Doing Business in India: Strategic & Practical Considerations Using a strategic framework to manage the challenges of business structuring, due diligence will help companies and funds create a robust India investment roadmap

1. Doing Business in India
Strategic and Practical Considerations
January 2010
Presented by
Anil Kumar, Managing Director
akumar@ivgpartners.com ; ph (646) 807-9290
501 Fifth Avenue . Suite 302 . New York, NY 10017 . 646.807.9290 . www.ivgpartners.com

2. Strategic Framework
• Sustainable Advantages
Do I need to leverage India? • Changing Global Economy
• Future Growth of India
• Organization Design
How can I create an India Entry • Finding Partners
Strategy? • Implementation
• Statutory Compliance
• Due Diligence
How do I manage risks in India?
• Legal Aspects
• Risk Management
• Culture & Communication
How do I grow my operations in India? • Creating Incentives
• Monitoring Investment
Page 1

3. Creating an India Entry Roadmap
Stage 1: Create Stage 2: Design Stage 3:
Strategy Phase Implement
• Market Study/ • Operating Model • Business Setup
Industry Assessment • Preparing Key • Statutory and Legal
• Competitive Stakeholders Filings
Landscape Analysis • Partner Selection & • Risk Management
• Feasibility Due Diligence • People
Assessment • Organization Design • Infrastructure
• Market Positioning • Legal & Regulatory • Employer Value
• Location Setup Proposition
Assessment • Investment • Funding
• Investment Structuring
Strategy
Page 2

4. Strategic Framework
• Sustainable Advantages
Do I need to leverage India? • Changing Global Economy
• Future Growth of India
• Organization Design
How can I create an India Entry • Finding Partners
Strategy? • Implementation
• Statutory Compliance
• Due Diligence
How do I manage risks in India?
• Legal Aspects
• Risk Management
• Culture & Communication
How do I grow my operations in India? • Creating Incentives
• Monitoring Investment
Page 3

5. Why India?
Educated, English-speaking populace of young workers
Democratic and business-friendly government
Low cost structure
Eager and savvy consumer market with growing buying potential
Page 4

6. India is One of the World’s Top Investment Destinations
2007 Global Retail Development Index (GRDI) 2007 Global Services Location Index
100
… India is the top
destination in the India 3.2 2.3 1.4
AT Kearney Global 80
China 2.9 2.3 1.4
Retail Development
GRDI Score
Index (2007) 60 Malaysia 2.8 1.3 2
40 Thailand 3.2 1.2 1.6
Brazil 2.6 1.8 1.5
Services sector 20
attracted interest of Indonesia 3.3 1.5 1.1
major global players 0
and large Financial structure People and skill availablity
India Russia Vietnam Ukraine China Chile Latvia Business environment
investments are
pumped in it
Projected GDP Growth Rates for Select Upcoming Economies
8
AT Kearney has
placed India as
the most
GDP Growth Rate (%)
6
preferable
destination for
Services sector
4
(2007)…
India is expected to
2
outperform its rivals
in the BRIC, in terms
of GDP growth rate,
from 2015 0
onwards… 2005-10 2010-15 2015-20 2020-25 2025-30 2030-35 2035-40 2040-45 2045-50
Source: Goldman Sachs, “Dreaming with the BRICs” Brazil China India Russia
Page 5

7. Consumer spending and household savings have grown..
36 35.9
34 34.8
Gross Domestic Savings
32
Gross Domestic Investment
% of GDP
30
28
26
24
22
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
Page 6

8. ..fuelled by several factors
India is the 4th largest economy in the world as measured by purchasing power
India has a consumer base of 1.2 billion people
The youngest population of the world – hence sustainable, long term growth is
assured
Modern (organized) retail converging with the consumption boom will open up
many opportunities for small and mid-size consumer companies
Rapid growth in the number of middle class consumers
Page 7

