxes Tax arbitrage from VAT via export and import

Acquisition Structure

Multiple options of acquisition vehicle Key considerations for acquisition structure Options for SPV Jurisdiction of SPV Tax incidence - Single/multiple Accounting (Consolidation) Raising of funds Local regulations Ability to push up/down debt cost Valuation of intangibles

Networth

The networth is the overall ceiling for overseas direct investment. Any fresh overseas investment can be made only on the basis of accretion to the networth. The eligible Indian Party intending to make a direct investment under the automatic route is required to fill in the form ODA supported by documents listed therein, i.e., certified copy of the Board Resolution, Statutory Auditors certificate, Valuation report (in case of acquisition of an existing company) as per the valuation norms and approach an Authorised Dealer (designated Authorised Dealer) for making the investment/remittance

Valuation

Where the investment is more than USD five million, the valuation has to be done by a Category I Merchant Banker registered with Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country And in all other cases by a Chartered Accountant/Certified Public Accountant. in the case of investment by acquisition of shares where the consideration is to be paid fully or partly by issue of the Indian Partys shares (swap), in all cases, the valuation will have to be done by a Category I Merchant Banker registered with Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate regulatory authority in the host country.

Non-Eligibility

Indian Parties which are under investigation by the Enforcement Directorate/other investigative agencies/regulatory authorities, or are on the Reserve Banks exporters caution list or are included in the list of defaulters to the banking system in India published/circulated by CIBIL/RBI are not eligible to make investment under the automatic route.

Normal Route

Proposals not covered by the conditions under the automatic route require the prior clearance of the Reserve Bank for which a specific application in form ODI with the documents prescribed therein. The parameters for considering proposals under the normal route Requests under the normal route are considered by taking into account inter alia The prima facie viability of the proposal, Business track record of the promoters, Experience and expertise of the promoters, Benefits to the country, etc.

Guarantee

Capitalization of export proceeds by an Indian Party, to its overseas JV/WOS, is permitted under the automatic route provided the export proceeds have not remained unrealised beyond a period of six months from the date of export. Such proceeds shall not be capitalized without the prior permission of the Reserve Bank. Loan and guarantee can be extended to an overseas entity only if there is already an equity participation by way of direct investment.

Share Swap Arrangement

Direct investment outside India in a JV/WOS by way of share swap arrangement can be made under the automatic route provided the valuation norms prescribed i.e. valuation of the shares is done by a category I Merchant Banker registered with the Securities and Exchange Board of India (SEBI) or an Investment Banker/Merchant Banker outside India registered with the appropriate Regulatory Authority in the host country, are satisfied. all share swap transactions require prior approval of the Foreign Investment Promotion Board for the inward leg of the investment.

Obligation of Indian Party

An Indian Party making investments abroad will have to comply with the following: receive share certificates or any other documentary evidence of investment in the foreign entity to the satisfaction of the Reserve Bank within six months, failing which an application for extension of time citing reasons for non-receipt will have to be made to the Reserve Bank. repatriate to India, all dues receivable from the foreign entity, like dividend, royalty, technical fees etc., within 60 days of its falling due, or such further period as the Reserve Bank may permit. submit to the Reserve Bank every year, within 60 days from the date of expiry of the statutory period, as prescribed by the respective laws of the host country for finalisation of the audited accounts of the JV/WOS outside India, an Annual Performance Report in form APR in respect of each JV or WOS outside India set up or acquired by the Indian party.

Annual Performance Report

This APR should inevitably be accompanied by : Copies of FIRCs in support of inward remittances on account of dividend, royalty, etc.; Audited Financial Statements of the overseas venture; Certificate from a chartered accountant in support of realization of export proceeds; A note on the working of the JV/WOS during the previous year highlighting the ups and downs, reasons for non-performance, etc. in monetary terms. In case the promoter company is unable to submit APRs within the stipulated time, an application on the due date should be made to the Reserve Bank of India seeking extension, giving reasons for the same.

Disinvestment

No prior approval of the Reserve Bank is required for disinvestment, either by way of sale to another Indian Party (which is eligible to make such investments under the Automatic Route) or to a person resident outside India, provided , The overseas concern has repatriated all its dues; The overseas concern has been in operation for at least one year and has submitted upto date APR with the prescribed documents; The Indian Party is not under investigation by any investigative/ regulatory authority; The sale is to be effected through a stock exchange where the shares of the overseas JV or WOS are listed; If the shares are not listed on the stock exchange, and the disinvestment is by private arrangement, the sale price of the share is not less than the value certified by a Chartered Accountant/Certified Public Accountant/Category I Merchant Banker registered with SEBI. The above conditions are applicable even when an Indian Party wants to windup/close its existing JV/WOS

Documents

The Indian Party may apply for disinvestment to the designated Authorized Dealer/Reserve Bank (in case the proposal is not eligible to be considered by the Authorized Dealer) with the following documents/information : Letter giving the reasons for the disinvestment; Latest Annual Performance Report on the working of the JV/WOS; Certified true copy of the Board Resolution approving the disinvestment and indicating the amount of disinvestment approved; Letter of offer from the purchaser; Consent letter from the partners in case of disinvestment of share in a JV abroad; Valuation certificate on the value of shares of the JV/WOS; Certificate from a Chartered Accountant certifying that no dues are outstanding to the Indian party or indicating the details of dues, if any, from the JV/WOS to the Indian party.

Others

Listed Indian Companies can invest upto 50 % of the net worth in overseas companies, listed on a recognized stock exchange

LEGAL ISSUES IN

DIFFERENT COUNTRIES

Legal Issues - Singapore

Seller on SGX-ST Disclosure obligations? Impact on buyer of receipt of information? Approvals?

