India WatchIssue 15 January 2012

Anuj Chande Partner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 E anuj.j.chande@uk.gt.com

In association with

Welcome to the Winter edition of Grant Thornton’s India Watch, in association with the London Stock Exchange.

the renewable sector in India, explaining why private equity investment into Indian renewable companies increased five-fold in 2011.

Lastly, Saurabh Mathur from Walker Chandiok & Co, gives us an update on the Companies Bill 2011 which was expected in the Winter session, but it is now expected to be finally passed in March 2012.

If you would like to discuss any of the matters arising in this issue or how Grant Thornton’s South Asia group can help you please contact me.

In this issue we highlight that Indian SMEs outperformed other small caps on the London markets in 2011, despite an overall muted performance across all indices. Mergers and acquisitions and private equity activity also remained robust throughout 2011 amidst the ongoing global economic woes, rising domestic inflation and interest rates, and the weakening of the rupee; there were a total of 961 deals with a total value of US$51 billion in 2011.

We look back on India’s economy in 2011 as we enter what will hopefully be a more promising year for many of the world’s economies.

Our guest contributor, Gurpreet Gujral of Brewin Dolphin outlines the state of play of

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London stock markets still attractive for Indian small caps, despite slowdown

Indian SMEs outperformed other small caps on the London markets in 2011, despite an overall muted performance across all indices. Year-end figures suggest the UK capital is still a strong contender for Indian businesses seeking markets in which to raise finance.

The Grant Thornton India Watch* Smaller Caps Index fell by just 11.27% during the year, compared with falls of 27.26% on the FTSE AIM 100, 25.75% on the FTSE AIM All-Share and 21.22% on the FTSE AIM UK 50.

Less risky large and mid-cap investments were also affected as investors grew nervous about a number of factors including continued slow economic growth in the West and a spreading of the eurozone sovereign debt crisis. The FTSE 100 fell 5.55% and the FTSE/ASEAN Index fell 7.37%.

The India Watch Smaller Caps Index seems to have benefited from the general shift among investors towards emerging markets in the hope that they would prove more resilient than developed markets. While the value of emerging markets investments may still have fallen, investors are hopeful that returns will bounce back faster than other investments when growth finally recovers.

No real sector trends emerged from the year-end figures for the India Watch Index. While the highest climb was in support services and the

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biggest fall in travel and leisure, most sectors were represented among the winners and losers.

iEnergizer, a call centre operator and supplier of outsourced back office processes, had a sterling first full year on the London markets after floating on the London Stock Exchange in September 2010. It gained 53.95% during 2011, the year’s top climber on the India Watch Index. It was also one of the top three climbers in Q4 2011, gaining 17.20%.

Interim results for the six months ending 30 September 2011, released last month (December 2011), showed iEnergizer’s revenue up 33.6% on the year to US$30.5 million and profit after tax up 32.6% to US$9.5 million. Non-executive chairman of the board Sara Latham said the increase was down to organic top-line growth and tight control of operating margins.

Investors have so far been happy with iEnergizer’s performance and, in December, the company raised £7.14 million through a placing of 3 million new ordinary shares. The extra funds are likely to be used, in part, for acquisitions after CEO and founder Anil Aggarwal said such a deal was needed to take the company to the next level.

Other full-year climbers on the India Watch Index include Alpha Tiger Property Trust (18.75%) and EIH (18.18%), an Isle of Man-based financial services company that offers investors access to a diversified Indian private equity portfolio.

The year ended on a low for hotel and restaurants group India Hospitality Corporation (IHC), which fell over 12 months by 88.21% – the index’s biggest loser. Against the backdrop of a flat year for India’s hospitality sector, IHC has continued to make losses albeit a significant reduction of 51.9% on the year, indicating a move in the right direction, led by an experienced and ambitious management team.

Other major losers on the India Watch Index in 2011 were real estate company Trinity Capital and media group DQ Entertainment, which fell 69.23% and 67.32% respectively.

Trinity Capital, which is seeking to divest its investments and return funds to investors, delivered a downbeat interim statement in December. An economic slowdown in India was leading to a reduction in the pool of potential buyers for its investments, it said. A seven per cent depreciation of the rupee against sterling had also led to an 11% decline in the £71.9 million value of its portfolio.

