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KPMG.com/in
Financing the Growth of IndiaBreakout session Netherlands-India Business Meet (NIBM)
31 May 2016
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Today’s Presenters
Function: International Tax and Regulatory Services
Role: Partner
Mobile: +91 9810583215
Email:nmaheshwari@bsraffiliates.com
Function: Transaction Services, Amstelveen, the Netherlands
Role: Partner
Mobile: +31 65 207 87 89
Email: mikkers.ruben@kpmg.nl
— A Chartered Accountant with a diversified industry experience of 15 years and a focus on technology, media, telecom and financial services sector
— Has extensively advised companies on corporate tax, entry and exit strategy, inbound and outbound investment structuring and devising tax-efficient ownership and operating structures
— A CFA, CMA and CFM with a wide sector experience, including industrial markets, consumer markets, chemicals, pharma and healthcare
— Has been involved in various engagements such as vendor due diligence projects, buy-side due diligence projects and independent business reviews
Nidhi Maheshwari Ruben Mikkers
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IndiaA bright spot in the global economyPolicy reforms and recent growth in investments to drive India’s growth
Source: IMF forecasts (%)
2.6
1.7
1.0
2.2
-3.5
-1.0
7.5
6.3
2.6
1.7
0.3
2.2
0.0
1.0
7.5
6.0
-6 -4 -2 0 2 4 6 8 10
2017 2016
U.S.
Euro
Japan
UK
Russia
China
India
Brazil
The International Monetary Fund (IMF) predicted that India would retain the status of the fastest growing large economy until 2020
India emerged as the top FDI destination in
2015, receiving USD 63 billion
GDP Growth Rate (%)
4
Macroeconomic Overview
Economy size of USD 2.4 trillion
Total Foreign Direct Investment of USD 250+
billion since April 2000
Labour force by Occupation:
Services – 31%Industry – 20%
A jump of 4 ranks in the Ease of Doing Business ranking in the last year
Main Industries:• Software• Agriculture• Construction• Pharmaceuticals• Life sciences• Textiles
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IndiaAn Insight
Gujarat
Andhra Pradesh
Jharkhand
Chhattisgarh
Madhya Pradesh
Rajasthan
29 States7 Union Territories
Population 1.26 billionA competitive environment among states encouraging
overall economic and inclusive development
Textile, Ports
IT/ ITES, Biotechnology
Minerals
Steel, Power
Auto, Cement, Tourism
Glass wares, Leather
Odisha
Maharashtra
Chemical, Aeronautical
Pharmaceuticals, Oil and Gas
Top performing states as per World Bank’s report on Ease of Doing Business in India
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Why Invest now in India?A Land of billion opportunities
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Flagship programs/ missionInvestment initiatives undertaken by India
GlobalGlobal
European
‘Make in India’• India as a
manufacturing destination
• Investors include German SMEs, Safran and Schindler
‘Digital India’• Establish branches
and R&D centres for foreign tech firms
Foreign direct investment• Undertaken
relaxation of policy in 15 sectors
• Further reforms proposed under budget 2016–17
Foreign portfolio investment• Focus on
simplifying the registration process
EU-India Agenda for Action-2020
• Endorsed at the Brussels summit (2016)
• To strengthen partnership
EU-India Broad-based Trade and Investment
Agreement • Under negotiation since
2007
Startup Europe India Network (SEU-IN)
• Launched in Jan 2016 to connect the European and Indian start-ups
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Flagship programs/ missionHow does it benefit Dutch Investors?
Make in India
• 25 growth sectors identified viz. IT, automobile, pharma, infrastructure, renewable energy etc.
• 10% capital subsidy
Start-up India
• Tax holiday for 3 years• Capital gains tax exemption• Self-certification scheme• EUR 1332 million (approx.) corpus for funding
of Start ups
• Focus: Small and Medium Enterprises
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Flagship program/ missionHow does it benefit Dutch Investors?
