inbound investment & entry strategy
TRANSCRIPT
Inbound Investment & Entry Strategy
Shefali GoradiaNishith Desai Associates
BCAS September 19, 2007
Share of Top Investing Countries FDI Equity Inflows
3.677,609(1,835)
549(134)
Germany7.
3.747,754(1,800)
705(172)
Singapore6.
5.2410,857(2,575)
1,543(367)
Japan5.
5.6411,680(2,704)
278(67)
Netherlands4.
8.1316,829(3,898)
169(41)
U.K.3.
12.2425,359(6,092)
823(198)
U.S.A.2.
42.0687,108(20,080)
7,946(1,934)
Mauritius1.
%age with totalInflows (in terms of rupees)
Cumulative Inflows(from Aug. 1991 to
May 2007)
2007-08 (April- May 2007)
CountryRanks
Source: Fact Sheet on Foreign Direct Investment dipp.nic.in/fdi_statistics/india_fdi_nov05.pdf
Sectors Attracting Highest FDI Equity Inflows
2.565,311(1,230)
30(7)
Drugs & Pharmaceuticals6.
3.3311,515(2,610)
1,892(464)
Construction activities (including roads & highways)
5.
5.9412,296(2,877)
191(45)
Fuels (power + oil refinery)7.
9.7720,227(4759)
3536(867)
Telecommunications(radio paging, cellular mobile,
basic telephone services)
3.
18.5638,434(8,851)
4,195(1,011)
Services Sector(financial & non-financial)
2.
18.5638,440(8,800)
2,406(573)
Electrical Equipments(including computer software &
electronics)
1.
% age with totalInflows (In terms of
rupees)
Cumulative Inflows
(August ‘91 to May ‘07)
2007-08 (April-May
2007)
SectorRanks
Source: Fact Sheet on Foreign Direct Investment dipp.nic.in/fdi_statistics/india_fdi_nov05.pdf
What attracts foreign investment?
Rising demand in emerging markets – China, India, SingaporeGlobal outsourcing of service functionsPolitical StabilityIPR ProtectionBusiness & Policy EnvironmentLabor availability & CostsFiscal and Financial Incentives
Tax breaksSubsidies
Favored investment destinations
USA – largest host of FDI in the worldInvestor friendly entrepreneurial cultureInfrastructure
SingaporeVarious bi-lateral free trade agreements e.g. CECALiberal investment climateWorld class infrastructureHighly educated work force
ChinaLarge domestic marketAvailability of cheap laborRapidly growing economy
Structuring Greenfield Investments
Foreign Investor
Investment
Unincorporated entity Incorporated entity
Company
India
Project Office
Branch Office
Offshore Jurisdictions
TrustLiaison Office
Entity Options
Direct Investment
Availability of tax holiday SEZ Act, 2005Tax Issues Tax Credit availability in foreign jurisdiction
49.31= Dividends distributed to Shareholder
10.10Less: Dividend Distribution Tax (16.995%)
59.41= Profits available for distribution
6.60Less: Transfer to reserve (10% of PAT)
66.01= Profits After Tax (“PAT”)
33.99Less: Corporate Tax on the same (33.99%)
100Taxable income
Amt (US$)
Particulars
ForeignCompany
Indian Company
Jurisdictions being usedNetherlands
Traditional holding co jurisdictionLimited capital gains tax exemptionParticipation exemption
MauritiusFavorable and settled offshore regimeCapital gains tax exemptionNo tax benefit for interest incomeTreaty re-negotiation-Threat?