DQ Entertainment’s share price fell steadily through 2011 from around 132 pence at the beginning of the year to around 41.5 pence in early January 2012. The animation group has been struggling to bring widening net losses under control.

Last year may have ended under par but many market watchers are surprisingly upbeat about what 2012 holds in store for equities. While performance in the first half of the year will continue to be volatile, many predict an eventual resolution of the Eurozone crisis. There are also hopes that control over inflation in China will give all emerging economies an added boost. The India Watch Index will benefit from both developments. Year-end figures in 2012 should offer more reason for good cheer.

Anuj Chande Partner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 E anuj.j.chande@uk.gt.com

* The India Watch Index consists of 31 Indian companies listed on AIM or the Main Market (excluding GDRs). We only consider companies to be Indian if they are domiciled in India and/or foreign companies holding Indian assets or Investment companies with Indian promoters. The index has been created via Datastream, a Thomson Reuters product and is weighted by Market Value. To avoid distortion of index trends, the two largest market cap entities, Essar Energy and Vedanta Resource, are excluded.** Data sourced from Thomson Reuters.

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Half yearly trend: While deal activity during H1’2011 echoed that of H1’2010, H2’2011 has seen relatively lower activity, reflecting fears over the economic dynamics of the European region. Nevertheless, deal volumes remained robust throughout the year. Importantly, the average size of deals where value was disclosed remained the same at approximately US$190 million.

M&A - Inbound bucks the trend: A notable trend reversal was observed in cross border M&A with focus shifting from outbound to inbound. Six out of the nine billion-dollar deals in 2011* were inbound, primarily owing to premium valuations received by Indian targets. The backdrop of stagnating economic activity in the west and the

India M&A and PE 2011: Resilience amidst odds

Amidst the ongoing global economic woes, rising domestic inflation and interest rates, the weakening rupee and a volatile Sensex, 2011* has contributed to robust Indian deal numbers. Mergers & Acquisitions (M&A) and Private Equity (PE) in India clocked up 961 deals with a total value of to US$51 billion in 2011 compared to 971 deals amounting to US$62 billion in 2010.

weakening rupee is making outbound acquisitions more expensive. This could also be a contributing factor for the downward trend in outbound deals. Having said that, the fundamentals of outbound M&A have remained intact as Indian acquirers continue to view outside markets strategic to their global growth plans, as witnessed in deals such as Mundra Port acquiring Abbot Point Port, GVK Power’s acquisition of Hancock coal mines, Aditya Birla Groups’ acquisition of Columbian Chemicals and Genpact’s acquisition of Headstrong, to name a few. Domestic deal activity was relatively lower as compared to 2010 mainly due to a continuing focus on mergers and restructuring, despite volumes remaining buoyant.

Deal summary Volume Value (US$ billion)

Year to date 2009 2010 2011* 2009 2010 2011*

Inbound 74 91 132 3.9 9 26.9

Outbound 82 198 132 1.4 22.5 10.4

Cross border 156 289 264 5 31 37

Domestic 174 373 342 6.7 18.3 5

Total M&A 330 662 606 12 50 42

PE 206 253 347 3.4 6.2 7.7

QIP 54 56 8 8.6 6.2 0.9

Grand total 590 971 961 24 62.2 50.9

*Jan – Dec 9, 2011

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M&A sector focus: The energy and telecom sectors have seen good amount of traction, accounting for over 50% of the total M&A deal value in 2011*. Other leading sectors in 2011* and their contribution to total deal values were IT and ITES (8%), pharma, shipping and ports, mining and automotive (approximately 5% each). However, few sectors saw a sharp decline in deal values, such as telecom (down 61%) and pharma (down 67%), mainly owing to a drying up of large value deals, but the volumes continued to remain steady in these sectors.