Legal Issues - Singapore

Competition Law Relevant Market share Extraterritoriality of the Act

Legal Issues - Malaysia

Distribution of information memoranda securities law restrictions Take-over Code Issues Upstream acquisitions Mandatory general offer minority squeeze out? Duties of directors in relation to takeovers Substantial shareholding reportings

Legal Issues - Malaysia

Limits on Foreign Investment Foreign Investment Committee (FIC) Guidelines Distributive Trade Guidelines

Legal Issues - United States

SEC Filings Shareholders in the U.S.? Exemption available for offer to purchase shares? Is any consideration in the form of shares Exemption available for this issuance? Tender Offer Rules Hart-Scott-Rodino Act

Legal Issues - India

Indian Acquirer Disclosure obligations if listed Shareholder approval if investment exceeds statutory Thresholds - need for intermediate subsidiary Net worth requirements for cross border acquisitions Constraints on liquidation of cross border holdings

Disclosures as Per Indian Laws

Approval of the Board Disclosure to the Stock Exchange Shareholders/Lenders Approval Takeover Regulations Insider Trading Regulations Committee of Directors Annual Business Plans

Structuring - Cross Border Transactions

Outbound Investment Listed Company(India) Holding Company (USA) 100% Operating Company(USA)

Inbound Investment Promoter Group(UAE) Holding Company (Mauritius) 100% FIPB Approval Operating Company (India) Real Estate Project (SPV 1) Real Estate Project (SPV 2)

CASE STUDIES

OUTBOUND

BHARTI- MTN

Structures

MTN merging with Bharti.-Involve issue of shares to the shareholders of MTN and part settlement in cash. Company Act allows a foreign company to get merged with an Indian company Swap of shares permitted under FEMA FDI limit in telecom sector - 74%.--Offering shares to MTN shareholders, will increase the foreign shareholding in Bharti

Structures

No waiver possible from FIPB BBEE norms in SA requires at least 20% of the capital of the merged entity to be with black investors MTN Chairman-Cyril Ramaphosa-wanted MTN to be the holding and not a subsidiary Approval from 21 Telecom regulators of different countries where MTN is operating

Structures

Counter proposal by MTN Board- MTN shareholders to be given majority share in Bharti Not in the interest of minority shareholders of Bharti Cost to Bharti around US$ 50 billion for a full stake Listing Bhartis shares in JSE- to be offered to MTN shareholders

Structures

Buying out most of MTNs public shareholders by offering cash key institutional shareholders can be offered Bhartis shares No need for listing in JSE-Equity dilution can be kept down Listing in JSE may help loading debt in MTNs books

Strategic Perspective

Geographical diversification Increase in customer base across the globe India has the lowest telecom tariff Unique Business Model -steady operating margins and profits Entry of several new players in teleocm space

Strategic Perspective

Extremely cost efficient operation EBITDA margin -45% for both ARPU-is $9 for Bharti and $ 16 for MTN Bharti Could also help in reducing costs through its unique business model Merged entity could reduce prices and increase market penetration in countries where MTN has operations

R COMM- MTN

Structures

Present shareholding in RComm Ambanis -66% Foreign shareholding - 13% Public - 21%

Structures

R Com (Ambanis) to transfer 66% to MTN shareholders RCom gets 34%(majority holding) in MTN and 20% indirect holding in R Comm Open Offer to the shareholders of RCom Share swap and offer to minority shareholders in cash

Structures

Deal requires approval form Indian, SA and 21 other countries where MTN is operating Exposure to SA political risk MTN presence in Iran & Sudan MTN may demand higher premium Doubts on having a management control FDI limit -74%- Only 61% can be offered.

INBOUND

RANBAXY-DAIICHI

Strategic Perspective

Sankyo -1899-selling digestive tablets Daiichi-1915-anti syphilitic drug Merger in 2005 Japanese pharma sector Reliance by the Japanese on licensing arrangements with western pharma companies for selling their brands Direct marketing by Pfizer in Japan led to consolidation among Japanese companies to cut losses and avoid entry by the foreigners Japanese firms started looking at acquiring generic manufacturers

Structure

Daiichi- second largest drug manufacturer in Japan to take 50.1% stake in Ranbaxy 34.8% from promoters (Rs 10000 crores) 20% through open offer allotment of convertible warrants

Push Factors for Ranbaxy

Strategy of pushing off-patent generic drugs in US faltered due to cost of fighting expensive litigation Debt of about $600m in Ranbaxys books Promoters shares pledged as collaterals Subdued financial performance in the last 2-3 years Cash from the deal -financial services, healthcare

DOMESTIC

Idea - Spice Communication

Idea Cellular(ICL) -acquire 40.8% in Spice Communication ICL along with Telekom Malaysia International to make an Open Offer - 20% Non-compete fee of Rs 544 crs to promoters of Spice Eventually Spice to merge with ICL Swap ratio: 49 shares of ICL for every 100 shares of Spice Preferential allotment (14.9% of post merged capital)to TMI

Idea - Spice Communication

Strategic perspective: Quick exit by Spice- permission rejected for pan India presence by TRAI Increased Competition -reduced returns Idea gaining entry into wireless markets in Punjab & Karnataka( acquisition advantage Vs launch of operations independently) Result in 11% of the total wireless market-Indias 5th largest mobile service provider

CHALLENGES

Challenges

Unity -CEO and the next level of employees Real reason to be communicated upfront Post integration-(unknown fear and loss of authority) Competency level of the senior management in the merged entity Removing mistrust right at the beginning

Quotes

When the territory of the king (the market share of a company) declines leading to a fear in the mind of the King(CEO) that he will not be able to survive the opponent/competition, it is better for him to submit to an alliance with a stronger king(company) A whole sea of troubles will disappear the moment a knowledgeable mind collects itself to face them Change willingly before life forces you to do so unwillingly