9. The Indian Demographic Dividend
Page 8

10. By Year 2050, India will be World’s 3rd Largest Economy
50,000
45,000
40,000
US 2003 $ billions
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
na
n
a
y
ce
a
il
ly
S
K
an
pa
az
di
si
U
U
Ita
an
hi
In
us
Br
m
Ja
C
Fr
R
er
G
Source: Goldman Sachs, “Dreaming with the BRICs”
Page 9

11. Many large companies have invested into India
POSCO to invest in building steel manufacturing USD 12 billion
plants and facilities in India by 2016
USD 11 billion
Vodafone buys Hutch
Plans to establish three manufacturing plants to USD 2 billion
produce photo-voltaic units
Plans to spend on its development operations in USD 1.7 billion
India over the next four years
Page 10

12. Many large companies have invested into India
Plans investment in private equity in Indian USD 1 billion
markets
Plans investment in private equity, real estate, USD 1 billion
and private wealth management
Aditya Birla Group increased its stake in Idea USD 0.98 billion
Cellular by acquiring 48.14-percent stake
Mylan Laboratories acquired a majority stake
in Matrix Laboratories USD 0.74 billion
Page 11

13. India has consistently improved over the last 17 years
•Opportunities to enter new sectors as the reforms process opens
Progressive Reforms Process them up for foreign direct investment (FDI). For example, Single
Brand Retail, Life and General Insurance
•Growing GDP and FDI, falling rates of interest and maturing capital
markets creates private equity investment opportunity in
Strong Economic Environment infrastructure, telecom, cement, toll roads, bridges, manufacturing,
technology, and pharmaceuticals
•Growing consumer population expands markets across sectors
•Opportunities to use India as a test market for clinical trials and
Large Domestic Market
developing products for the global market
•Growing through acquisitions of strong Indian companies across
sectors
•Availability of raw material and highly skilled workforce
•Opportunities to set up manufacturing bases in India, both for fulfilling
local demand, as well as for developing a global sourcing hub
Availability of Resources •Opportunities to set up R&D, software development and engineering
centers that cater to their global operations
•Opportunities to set up centers for business process outsourcing
Leveraging India as a source of high quality managerial talent
Page 12

14. It has become easier to invest into India
2000 on More sectors opened ; Equity caps raised in many other sectors Procedures
simplified
2000 Up to 100% under Automatic Route in all sectors except
a small negative list
Up to 74/51/50% in 112 sectors under the
1997
Automatic Route 100% in some sectors
1991 FDI up to 51% allowed under the
Automatic route in 35 Priority sectors
Pre 1991 Allowed selectively up to
40%
FDI Policy Liberalization
Page 13

15. Potential Investment Opportunities
Information Technology
Software and Services - $50 billion
IT-enabled Services - $17 billion
E-Commerce - $8.9 billion Power Roads Transmission
&
Generation $40 billion Distribution
$143 billion $ 116 billion
Biotechnology
$4.5 billion by 2010
Coal Investment Refineries
Retail $ 26 billion Requirement $ 22 billion
in Energy
$300 billion by 2010
up to 2012 and
Healthcare Cross-Country
other
Pipelines Infrastructure Oil & Gas
$ 116 billion $ 100 billion
$ 16 billion potential Areas
Energy
Ports Railways
LNG Terminals $ 15 Billion
$ 20 Billion
$ 10 billion
Page 14

16. Markets with Significant Export Potential
Airport and Ground Handling Mining and Mineral Processing
Equipment Equipment
Computers and Peripherals Oil and Gas Field Machinery
Education Services Pollution Control Equipment
Electric Power Generation, Safety and Security Equipment
Distribution and Transmission
Equipment Telecommunications
Equipment
Food Processing & Cold Storage
Equipment Textile Machinery
Machine Tools Water Treatment
Medical Equipment
Page 15