M&A outlook: We can expect consolidation in the telecom space in 2012, with sector regulator TRAI proposing an increase in the combined market share caps and spectrum caps of merged entities. Also, the pharma sector is expected to see heightened M&A activity due to the impending patent cliff in the US (the patent protection for many big-selling drugs is expected to expire in the next few years which will lead to opportunities for other generic drug companies), and the increasing attractiveness of India as a low cost R&D destination. Other sectors to look out for in 2012 would be aviation and retail where the government is looking at opening up the Foreign Direct Investment (FDI)

limits. The beginning of 2011 was witness to the notification of merger control provisions by the Competition Commission of India (CCI) and other government regulations on sector specific M&As such as inbound acquisition of drugs and pharma companies requiring approvals. Though we are yet to perceive any tangible effect on the deal activity as a result of these policies, it could result in increasing timelines for completing an acquisition. Also, the current flux in public markets, low trading multiples and increased costs of finance could be major causes of buyer-seller mismatch in price expectations, thereby resulting in prolonged deal closures.

PE Deals – Volume uptrend, drying up of large value deals: Private Equity investments in India showed significant activity in 2011* with a 23% increase in deal values over 2010. The resurgence could possibly be attributed to sluggish IPO & QIP activity coupled with a cautious return in confidence levels which were seen lacking in 2009 and the first half of 2010. There have been 347 PE deals in 2011* totaling a value of US$ 7.7 billion with no large deals announced.

Top M&A deals 2011Acquirer Target Sector % Stake US$ millionVedanta Plc Cairn India Oil & Gas 59% 8,670** British Petroleum Reliance Industries Oil & Gas 30% 7,200Vodafone Group Plc Vodafone Essar Telecom N.A. 5,000Mundra Port SEZ Ltd (Adani Group) Abbot Point Port Shipping & Ports 100% 1,957GVK Power & Infrastructure Hancock Group-coal mines, port /rail project Mining 79% 1,260iGate Corporation Apax Partners Patni Computer Systems IT & ITES 83% 1,209

**Multiple transactions

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Karthik Balisagar Valuations Manager and Assistant Head of Valuations South Asia GroupGrant Thornton UK LLPT +44 (0)20 7865 2475 E karthik.balisagar@uk.gt.com

With special thanks for their contribution to Ankita Arora and Sowmya Ravikumar of the Grant Thornton India Dealtracker team.

Top PE deals 2011Investor Investee Sector Stake US$ million Bain Capital, Government of Singapore Hero Investment Automotive 30% 848Apollo Global Management Welspun Corp Manufacturing N.A. 284Texas Pacific Group Shriram Capital Financial Services 15% 257Macquarie SBI Infrastructure Investments

GMR Airports Infrastructure N.A. 200

Standard Chartered PE(Mauritius), JM Financial-Old Lane India Corporate Opportunities Fund, NYLIM Jacob Ballas India Fund

GMR Airports Infrastructure N.A. 200

Goldman Sachs ReNew Wind Power Power & Energy N.A. 200Blackstone Embassy Property Developments Real Estate 37% 200

PE sector insight: PE investments are back in the real estate and infrastructure space with the sector garnering close to US$1.7 billion of PE funding in 2011*. It is interesting to note that the real estate and infrastructure investments that took place in 2010 were primarily in the commercial and residential space, whereas 2011* attracted investments in large infrastructure projects such as airports, roads and highways.

Other major sectors driving PE activity were automotive (US$1 billion), power and energy (US$ 892 million), banking and financial services (US$ 816 million) and, IT and ITES (US$ 783 million).

Second coming of e-commerce: The year also witnessed e-commerce firms raising over US$300 million of investment from both PE funds and venture capital firms. Few of these companies received premium valuations with overall firm valuation upwards of US$ 250 million implying EV/Sales multiples ranging between 10x and 15x. One possible reason for stretched valuations could be that the investors expect e-commerce in India to replicate the e-commerce success story in developed countries. The second coming of e-commerce in India is backed by strong fundamentals such as critical mass of internet users, broadband penetration and 3G growth, rising middle class, improved payment gateways and logistics, etc, though there is significant scope to improve these parameters.

PE Outlook: PE investment in India faces high entry valuations driven by a high proportion of family owned business in India tending to wait for higher bidders and exercising extreme caution before dilution. This generally translates into longer negotiations and consequently longer time

for deal closures. Since PE is still not seen widely as a preferred funding source, it may take some years for the Indian market to see much bigger deal sizes as the norm. Exit opportunities can be expected in the pharma, healthcare and biotech and real estate sectors in 2012; one of the possible reasons for these results could be the heightened PE investments that these sectors saw in 2007-2008, and the investment cycles coming to an end in 2012.

