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Theme Presentation
November 2005
Agenda
Part I: India and the global economy Part II: The trends Part III: The Regulatory Framework Part IV: The Tax Framework Part V: Concluding Remarks
US and Europe are expected to grow at 2-4% Brazil, Russia, India and China are going to be the next big drivers of the global economy In less than 40 years, the BRIC companies could be larger than the G6 in dollar terms Among BRICs, India will be the fastest growing and will rank behind China and USA by 2033 GDP of BRIC countries, in 2003 US$bn, Source: Goldman Sachs BRIC report
Higher growth will lead to higher returns Increased demand for capital will mean more fund flows in these countries Accompanying shifts in spending would provide significant opportunities for global companies
FDI (USDmn)
Why India ?
Sweeping reforms post liberalization Cost competitiveness Large scientific research capabilities
Dismantling Protectionism
Average imports tariffs have reduced from 53% in 1988 to 18% In 2002
- Avoid direct government
banking, insurance and securities - Securitisation Act - Strengthening creditors rights, debt restructuring efforts
Strong Infrastructure
involvement - Allowing FDI - Sound regulatory framework (TRAI, CERC) - Introduction of competition
Fiscal Reforms
compliance
Disinvestment
BALCO, CMC, Maruti Udyog, GAIL, ONGC, NTPC - Progress by state governments as well
Globalisation
Increasing participation limits for FII and FDI in different sectors Lower custom tariffs leading to competition and lower prices More than half of cost diff between India & China is on account of high tariffs and taxes FTA with Thailand, CECA with SG, moving towards pact with ASEAN
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
Price structure comparison between India and China: higher taxes main difference
100 14-16
4-7 3-4 2-5 2-5 67-72
India
Indirect taxes
Import duties*
Labour Produc-tivity
Interest costs
Others**
China
FY06
More than 100 companies outsource R&D facilities from India GE, Monsanto, Eli Lily, to name a few have largest facilities outside US, in India
Well established IT and ITES services market with CAGR of > 50% in last 5 yrs
IT exports touch US$ 22bn in 2004, form 20% of total exports (goods+services)
Skilled workforce: 0.36m engineers are certified every year
1400 1200 1000 800 600 400 200 0 FY 98
Source: GOI
FY 99
FY 00
FY 01
FY 02
FY 03
Significant milestones in infrastructure developments over last 5 years New Telecom Policy of 1999 led to rapid penetration of telephony Government initiated NHDP at a cost of US$13.2bn (Phase 1&2) until 2008 Phase 3 to add another 10,000km by 2012
Electricity Act 2003 improves investment scenario in power sector US$ 62bn of investments only in generation until 2012
Development of new airports and upgradation of major airports Private sector participation in ports Increased investments in mining (oil & gas, coal, minerals) NELP progressing well
Private / Foreign participation in iron ore, coal into last lap of evolution
Almost half the population is under 25 years Literacy levels among young significantly high Impact of mass media is potent Legacy savings nest of US$600bn+ Time to ditch the adage Indians live poor but die rich
Literacy levels
(%)
Age profile
2003 84.3 76.9 67.9 58.6 45.2 2002 76.1 70.2 57.4 46.9 36.9
10
Rising share of spend on new services and lifestyle Savings rate remains high @ 24% Penetration of media, higher literacy and a nascent credit culture underpin the transition
Urban
Other food 20% Vegetables 4%
Clothing & footw ear 8%
11
Universal restructuring : Top 100Midcap 200 down to SMEs Relearned the mantra post liberalisation: ROCE > WACC ! Focus on de-gearing and free cash flows Operating rates near peak Cement, Automobiles, Steel, Mining, Electricity Well positioned for modular, high yield capex phase Job creation - Manufacturing renaissance
Textiles, Tourism, Pharma R&D, Ad industry joins IT/ITES in globalisation/ outsourcing PSUs : employment boomers of 70s to retire over next 3-5 years
(Rs bn)
12
13
Source: A T Kearney
14
Strong rally in the market in spite of minor hiccups along the way Superior returns attracting increased FII participation
15000
9000
Equity Mutual Funds have emerged as strong players with AUM of about USD12 bn
-15000 Jan-05
Aug-05
15
110
10 0
80 -10 50 -20
May-93
May-94
May-95
May-96
May-97
May-98
May-99
May-00
May-01
May-02
May-03
May-04
driving investments
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May-05
(% chg YoY)
Companies are tapping primary Primary Market Issuances equity markets for financing a First half of 2006 has already witnessed issuances of over USD 1.6 bn large number of expansion with many more issues in the pipeline Issue Amount USD mn No: of issues projects 6000 50
Issue Amount
4000 3000 2000 1000 0
FY 2001 Source: Prime Database FY 2002 FY 2003 FY 2004 FY 2005 * Data till September 30, 2005 FY 2006*
30
20 10 0
Virtuous cycle of larger IPOs leading to increasing inflows by QIBs; especially FIIs Primary markets remain active with a total of USD 1.7 bn equity raised by 35 companies in first 6 months of 2005-06 The primary market will continue to remain active with a strong pipeline of issues expected to hit the market
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No. of Issues
5000
4,915 4,087
40
Overseas fund raising options Break up of Equity Capital Issuances GDR and FCCB gaining Significant international investor participation through DRs and FCCBs IPO/FPO DR FCCB 100% significant popularity