17. Market Potential – Retail
Potential
The high growth projected in domestic retail demand will be fuelled by:
The migration of population to higher income segments with increasing per capita incomes
Increasing urbanization
Changing consumer attitudes, especially the increasing use of credit cards
Growth of the population in the 20 to 49 years age band
There are retail opportunities in most product categories and for all types of
formats:
Food and Grocery: The largest category but largely unorganized
Home Improvement and Consumer Durables: Over 20% p.a. CAGR estimated in the next 10
years
Apparel and Dining: 13% p.a. CAGR projected over 10 years
Opportunities exist for investment in supply chain infrastructure, cold chain,
and logistics
India also has significant potential to emerge as a sourcing base for a wide
variety of goods for international retail companies
Many international retailers including Wal-Mart, GAP, JC Penney etc. are already procuring
from India
Page 16

18. Market Potential – Retail
Policy
100% FDI is allowed in Cash and Carry Wholesale formats. Franchisee
arrangements are also permitted in retail trade.
51% FDI is allowed in single brand retailing.
The government is examining further liberalization of FDI in retail trade.
Page 17

19. Market Potential – Power Sector
Potential
Large demand-supply gap - All India average energy shortfall of 9% and peak
demand shortfall of 14%
The implementation of key reforms is likely to foster growth in all segments
Unbundling of vertically integrated SEBs
“Open Access” to Transmission and Distribution networks
Select distribution circles to be franchised/privatized
Tariff reforms by regulatory authorities
Opportunities in Generation for:
Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each
Coal-based plants at pithead or coastal locations (imported coal)
Natural gas/CNG-based turbines at load centers or near gas terminals
Hydel power potential of 150,000 MW is untapped as assessed by the Government of India
Renovation, modernization, up-rating and life extension of old thermal and hydro power
plants
Opportunities in Transmission network ventures - additional 60,000 circuit
km of Transmission network expected by 2012
Private sector participation possible through JV and 100% equity mode
Total investment opportunity of about US$ 150 billion over a 5 year horizon
Page 18

20. Market Potential – Pharmaceuticals
India is an attractive global sourcing destination for pharmaceuticals
Availability of low-cost, high-quality production and regulatory compliance
Large and growing US FDA-approved plant capacity
Synthetic chemistry talent for early stage compound development
Low cost of research and world-class testing facilities
— Cost of a research scientist in India is only about 1/6th to 1/4th of that in USA
Major opportunities in pharmaceuticals are in the following areas:
Marketing of Patented Drugs
Contract Research and Manufacturing (CRAM)
IT-enabled services including clinical/market data analysis
Clinical trials: revenues to grow from US$70 million (2002) to US$1-1.5 billion by 2010
driven by a 60% cost advantage and large gene pool for trials
Page 19

21. Outlook and Policy - Pharmaceuticals
The pharma industry is expected to grow to over US$20 billion by 2010
India has a low per capita annual spend of US$5 on pharma products and ranks 67th in the world
India accounts for 22% of the global generics market
The Pharmaceutical industry in India is fragmented with over 3,000 small/medium sized generic pharma
manufacturers. International pharmaceutical majors like Pfizer, Johnson & Johnson, Glaxo SmithKline and
Novartis have an established presence in India
Consolidation likely in the fragmented Pharma industry due to recent legislation and policy updates
Policy
FDI up to 100% is permitted through the automatic route for the manufacture of drugs and
pharmaceuticals provided the activity does not attract compulsory licensing or involve the use of
recombinant DNA technology and specific cell/tissue targeted formulations
The Patent (Amendment) Act enacted in April 2005 introduces product patent regime for food, chemical
and pharmaceutical products – TRIPs compliant
Manufacturing units are required to comply with the WHO and international standards of production
Page 20