Overall, 2011 emerged fairly resilient in terms of deal appetite, despite challenging circumstances. However, stabilisation of economic factors is critical for deals to continue the momentum going forward, and it will be interesting to see how 2012 unfolds.

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2011 was somewhat of an annus horribilis, with natural disasters in Japan and New Zealand, political uprisings across North Africa, riots in some of the UK’s major cities and what could still be, an economic time-bomb in the form of the Euro-zone debt crisis. All these factors, and many others, led to the continued economic uncertainty seen in both 2009 and 2010, and India, like many other emerging markets was not immune to the global economic turmoil.

India’s economy continued to suffer from a number of economic factors (as discussed in previous editions) such as a lack of growth, inflation, a weak currency and, most importantly, poor political direction. As a result, the country’s

Indian economy – Uncertain timesAs we enter what will hopefully be a more promising year in economic terms for many of the world’s economies, let us take this opportunity to take a look back at the year just passed.

major stock exchanges went into relative free-fall. The National Stock Exchange’s 50 stock index, Nifty, declined nearly 23% over 2011 making it one of the worst performing stock exchanges in the world. The Bombay Stock Exchange’s Sensex index also suffered significantly, seeing a fall of nearly 22% over the year.

Furthermore, a record low rupee added to India’s economic headache. In December, the rupee reached a record low, down around 20% against the dollar since August – making it the worst performing Asian currency in the last quarter. To make matters even worse, C.Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said that that there

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was little policymakers could do to counter the rupees’ decline. The rupee’s weakness, which has been driven primarily by weakening economic data, has pushed up the price of imported goods, adding further fuel to India’s on-going battle with inflation.

Inflation itself has remained around the nine per cent mark despite 13 interest rate rises in less than a year and a half. However, in December, India’s inflation slowed to its lowest level in twelve months, leading to a pause in interest rate rises. Food inflation rates, a key driver of overall inflation, levelled off to around 6.5% from the start of the year, the lowest level in over three years. Nevertheless, with an underperforming currency and a slowing economy, the government’s timing from which it expects inflation rates to start easing on a continuing basis might need to be revisited.

In respect to India’s slowing economy, The Reserve Bank of India has again revised its economic growth rate lower. In its most recent revision, is said that it expects the country’s economy to expand 7.5% in the year ending March 31 2012 – down 0.4% from its forecast earlier in the year. BNP Paribas also cut their India 2011-2012 GDP forecast to 6.5%, in their latest economic report, down from its earlier projection of over seven per cent. The bank cited sliding capital expenditure and the country’s exposure to European Banks for its rate cut.

However, while India’s economy has some exposure to European Banks, its main problems come from within. In the second quarter of India’s financial year, the country’s economy grew by only 6.9%, the lowest level in over two years. While healthy monsoons have boosted agricultural output, the weakness of the country’s mining and manufacturing sectors has brought overall growth rates down significantly.

So, what is next for India’s economy? Prime

Minister Singh is halfway through his second term in office and is under continued pressure to revive a strong legislative agenda to help restore and lend direction to the country and its economy. However, with major corruption allegations still unresolved, it looks unlikely that the economic reforms required will come to fruition. Furthermore, with at least five regional elections due in the coming year, economic pressures look to be just one of many which Prime Minister Singh and his government will face in 2012. What this will mean in real terms for India and its economy is unknown and any prediction here would be fruitless but let us hope suitable actions can be taken to drive India forward.

Anuj ChandePartner, Corporate Finance and Head of South Asia GroupGrant Thornton UK LLPT +44 (0)20 7728 2133 E anuj.j.chande@uk.gt.com

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Indian renewables – The state of playAnyone that has travelled to India is likely to have experienced a power outage at some point during their stay. This is not uncommon given that the country operates at a peak energy shortage of 12%. Moreover, its per capita consumption of power is amongst the lowest of the BRIC nations, and below the world average (some 300 million Indian citizens still have no direct access to electricity).

Power in India is therefore a commodity in demand. A bottleneck in the value chain is the supply of fuel – coal being the dominant fuel source. Despite having the third-largest hard coal reserve in the world (after the United States and China) the quality is relatively poor due to its low sulphur and high ash content. Supply is also constrained to a small number of inefficient state-owned companies; India’s Ministry of Coal estimate that the demand-supply gap will increase to 106MT in 2012 from 74MT in 2011. There is now a growing import market of coal from Indonesia.

