What’s the secret to successful deals in India?
Think BIG
The sheer size and diversity of India are mind-boggling, with a population of 1.3 billion people living in a country almost 80 times the size of Switzerland and speaking more than 20 languages. Despite India’s democratic processes and significant economic expansion (averaging around 7% p.a. over the last two decades), this size and diversity at times had a limiting effect on growth. Nevertheless, economists anticipate growth in India in the next 20 or 30 years, driven by demographics: in 2016, around 50% of the population was aged between 20 and 60, but by 2030 this group will account for 60% of the total population (versus 45% in China and 38% in the EU).
Swiss players already have a share of the action – some companies with presence going back more than 70 years. In 2015, Swiss imports from India amounted to USD 1 billion, primarily software and services, textiles, organic chemicals, precious stones and jewellery, watchmaking machinery and parts, leather products, cotton, coffee, tea and hand-knotted carpets. Excluding bullion, Swiss exports to India came to USD 0.8 billion, mainly taking the form of chemicals and pharmaceuticals, machinery, transport equipment, precision engineering products and watches.
Between 2000 and 2015 Switzerland invested over USD 3 billion in India, making it the eleventh-largest investor in the country. At the same time, Switzerland is one of the top five European destinations for Indian investment.
Changing economic structure
Agriculture is still a major source of employment in India (with three times the global average share of GDP), but the importance of services and industry has increased substantially in recent decades. The change has been relatively slow, however; partly because of the relatively low level of mechanisation in Indian farming, but also because India has taken deliberate pains not to change agriculture too rapidly and thus jeopardise the employability of a significant share of the population.
IT, of course, including IT-enabled services, has played a major role in the shift away from agriculture. Services accounted for 54% of the economy in 2014 versus 45% in 1990, around the time the process of liberalising the Indian economy commenced. Economic growth rates jumped from an average of 4% in the 1980s to double in the nineties and noughties. It’s important to remember that while some sectors of the Indian economy are relatively liberalised, others such as insurance, defence, aerospace and real estate still have limits in place on the scale and type of foreign investment.
India isn’t leaving the future to chance, with major investments and incentive schemes designed to promote growth in areas such as smart cities, products made in India, digitalisation, and improvements in sanitation.
M&A activity on the increase
Mergers and acquisitions have increased gradually over the last five years. In 2016 there were 1,002 deals with a total value of USD 61 billion, including three accounting for USD 28 billion in deal value. Reflecting an overall trend towards consolidation across sectors, the value of domestic transactions has exceeded the value of inbound or outbound deals in the last three years.
In terms of numbers of deals, the M&A market was led by IT (primarily internet software and services) in 2016, followed by retail and consumer, industrials and financials. In terms of value the energy sector saw the most activity, followed by the financial sector and telecoms.
India is an attractive destination for SME deals, with most transactions over the last five years worth less than USD 100 million. This makes the country’s small and medium-sized enterprises a hot target for dealmaking.
Location is key in such a large and diverse country. Maharashtra, Haryana and Karnataka remain among the M&A hot spots, while the state of Gujarat, which had been attracting huge amounts of foreign capital thanks to a well-developed infrastructure, slipped from the top five in 2016 – possibly because its potential has plateaued, possibly because of the incentives offered by other states.
So what’s the deal in India?
The authors of PwC’s Deal Talk India − including Devinder Singh, an Indian national on PwC’s team in Switzerland who has worked on numerous Indo-European transactions in the last eight years − look at the deals landscape in India from an insider’s point of view. The key points they recommend looking out for:
Significant exchange control regulations: Certain foreign exchange transactions, called capital account transactions because they alter the assets or liabilities of India residents outside India or assets and liabilities in India of non-Indian residents, are not permitted. Other transactions are classified as current account transactions and are subject to a lower level of restrictions. The Indian rupee is fully convertible for current account transactions.
The right deal structure: There are different legal modes available to facilitate M&A, each with different tax implications and ease of deal implementation. They include direct/indirect transfer of shares, asset transfers, and amalgamations/demergers. Foreign buyers typically use entities in jurisdictions such as Mauritius with favourable tax arrangements with India.
Taxation can be a minefield: Over the years the government has tried to tone down the harsh interpretation of laws (for example withholding tax on capital gains on the sale of an Indian business by a non-resident Indian entity or individual). On the positive side, goods and services tax (GST) has been introduced to help standardise the tax regime across India.
Due diligence is key: Business in India hinges on trust. As a foreign buyer you don’t have this advantage upfront, so thorough due diligence is critical. In response to this need, vendor due diligence reports have increasingly been made available over the years.
Accounting standards: Indian Accounting Standards (Ind-AS), which since 2017 have been applied to all listed and larger unlisted companies, is closely aligned with IFRS. All companies also have to comply with the 2013 Companies Act, which regulates incorporation, the responsibilities of a company and its directors, and dissolution.
Labour unions: The situation in terms of strikes and shutdowns has improved over the decades, although there are still flare-ups in certain parts of the country. India has long been trying to reform its labour laws, but the emphasis varies from sector to sector: some more in favour of the unions, others allowing for the exploitation of temporary labour. There is stiff resistance which has slowed the pace of these reforms.
Keep these points in mind and you’re on your way to a successful deal in India. Feel free to check out PwC Deal Talk India or contact us for a more in-depth conversation about the risks and opportunities. Wishing you good dealmaking!
Risk management framework and Board of Director oversight
The framework is an overarching document that covers a bank’s risk policy, risk appetite and risk limits. Furthermore, banks must describe the tools and the organisation they have implemented to identify, assess, monitor and report the defined risks within each risk category.
The Board of Directors needs to evaluate and approve the risk management framework annually. Approval by the Board of Directors goes further than merely confirming adherence to the purely formal aspects. The key to an effective risk management framework is the ability to assess whether the framework is effective.