22. Market Potential – IT and IT Enabled Services
Potential
India’s inherent IT capabilities - talented workforce and world-class
companies
Availability of technically skilled and English-speaking labor force at a fraction of the cost
compared to US and Europe
Quality orientation, project and process management expertise
Enhanced global service delivery capabilities of Indian companies through a combination of
greenfield initiatives, M&A, alliances and partnerships with local players
International recognition of India’s strengths
Increasing awareness among global companies about India’s capabilities in higher, value-
added activities and in the global delivery model
Leading international companies have identified custom application development and
maintenance as priority areas due to a high offshoreable component
High growth of domestic IT & ITeS market due to several regulatory and
technological factors:
Increased investments by enterprises in IT infrastructure, applications and IT outsourcing
Demand for domestic BPOs has been largely driven by faster GDP growth and by sectors such
as telecom, banking, insurance, retail, healthcare, tourism and automobiles.
Opportunity to supply to the global market in addition to serving the growing
domestic demand
Page 21

23. Market Potential – IT and IT Enabled Services
Policy
100% FDI is permitted in this sector under the automatic route
SEZs, EOUs and Software Technology Parks have been set up across India –
income tax exemptions are available for units in these designated
areas/zones
IT Act, 2000 legalizes the acceptance of electronic records and digital
signatures providing a legal backbone to e-commerce
Page 22

24. Market Potential – Healthcare
Potential
High-growth in the domestic market arising from:
Increasing health awareness: share in total private consumption expected to increase by 10%
Increasing penetration of health insurance
Rapid growth in private sector companies owning and managing hospitals
High-growth in medical tourism
Cost of comparable treatment is on average 1/8th to 1/5th of those in western countries.
Opportunities exist in multiple segments along the value chain
Service providers: curative and preventive in primary, secondary and tertiary care
Diagnostics services: imaging and pathology labs
Infrastructure: hospitals, diagnostic centers
Health insurance: less than 10% of the population is covered by health insurance. The
medical insurance premium income is expected to grow to US$3.8 billion by 2012
44% growth in health insurance during 2006-2007
Healthcare BPO: medical billing, disease coding, forms processing and claims adjudication
Training: large opportunity for training doctors, managers, nurses and technicians
Investment opportunity of over US$25 billion by 2010
Page 23

25. Market Potential – Healthcare
Policy
100% FDI is permitted for all health-related services under the automatic
route
Infrastructure status has been accorded to hospitals
Lower tariffs and higher depreciation on medical equipment
Income tax exemption for 5 years to hospitals in rural areas, Tier II and Tier
III cities
Page 24

26. Market Potential – Power Sector
Potential
Large demand-supply gap - All India average energy shortfall of 9% and peak
demand shortfall of 14%
The implementation of key reforms is likely to foster growth in all segments
Unbundling of vertically integrated SEBs
“Open Access” to Transmission and Distribution networks
Select distribution circles to be franchised/privatized
Tariff reforms by regulatory authorities
Opportunities in Generation for:
Ultra Mega Power Plants (UMPP) – 9 projects of 4000 MW each
Coal-based plants at pithead or coastal locations (imported coal)
Natural gas/CNG-based turbines at load centers or near gas terminals
Hydel power potential of 150,000 MW is untapped as assessed by the Government of India
Renovation, modernization, up-rating and life extension of old thermal and hydro power
plants
Opportunities in Transmission network ventures - additional 60,000 circuit
km of Transmission network expected by 2012
Private sector participation possible through JV and 100% equity mode
Total investment opportunity of about US$ 150 billion over a 5 year horizon
Page 25

27. Market Potential – Power Sector
Policy
100% FDI permitted in Generation, Transmission & Distribution - the
Government is keen to draw private investment into the sector.
Policy framework: Electricity Act 2003 and National Electricity Policy 2005.
Incentives: Income tax holiday for a block of 10 years in the first 15 years of
operation; waiver of capital goods import duties on mega power projects
(above 1,000 MW generation capacity).
Independent Regulators: Central Electricity Regulatory Commission for
central PSUs and inter-state issues. Each state has its own Electricity
Regulatory Commission.
Page 26