These issues are two of the key drivers for the rise of renewable independent power producers (IPPs). Private investment into the sector has been encouraged by the government through preferential power-purchase agreements and the introduction of a Renewable Energy Certificate market. As a result many projects (at the moment mainly hydro, biomass and wind) are generating leveraged IRRs in the late teens.

Such returns have attracted domestic and international institutional capital. Over the last year private equity investment into Indian renewable companies increased five-fold from US$100 million to US$522 million. This takes

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the total private equity investment to over US$1 billion since 2006. Indian IPPs on London’s AIM market have also been successful in raising capital, in 2010 we estimate £120 million was raised which grew to nearly £190 million in 2011. We expect this to continue to grow as we estimate the capacity for renewable energy in India is some 69GW. This does not include solar assets, which is only recently begun to attract investment as a result of the recent state and national auctions.

It is natural to assume the sector is a defensive play given that government reforms in the renewable and wider power market should protect IPPs from global and national economic headwinds. However over the last 12 months the value of pure-play public Indian renewable companies (listed in London and in Bombay) has fallen by 22% on average. This has performed in line with the overall market (the BSE Sensex falling by 23% over the same period).

We believe one of the reasons for this could be due to the increases in debt financing costs caused from inflationary pressures. The Indian central bank has increased interest rates 13 times over the past two years; taking it from 5% in 2009 to 8.5% in 2011. Despite the central bank deciding to not raise rates last month, and some early signs of easing inflationary pressure, we believe it is still unclear if rates will fall in the short term.

Another reason for the fall in valuations could also be due to a lack of well-established companies in the sector. We estimate there are only six pure-play renewable energy generators in India that are listed. Only three of which have a market capitalisation of over £100m, and five have a combined installed capacity of less than 800MW. Such small/mid-cap stocks often have poor liquidity which typically obscures

valuations, particularly during flight to quality periods.

These factors, in the backdrop of political unrest due to the recent corruption scandals, may still be in-play during the early part of 2012. However a strong catalyst for improvement in stock valuations is through commissioning assets. For example a typical wind asset should generate over US$200,000 in EBITDA per MW once in operation; a decent sized wind site could therefore make a dramatic difference to the financials of a small-cap stock. We are therefore most bullish on those stocks with a management team that has a strong track record, and a fully funded pipeline of assets which are expected to be commissioned in the short term. Such stocks have mitigated risk profiles given financial closure is complete (a significant hurdle for any infrastructure related company), and also offer good upside as the market typically does not price in pipeline projects.

Gurpreet GujralDirector, Research – CleantechBrewin DolphinE gurpreet.gujral@brewin.co.uk

India Watch - Issue 15 January 2012

The proposed Bill gives the central government significant additional power by way of delegated legislation, as a result of which numerous additional provisions can be prescribed through rules that the government can notify from time to time.

The Bill has changes ranging from incorporation, fundraising and corporate governance through to mergers, auditor rotation and independence requirements.

Incorporation, funding and investor protectionThe Companies Bill, while simplifying certain requirements for incorporation, has introduced new concepts of ‘One Person Companies’ and ‘Small Companies’ that enjoy relaxation in norms relating to reporting requirements, board meetings and other procedural compliances. Private companies can now also be incorporated with up to 200 members, which is higher than the limit of 50 in the existing Act.

For private companies, a review of the fundraising activities through private placement introduced stricter norms; offer documents with relevant details are required to be filed with regulators, subject to the number of persons to whom the offer is made or the investment size.

For public fundraising, the information required to be disclosed in the prospectus has been increased. Investor-friendly norms have been introduced, eg if money remains unutiliased, a special resolution (2/3rd majority) is to be passed for change in the company’s object clause, as well as other requirements of advertisement and exit opportunity to dissenting shareholders. Similarly, any variation in the terms of contract referred to in the prospectus or object invite restrictions on the use of money raised.

‘Class action suits’ make their debut in the Bill, where any class of members or depositors, in specified numbers, can initiate proceedings against the company if they are of the opinion that the

Companies Bill 2011 – the changing face of Company Law in India

affairs are being carried out in a manner prejudicial to the interests of the company, members or depositors.