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY 04 FY 05 FY 06*
84.10% 12.11% 22.77% 12.90% 3.00% 32.56% 40.63%
55.33% 36.60%
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June 2005
Facility consists of a USD, Euro and JPY tranche Reliance Industries Limited
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July 2005
Conversion Premium of 50% 5 yr, Zero Coupon, Bullet deal with issue at par Redemption Premium of 126.77% ; YTM 4.8% Call Option after 3 years with 130% hurdle and no greenshoe EUR 50,300,000 Motherson Sumi
FCCB Offering
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Large number of companies in India are looking at achieving growth through acquisition of companies in the US, Europe and Asia
Key aspect of acquisition of the customers of the target Creation of value through usage of the manufacturing set up at a lower cost Indian location
The potential Indian acquirers are evaluating the available opportunities on the following criteria
21
Indian Corporates are Seeking International Acquisition Opportunities to Reach Global Size
Target Name Acquirer Name Date Announced Total Value (USD mn) Industry
Jun 05 Aug o4
291 284
Manufacturing Steel
Oct 03
Nov 04 Nov 04
191
157 130
Telecom
Software Telecom
Nov 03
118
Auto
Jun 04
97
Textile
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International Companies are also Seeking a Foothold in the Growing Indian Market
Target Name Acquirer Name Date Announced Total Value (USD mn) Industry
BPL Mobile Cellular Ltd I-flex Solutions Ltd Indian Phone Ventures ACC GECIS Global Aircel Televentures Ltd Flextronics Software Sys Ltd Digital Globalsoft Ltd
Hutchison Telecommunications Oracle Corp Hutchison Telecommunications Holcim US Based Private Equity Firms Afk Sistema Flextronics Intl Ltd Hewlett-Packard Co
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In-bound M&A in sectors like IT/BPO, telecom and manufacturing Outbound M&A in pharmaceuticals, auto & auto ancillary, textiles, oil & gas
Outbound Total
23 47
1338.4 1920.1
21 33
668.1 784.4
30 51
1081.4 1537
Source: Bloomberg; includes only completed transactions; average size and range calculated on deal values that are Publicly announced
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Well entrenched capital markets and ease of transactions ensure smooth exits for PE players
25
March 2000
Tata Tea Limited Acquisition of 100% equity stake in Tetley Tea (UK)
SPV created to ring fence risk with equity contributed by Tata Tea and Tata Tea Inc
INR 21,350,000,000
Debt of 235 mn pounds raised in the form of long term debt and revolver; charge against Tetleys brand and assets
26
December 2002
Sets up a joint venture with Benda Kogyo, Japan for manufacture of flywheel ring gears and flexplates
Acquisition of 100% equity stake in Smith Jones, Inc. (USA) Rs358,010,000
Acquires
Smith
Jones,
Inc.,
leading
Acquisition catapults Amtek Auto into number three producer of ring gears in the world and provides access to key OEM customers
27
Largest investment in the Indian telecom sector by overseas player (Deal Size: Rs 6700 cr)
September 2005
Rs 21,350,000,000
Exit for Warburg Pincus who originally invested US$ 300 mn for 18 % in 1999-2001
28
29
Portfolio Investment by institutional investors through Securities and Exchange Board of India Regulations
Foreign Direct Investment is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling FDI for virtually all items allowed through the automatic route under powers delegated to the Reserve Bank of India (RBI) and for the remaining items through Government approval
Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB)
Automatic Route Through RBI Foreign Direct Investment Approval Route Through FIPB
30
Unlisted entity
Fair valuation of shares to be performed by a chartered accountant as per the Guidelines issued by the Controller of Capital Issues Listed entity
If the investment is made in a listed entity, the Acquirer needs to comply with various provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997
31
100% in all infrastructure projects, drugs and pharmaceuticals, hotels and tourism, etc Currently at 74% in banking, telecom services, exploration and mining 49% in civil aviation 26% in insurance
Foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to foreign investors
RBI Notification:
Notification by the company to the RBI within 30 days of receipt of inward
remittances
Filing the required documentation within 30 days after issue of shares
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33
plus cess: 2%
plus cess: 2%
percentages of expenditure
cess: 2%
34
Facilitation of R&D
Weighted deduction benefit for biotechnology, drugs and pharmaceuticals Tax advantage of 7-8% as against 35% in developed countries
Share buy-back Shares transferred under open offer Sale/transfer of shares under SEBI approved routes
35
Foreign Dividends and Capital gains Dividends from foreign subsidiaries taxed at 35% Profits from foreign subsidiaries taxed at 20%
Foreign Income in a country with a tax rate lower than tax rate applicable to resident shareholders is classified CFC CFC is taxed at the rate applicable to resident shareholders
36
37
Recap
India occupies a favorable place for foreign investment Indian corporates are looking at opportunities abroad Financial innovation has spawned a host of products
Foreign Investment in the form of FII/FDI FII Investment requires SEBI registration FDI Investment through (a) approval and (b) automatic route Indian and Foreign corporates taxed differently Tax structure needs to be streamlined to facilitate cross border transactions
38