28. Market Potential – Real Estate and Construction
Potential
Several factors are expected to contribute to the rapid growth in real estate
Large demand-supply gap in affordable housing, with demand being fuelled by tax incentives
and a growing middle class with higher savings
Increasing demand for commercial and office space especially from the rapidly growing retail,
IT/ITeS, and hospitality sectors
The recently announced JNNURM expected to provide further impetus
Investment opportunities exist in almost every segment of the business
Housing: about 25 million new units expected to be built in 7 years
Office space for IT/ITES: 150 million sq. ft. across urban India by 2010
Commercial space for organized retailing: 220 million sq. ft. by 2010
Hotels and Hospitality: Over 100,000 new rooms in the next 5 years
Investment opportunity of over US$75 billion in the next 5 years
Page 27

29. Market Potential – Real Estate and Construction
Policy
100% FDI is allowed in real estate development subject to minimum scale
norms of either:
25 acres in case of serviced plots or integrated townships; or
50,000 square meters of built-up area for construction development projects
Initial investment is locked-in for a 3 year period
Page 28

30. Market Potential – Banking and Financial Sector
Potential
Several factors favor high growth
Demographic profile favors higher retail offtake - 54% of the population is in the 15-35 years
age group
Capital expenditure by the government and private industry expected to grow at a high rate
Economic growth of about 14% p.a. in nominal terms
SME lending, a largely untapped market, presents a significant opportunity
SMEs account for 40% of the industrial output and 35% of direct exports
Regulatory and technological enablers leading to high growth
The banking system is technologically enabled with RTGS and check truncation in place
Improved asset management practices - Gross NPAs to Advances ratio reduced from 24-25% in
1993 to 2.5% in 2006-07
Investment opportunity across all segments in the banking and financial
services sector
Low penetration in the pension market makes it a lucrative business segment
Foreign banks likely to be allowed to acquire local banks after March 2009 when the next
stage of banking reforms is proposed
Page 29

31. Market Potential – Banking and Financial Sector
Policy
Reserve Bank of India (RBI), India’s central bank, is the regulator for the
banking and financial services industry
RBI approval is required for all foreign investment in this sector
Foreign banks can do business in India either by setting up branches or through a wholly
owned subsidiary, after approval by RBI
Indian private banks can be 74% foreign owned, with a 5% cap on ownership
by any one entity
Page 30

32. Market Potential – Auto Components
Potential
India amongst the most competitive manufacturers of auto components,
especially:
Metal intensive components: forgings, stampings, castings
Skilled labor-intensive components: machining, wiring-harness, other electrical components
Hi-tech components: electronic fuel injectors
Opportunity to address the global auto components market while leveraging
India’s large and growing domestic market
Opportunity to set up R&D centers in India
Indian technical skills acknowledged as among the best in the world
High level of sourcing of auto components from low cost countries (LCC’s) to
act as a driver for growth
Potential of over US$5 billion for investment in India
Policy
100% FDI allowed through the automatic route
Page 31

33. Special Economic Zones (SEZ’s)
SEZ Act and the rules framed hereunder have been notified with effect from February 2006.
An SEZ is an export oriented duty free enclave, which is deemed to be outside the customs
territory of India.
As of 2008, more than 500 SEZs have been proposed, 220 of which have been created.
100% Income Tax exemption on export income for SEZ units under Section 10AA of the
Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed
back export profit for next 5 years.
Duty free import/domestic procurement of goods for development, operation and
maintenance of SEZ units
Exemption from minimum alternate tax under section 115JB of the Income Tax Act.
External commercial borrowing by SEZ units up to US $ 500 million in a year without any
maturity restriction through recognized banking channels.
Exemption from Central and State Sales Tax and Service Tax, and other levies.
Single window clearance for Central and State level approvals.
Page 32

34. Strategic Framework
• Sustainable Advantages
Do I need to leverage India? • Changing Global Economy
• Future Growth of India
• Organization Design
How can I create an India Entry • Finding Partners
Strategy? • Implementation
• Statutory Compliance
• Due Diligence
How do I manage risks in India?
• Legal Aspects
• Risk Management
• Culture & Communication
How do I grow my operations in India? • Creating Incentives
• Monitoring Investment
Page 33