Digital India
Smart Cites
• Aims to enhance investment in the technology sector
• 3 core components: creation of digital infrastructure, digital service provision and digital literacy
• An opportunity for Dutch companies to collaborate with the Smart City project viz. development of adequate water supply, urban mobility, robust IT connectivity, sustainable environment, health and education
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Flagship program/ missionHow does it benefit Dutch Investors?
• Applying for industrial license made online on 24*7 basis
• Single window E-biz portal• No minimum paid-up capital• Facilitation Cell created to guide, assist and
handhold investors during the entire life-cycle of the business.
Ease of doing business
Opportunities galore for Dutch investors especially for agriculture, telecom, city and waste management, construction, development etc. facilitated by
Ease of Doing Business initiatives
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Indian High Growth Sectors
• Indian food and grocery market world’s 6th largest
• Food retail market expected to reach USD 900 billion by 2020
• Plans to set up 42 mega food parks in next 3-4 year
• 100% FDI in sectors such as horticulture, floriculture, animal husbandry etc.
• USD 1,000 Bn in 12th 5 yr plan
• Increasing private sector participation and Domestic Demand
• 100% FDI allowed
• Huge untapped potential
• Energy Security
• Climate Change Considerations
• 100% FDI allowed
Food and Agriculture Infrastructure Renewable energy
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High Growth Sectors
• Regulatory reforms
• Infrastructure Financing
• Insurance/ Pension –Automatic < 49%
• Banking – 74% FDI (up to 49% automatic)
• Liberalization of policies
• Evolution of private sector
• 100% FDI allowed Automatic < 49% if foreign investor brings state of the art technology
• IT exports expected to grow three fold
• Huge potential for remote infrastructure management, testing and knowledge services
• Emerging new trends –Cloud, Green IT , etc.
• 100% FDI allowed
Financial services Defence IT/ ITes
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Trade missions from Europe to India
April2016
June 2015
October 2015
Enhancing cooperation across sectors such as infrastructure, agriculture, smart cities, renewable energy and waste energy
January 2016
March 2016
Maintaining export relationship in diamonds and extending it to clean technology, infrastructure and smart cities
Signing of an MoU aimed at increasing bilateral trade
Exploring partnership options across IT, defence, renewable energy and aerospace sectors
Enhancing exports and understanding the banking and cybersecurity environment of India
Enhancing imports from the Indian agro sector
Signing of multiple MoUs in the manufacturing, aviation security, and science and technology sectors
Netherlands
Germany
Poland
UK
France Belgium
Luxembourg
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Investing into India
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• Greenfield Investment
• Acquisition• Joint Venture
Investing into IndiaPreferred Financing Options
Preferred Financing Options
Portfolio DebtStrategic
Investor Group
Funding Option
Mode of entry
FDIEquity sharesCompulsorily Convertible Preference shares/ Debentures
Holding Companies
JV Partners
Normally invest in Capital markets
Listed securities
Foreign Institutional Investors
Qualified Foreign Investors
• Financing• Loans
External Commercial BorrowingsBondsRupee Denominated Bonds
Foreign Equity Shareholders/ Group companies
Multilateral Agencies
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36.3% 29.4%45.3%
21.1%
41.6% 19.1%
16.8%
13.4%14.8%
12.6%
3.9%8.4%
9.6%
7.2% 7.9%
3.6%
4.5% 4.4%
4.5
6.8 6.7
2012-13 2013-14 2014-15
€b Switzerland
Cyprus
France
Germany
UK
Netherlands
Investing into IndiaFDI and commercial loans
Energy66.4%
SMEs16.8%
Transport16.8%
FDI inflows by top six countries in the EU
36.1%
15.8%
14.4%
(0.9)%
10.5%
36.8%
The Netherlands accounted for the largest amount of FDI inflow to India in FY14
21.8%
CAGRFY12–14
• Europe accounted for one quarter of the FDI inflow to India during April 2000–June 2015
• India is amongst the top ten countries for attracting the highest FDI (2014 and 2015)
FDI inflows in India Commercial loans to India
EIB financed amount on projects
Finance amount by sector, 2011–YTD 2016
100% = €1,190 m
Projects under appraisal (2010–YTD 2016) worth €561 million
200 190
500
100200
2011 2013 2014 2015 YTD 2016
€m
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Investing into IndiaPreferred forms of business presence
Modes of Business Operation
Setting up of a business presence Technical collaboration
Different forms of business presence such as:
• Company/Joint Venture/Wholly owned subsidiary
• Branch office/Liaison office/ Project Office
• Limited Liability Partnership (LLP)
• Imparting technical know-how
• Providing technical assistance in research, training
• Consultancy services
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Investing into IndiaPreferred Investment Jurisdiction
Mauritius/ Singapore
Indian Co.