The financial year of all companies has been mandated to end on 31 March and only companies which are holding/subsidiary of a foreign entity can have a different financial year with prior approval.

Mergers regime Mergers between holding companies and their wholly owned subsidiaries or between two or more small companies (as defined in the Bill) no longer require court/tribunal approval. Companies registered in India and those incorporated in foreign jurisdictions can also merge subject to rules as may be prescribed by the central government in consultation with the Reserve Bank of India.

If a listed company merges with an unlisted company, the transferee company has been given the option to remain unlisted with a payment of cash to shareholders of the listed company.

Finally, in a bid to eliminate unnecessary litigation that may occur due to dissenting shareholders or creditors, only persons holding at least 10% of the share capital or 5% of the total outstanding debt have the right to object to the scheme of arrangement. However, to prevent financial re-engineering through a scheme of arrangement, specific provisions have been made for the scheme to comply with accounting standards and for the report of an expert valuer to be disclosed to the shareholders.

Corporate governancePublic companies are now required to have independent directors. While the directive on the number of independent directors on the board does not differ too significantly from what was provided in Clause 49 of the Listing Agreement of Stock Exchanges in India, the Bill has also codified duties of such directors and has placed restrictions

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A new Companies Act to amend the more than 50-year old Companies Act, 1956, is expected to be finally cleared in the Budget session in March 2012.

About usGrant Thornton UK LLP established a dedicated South Asia Group in 1991 to serve Asian owned businesses in the UK as well as those investing into and from the Indian subcontinent. We are proud to be one of the first UK accountancy firms to focus on this region.

We are widely recognised as one of the leading international firms advising on India-related matters and have been in involved in every IPO involving an Indian company on AIM, with the exception of the real estate sector.

For those clients requiring advice in both the UK and India we offer a seamless service building on the already strong and close relationship between Grant Thornton UK LLP and Grant Thornton India.

on remuneration, eg Independent Directors cannot be given any ESOPs.

Directors cannot exceed two five-year terms and are required to have a cooling off period of three years before they can be re-appointed. In addition, independent directors have to declare that they comply with the criteria as set in the Act. On the anvil is the establishment of a data bank of independent directors.

Provisions related to board meetings and their powers, and appointment and remuneration of managerial personnel have also undergone changes. Secretarial standards, as issued by the Institute of Chartered Company Secretaries (ICSI) and approved by the central government, are required to be adhered to, with every listed company also required to annex to its board report, a secretarial audit report.

Information disclosed in Annual Returns submitted to the Registrar of Companies and in board reports accompanying financial statements has been increased.

Auditor’s rotation and independence requirementsProposals similar to those being considered by the European Commission to change audit regulation, which include audit firm rotation and the requirement for large audit firms to separate audit and non-audit activities, have also found resonance in the new Bill.

The proposed changes include auditor rotation

International and emerging markets blogAs part of our commitment to remaining at the forefront of changes and developments in regards to UK-India relationship we will be using this space to post original thought leadership and research relevant to the industry. The idea is to encourage discussion around these issues and to open up new areas and debate.

To participate: www.grant-thornton.co.uk/thinking/emergingmarkets

More information about our South Asia Group can be found at: www.grant-thornton.co.uk/sectors/emerging_markets/south_asia

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for listed or other prescribed companies every 5 or 10 years depending on whether the auditor is an individual or a firm, respectively. There is a cooling off period of five years after completion of such a term during which the auditor cannot be re-appointed. To circumvent the possibility of appointment of an entity related to the auditor whose term has expired, the Bill provides that no such audit firm which has a common partner or partners to the retiring audit firm, shall be appointed as auditor of the same company for a period of five years.

An auditor of the company is also prohibited from providing, directly or indirectly, a number of specified non-audit services to the company, its holding company, subsidiaries, fellow subsidiaries or associate companies.

In the wake of recent accounting scams, duty has been cast on the auditor, to immediately report to the central government any offence involving fraud which is being or has been committed against the company by officers or employees.

In conclusion, while there are many changes, the Companies Bill should bring stronger legislation, greater transparency and better investor protection; how many of such changes finally make it to the Act enacted by the Parliament remains to be seen.

Saurabh Mathur Manager, Assurance Walker Chandiok & Co India