35. Creating an India Entry Roadmap
Stage 1: Create Stage 2: Design Stage 3:
Strategy Phase Implement
• Market Study/ • Operating Model • Business Setup
Industry Assessment • Organization Design • Statutory and Legal
• Competitive • Partner Selection Requirements
Landscape Analysis • Preparing Key • Risk Management
• Feasibility Stakeholders • People
Assessment • Legal & Regulatory • Infrastructure
• Market Positioning Setup • Employer Value
• Investment • Investment Proposition
Strategy Structuring • Funding
• Location • Partner Due
Assessment Diligence
Page 34

36. Keys to Success in India
Good local partners knowledgeable regarding the local market and
procedural issues.
Study the Market & Competition.
Good planning.
Aggressive due diligence and follow up.
Patience and commitment.
Hire good advisors
Understand the rules, standards and regulations.
Page 35

37. Creating Strategy
• Market study/ Industry Assessment
• Market organization
• Current market size
• Expected growth rate
• Industry trends
• Drivers of value
• Export component
• Affect of currency fluctuation and relationship to the global markets
• Competitive Landscape Analysis
• Barriers to entry
• Degree of maturity
• Number of competitors
• Performance and profitability
• Products and brands
• Financing and flexibility
• Areas of vulnerability
• First-Mover advantage
Page 36

38. Creating Strategy
• Feasibility Assessment
• Price Point
• Unit economics
• Cost benefit Analysis
• Change in consumer tastes, preferences
• Market Positioning
• Branding/ Positioning
• Impact on P&L
• Investment Strategy and Structure
• Investment timeframe
• Step by step analysis
• Return on Investment calculations
• Location Assessment
• Access to ports/ highways
• Tax incentives
• Special Economic Zones
• Proximity to industry clusters
Page 37

39. Design Phase
• Operating Model
• Form of enterprise
• Corporate structure
• Partnership structure
• Organization Design
• Number of employees
• Mix of local and global staff
• Partner Selection
• Value Proposition
• Key Advantages
• Risk Assessment
• Due Diligence
Page 38

40. Design Phase
• Preparing Key Stakeholders
• Business plan presentation
• Financial analysis
• Legal & Regulatory Setup
• Choosing the right legal and tax structure
• Investment Structuring
Page 39

41. Implementation
• Business Setup
• Registration of company
• RBI approvals
• Statutory and Legal Requirements
• Risk Management
• People
• Hiring key personnel
• Infrastructure
• Employer Value Proposition
• Recruitment strategy
• Long term / Short term incentive programs (ESOP’s / variable pay / incentives)
• Funding
Page 40

42. Key Indian Cities
Page 41

43. Structuring Investments
Liaison Office
Branch Office
Operate as a Foreign
Company
Project Office
Strategic Investor
(FDI)
Joint Ventures
Operate as an Indian
Company Private
Wholly owned
Subsidiary
Public
Investing
in India
Invest in a U.S. company with a services
fulfillment subsidiary in India
Invest in a Caymans or Mauritius company
with a services fulfillment sub in India
Financial Investor
(FII or FVCI)
Direct investment in an India company
from outside India (Mauritius/Cyprus subs)
Direct investment in an India company
from outside India through a venture
capital fund registered with the SEBI
Page 42

44. Strategic Investors seeking India presence commonly
use the automatic route
Automatic Prior FDI in select
Negative List
Route Approval sectors
•100% FDI permitted in most Generally, applicable in FDI not allowed in certain IT
sectors following cases: sensitive sectors e.g.: ITES
•No prior approval necessary;
• Certain cases where FDI is • Agriculture Textiles
regulated • Atomic energy Pharma
Only post-facto filings Oil & Gas
• Investor has existing joint • Railway Transport
•FDI should be brought venture / collaboration in AMC
• Real Estate (except NBFC
through normal banking same field existing prior to townships/ industrial
channels 13 Jan 2005 Integrated township
parks, etc)
• Acquisition of existing development
•Investment represented by Industrial parks
shares in financial services
fresh issue of shares Industrial model towns
sector
Hotels and tourism
Applications processed by SEZ’s
Foreign Investment Promotion Atomic energy
Board [FIPB] Decision generally Railway transport
within 4-6 weeks Lottery business,
gambling and betting
Page 43

