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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 (%)

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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

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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.)

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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

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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

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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

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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

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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?

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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

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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

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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