Share of Top Investing Countries
Mauritius
Singapore
United Kingdom
Japan
USA
Netherlands
95, 910
45, 880
23, 108
20, 966
17, 943
17, 314
33%
16%
8%
7%
6%
6%
Amounts in USD in million as on 31 March 2016
• Taxation rights of capital gains accorded to India• Service Permanent Establishment, Fee for Technical Services clauses
introduced
Impacts India- Singapore tax treaty as it is co-terminus with Mauritius tax treaty
19
Structuring OptionsPost India – Mauritius Treaty amendment
Dutch Co
Indian Company
Capital Gains tax exempt on transfer of shares in an Indian Company, subject to conditions
The Netherlands
India
Investors exploring other jurisdictions such as Netherlands, Sweden, France, Korea, Spain etc.
Indications to move from residence based to source based taxationPossibility of renegotiation of India – Netherlands tax treaty?
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Alternative OptionsLimited Liability Partnerships
Dutch Company
Repatriation of profits
Designated Partners
Dividend Distribution Tax
of 20.36% Indian LLP
Dutch taxation aspects for consideration:
Foreign Investment Policy significantly relaxed
Enables tax free profit repatriation
Benefits
Simpler compliances
• Characterization of profits repatriated from Indian LLP• Characterization of interest on capital• Eligibility to avail Dutch participation exemption?
Interest onCapital
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Recent Tax Updates
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Recent Tax UpdatesIndirect transfer – Draft Computation Rules released
Draft rules for computation of Fair Market Value, proportionate taxation released
US
India Company
Overseas
Dutch SPV
India
Buyer
Sale of shares of Dutch SPV
Transfer of shares or interest to be taxable in India if directly or indirectly, its value is substantially derived from assets in India
‘substantially derived’ at least 50% and exceeds EUR 1.3mn (approx.)
23
Other Tax Updates
No requirement of Permanent Account
number
Place of Effective management
(POEM)
Rationalisation of tax measures
General Anti-Avoidance Rule
(GAAR)
Foreign Companies may provide alternative documents to avoid higher withholding tax rate
Applicable from 1 April 2017
Applicable from 1 April 2017
Legal framework to be provided for paperless assessment
Penalty provisions rationalized; Immunity provisions on payment of tax and interest and no appeal
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Other Tax Updates
Foreign companies – Filing of tax
returns in India
Consultative process of policy
making
• Stringent penalty provisions introduced on non-filing of tax returns
• Penalty – 50% of tax payable without giving credit of taxes deducted in India
Public comments invited for major policy changes e.g. rationalisation of tax measures, POEM etc.
Advance Pricing Arrangement
• Tax certainty for 9 years possible• Roll back possible
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Other Tax Updates
Equalisation Levy
Country by Country Reporting
• Payment to non residents for online advertisement, provision of digital advertising space etc. to get impacted
• Introduced by a separate code in the Finance Act – Not part of the Income tax Act
Three-tiered Transfer Pricing documentation structure introduced by Finance Act 2016, in line with BEPS Action Plan 13
New Patent regime • Royalty income to be taxed at concessional rate of 10%, subject to conditions
• No Minimum Alternate Tax on such income
26
Key Regulatory updates (1/2)
Modern Bankruptcy and Insolvency law
• Ease in winding up of a Company and in recovery of debts
• Time limit of 180 days proposed for completion of the process
Liberalisation of Foreign Direct Investment scheme
• Major relaxations (investment limit, investment route) in most of the sectors viz. agriculture, insurance, stock exchange, defence, telecom, media etc.