CyprusCapital gains tax exemptionInterest taxed at 10%Treaty re-negotiation
SingaporeLoB clauseCapital gains tax exemption tagged to Mauritius TreatyIncome characterization issues
Foreign Company
Indian Company
HoldingCompany
Use of intermediate jurisdiction
Corporate PhilosophyBenefits of handling different venturesProviding oversight functions for entire groupCapturing value at one levelOverall group tax rationalizationAbility to leverage on group strength
Resistance by few jurisdictions Mexico - Anti holding company regulations for investment through tax favorable jurisdictionsUS – CFC Regulations, anti-inversion rules
Holding Companies
Equity
PreferenceShares
Fully / Compulsorily Convertible
Partly / Optionally Convertible
Redeemable
Debentures
DebtOther External Commercial Borrowings
Fully / Compulsorily convertiblePartly / Optionally convertibleNon – convertible
Types of instruments
Voting
Non-voting
Other structuring considerations
Check-the-box issuesType of entity – private/publicLoss making
Regulatory ConsiderationsPress Note 1Press Note 9
Financial ConsiderationsDebtEquity
Profit repatriationDividend DistributionBuy back of shares
Exit optionsSale MergerIPO
Mergers & Acquisitions
ForeignCompany
Indian CompanyMerges into
© Nishith Desai Associates
Merger
Legal and tax perspective Companies Act
High Court approvalShareholder and creditor approval – 3/4th in value and majority in number
Stamp duty – Instrument liable to stamp dutyExchange control – compliance with pricing guidelines, sectoral capsTax-free merger
All assets and liabilities taken overContinuing shareholders – at least 3/4th in valueMerged company should be Indian company
Tripartite mergers also possible
Merges
IndianSubsidiary Company
ForeignCompany
Indian Company
© Nishith Desai Associates
Merger – Proposed structure
ForeignCompany
Indian CompanyAcquires
© Nishith Desai Associates
Share Acquisition
Legal and Tax Perspective
Companies ActShareholder approval – sec 81(1A)Minority squeeze out – sec 395 complianceListed companies – disclosure requirements
Exchange control – compliance with pricing guidelines, sectoral capsTax Implications
Seller liable to capital gains taxTransfer pricing applicable if associated enterprises
Acquires
Assets
ForeignCompany
Indian Company
© Nishith Desai Associates
Asset Acquisition
Legal & Tax Perspective
Companies ActShareholder approval for substantial disposal of assetsListed companies – disclosure requirements
Stamp Duty – on transfer of assets Exchange control – whether results in branch operations – RBI approvalTax Implications
Seller liable to capital gains taxPE issues
Acquires AssetsIndian
Subsidiary Company
ForeignCompany
Indian Company
© Nishith Desai Associates
Asset Acquisition – Proposed structure
Other structuring considerations
Role of seller Tax Planning in achieving tax treaty protection for capital gainsLocal Indian tax free merger rules or other means of combining operations tax-freeIntroduction of local debt
Debt push downShare pledge – exchange control issues
Procedural issues in aligning two different transfer pricing systems
US Parent
India Sub
US
INDIA
100%
FoundersEmployees
VCsOthers
Current structure
Flipping a structure: Inversion
Significant US Tax Impact
US Sub
India Parent
US
INDIA
100%
FoundersEmployees
VCsOthers
After Flip
Flipping a structure: Inversion
US Tax Issues
Tax free re-organization – section 368 of IRCAmerican Jobs Creation Act, 2004
Section 7874A US company becomes a subsidiary of a foreign company or otherwise transfers substantially all of its property to a foreign company (that is, the US company inverts); The shareholders of the US company end up holding 60% or more of the vote or value of the shares of the new foreign company; andThe new foreign parent company, alongwith all of its subsidiaries does not have “substantial business activities” in its country of incorporation when compared with the total business activities of the group.Safe Harbour Test
Sector Specific Structures
Franchising
Tax IssuesFTS v. RoyaltyDomestic tax rate – 10%Service tax – 12.36%
Exchange Control IssuesLump sum payments > US$ 2m for purchase of franchise – RBI approvalRoyalty payments > 8% exports/5% domestic sales on use of trademarks/brand name – RBI approval
Retail
51% FDI permitted‘Single Brand’ products onlySame international brand Covers only products which are branded during manufacturing.
Retail Structure
WOS
Offshore Investor
INDIA
FOREIGN
JURISDICTION
Indian Partner
RETAIL STORES
Services Agreement
Procurement, logistics, supply chain management, wholesale cash & carry services
Trade name Agreement
Retail
Real Estate
Direct holding of land not permittedECB not permitted Requirements of Press Note 2 to be complied with
Minimum capitalization (US$ 5m/US$10m)Lock in period of three years of ‘original investment’Minimum area sizeInvestment in SEZ/Hotels excluded from PN2 requirements
Hotel Industry
100% FDI permittedReal estate v. HotelProvisions of PN2 not applicableECB permitted
Real Estate Structure
Offshore Fund
Offshore Investors
MAURITIUS
INDIAHotel Holding & Developing Company
FOREIGN
JURISDICTION
SPV SPV
INDIAN PROPERTY HOLDING COMPANIES
Venture Capital Fund Structure
Offshore Fund
Portfolio Company
Offshore Investors
VCF
MAURITIUS
INDIA
Domestic Investors
FOREIGN
JURISDICTION
Offshore Fund
Portfolio Company
Offshore Investors
MAURITIUS
INDIAAdvisory Company
Dos and Don’ts
Arm’s length relationship
Non binding advice
Fixed place of business
Decision making authority
Nominee Directors on Portfolio Companies
Directorship in Mgt Company
FOREIGN
JURISDICTION
ManagementCompany
Advisory Services from India
Indirect Foreign Investment
Impacts joint ventures in telecom, insurance, broadcasting (capped sectors)Foreign shareholding – pro rata?
Press Note 9 – Downstream investment subject to sectoral caps
On the Anvil - DIPP ProposalNo foreign shareholding
Foreign investment < 10%Indian company not acting in concert with other foreign investors
Other cases – foreign shareholding to be taken on pro-rata basis
Impediments
No tax consolidation, so no underlying tax creditNo dividend franking system - Tax leakage at time of payment of dividend between group companiesTransfer Pricing challenges