Real Estate Bill passed
• Major step towards reviving the real estate sector to attract more foreign investment
New Intellectual property policy
• Encouragement for IP creation and registration further supported by tax incentives
27
Key Regulatory updates (2/2)
Ind AS reporting framework
• A step closer to being IFRS compliant• A significant move to improve the appeal of
Indian companies to foreign investors
New Companies Act• Reduced compliances• Increased focus on Corporate Governance
Goods and Services Tax
• Lower cost of doing business• A move towards making export competitive• Prices expected to come down, benefit for
companies as consumption may increase.
Defense Procurement Policy
• An important step towards clarifying the various ambiguities in the defense sector
28
India – Netherlands Social Security Agreement
India Netherlands SSA was signed on 22 October 2009 and came into effect on 01 December 2011. It provides for following benefits:
Detachment • Avoidance of double social security
contributions
• Benefit available for a period of 5 years
• Mandatory to obtain a Certificate of Coverage from the respective authorised agencies of India and Netherlands
Exportability of pension
• The benefits acquired under the legislation of one country will be exportable to the other country
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Deal flow
30
Actual deal flow into India: Questions
1 How many M&A deals (European acquirer and Indian target) were done in 2014 and 2015?
2 Is the trend rising, declining or stable?
31
Actual deal flow into India
76 79
119 112
7690 86 93 101
80 84
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Number of completed deals (2005–15)
Number of completed deals (2005–15) EBITDA Multiple (2005–15)
EBITDA Multiple (2005–15)
E2I deals
B2I deals
5
13
5
9
3
119
68
7
14
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
15.5x
24.8x
15.9x 15.2x 12.7x
18.6x 20.7x
22.7x 25.3x
6.7x
15.5x
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
2.2x
50.7x
9.2x 4.1x 7.4x
1.7x
12.3x 6.7x
32.0x
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Benelux region accounted for 15% of the E2I deals in 2015
32
Actual deal flow into India – Key sectors
E2I deals
B2I deals
Industrials21%
Consumer16%
Chemicals and materials
13%Financial Services
10%
Telecommunication, Media and
Entertainment3%
Technology13%
Energy and Power8%
Healthcare6%
Services5%
Others5%
Industrials24%
Consumer16%
Chemicals and materials
15%
Financial Services13%
Telecommunication, Media and
Entertainment9%
Technology8%
Energy and Power7%
Healthcare5%
Others3%
Industrials20%
Consumer40%
Financial Services20%
Services20%
Industrials10%
Consumer30%
Chemicals and materials
10%
Financial Services10%
Technology10%
Energy and Power10%
Services20%
2005 2015
2005 2015
Industrial and consumer sectors continued to dominate deal activity in Europe as well as Benelux
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Wrap-up
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Key Takeaways
Indian economy, backed by sound policy reforms and increased investor confidence, on an exponential growth trajectory
Competitive environment among states encouraging the overall economic and inclusive development
Flagship programs such as Make in India, Digital India, Smart Cities etc. leading the path of unprecedented investment and business opportunities
Liberalisation reforms in various sectors helping in overall balanced economic growth
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Key Takeaways
Increased Investor interest in exploring alternative jurisdictions such as Netherlands in the light of India – Mauritius tax treaty amendment
Further clarity on evaluating tax impact on indirect transfer of shares thereby avoidance of tax disputes like Vodafone
Clear intent of tax authorities to rationalize tax measures and ease out burdensome tax compliances
Ease of doing business initiatives vis-à-vis easy entry, streamlined business ecosystem and faster exit scheme
36
Questions
1 What else could be done?
2 What could India do to attract more capital?
3 Which form of ‘financing the growth’ is preferred?
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Thank you
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