45. FDI limits
• Petroleum Sector • Drug and Pharmaceuticals
• Construction Development Project • Software Development
• B2B e-commerce • Electronic hardware
• Tea Sector, including tea plantation • Hospitals
FDI up to 100% • ISP • Venture capital funds/companies
• Domestic Airlines • Roads and highways
• Hotel and Tourism
• Development of Airports • Telecommunication services
• ISP with Gateways, radio-paging, • Mining of precious stones
end-to-end bandwidth • Atomic minerals
FDI up to 74% • Establishment and operation of • Exploration and mining of coal and
facilities ignite for captive consumption
• Private sector banks
• Investing companies in
• Broadcasting infrastructure/services
FDI up to 49% • Domestic airlines
• FM Broadcasting • Defense Industries
FDI up to 26% • Print Media • Insurance
• Retail Trading • Gambling and betting
FDI Prohibited • Atomic Energy • Lottery business
• Arms and ammunition • Railway transport
• Coal and ignite
Page 44

46. In order for a foreign investment to be eligible for the
automatic route, certain conditions must be met
The investment should be by way of subscription of a fresh issue of shares and not
by way of purchase of existing shares from existing shareholders of the company.
The investment should be within the sectoral equity caps prescribed, where
applicable.
The investment should not be in sectors where industrial license is required to be
obtained or where foreign investment has been expressly prohibited.
FDI Regulations prescribe a minimum price for foreign investment which is arrived
at on the basis of a prescribed formula, unless made by Foreign Venture Capital
Investors registered with SEBI
With the exception of the IT sector, in all other sectors, the foreign investor
cannot avail of the automatic route if such investor already has a previous venture
or tie-up in the same field in India. However, this requirement applies essentially
to strategic business investors and not to financial investors who may hold other
portfolio investments in Indian companies.
Page 45

47. Automatic Route vs Prior Approval
• The Automatic Route requires no prior regulatory approval, but only post filing
notification to RBI through their Authorized Dealer/ Bankers within 30 days of
investment.
• FDI in sectors/transactions requiring prior Government Approval is granted by the
Government Of India, Ministry of Finance, and the Foreign Investment Promotion
Board (FIPB).
• An application is required to be filed with the Secretariat for Industrial Assistance
• (SIA)setting out the details of investment, business plan, financials of the foreign
• company, etc. Along with the application, a declaration as to whether the
applicant has or had any previous financial/technical collaboration or trademark
agreement in India in the same field for which approval has been sought, are
required to be submitted. Approval is granted by the FIPB on a case by case basis.
Page 46

48. Liaison/ Representative Office - Scope of Activities
Key Considerations
Testing the waters without committing major resources.
Developing trade relations.
Collecting market information.
Inspection & coordination of purchases for export to parent company.
Regulatory/ Legal Framework
No business activity permitted. Office expenses to be met through foreign
exchange remittance from Head Office abroad.
The foreign entity needs to have a successful profit making track record
during immediately preceding 3 years in the home country.
Prior RBI approval required.
Liaison office not taxed.
Regular filings with Registrar of Companies (ROC).
Page 47

49. Project Office - Scope of Activities
Key Considerations
Office for undertaking a specific project.
Approvals granted for both Government and private sector projects.
Regulatory/ Legal Framework
The foreign entity needs to have a successful profit making track record
during immediately preceding 5 years in the home country.
Regular ROC filings to be made.
The activities permitted do not include manufacturing (unless set up in an
Special Economic Zone) and retail trading.
Page 48

50. Branch Office - Scope of Activities
Key Considerations
Scope of activities larger than that of a liaison office.
Represent parent or other foreign company as buying/ selling agent.
Research in the sector, in which the parent company is involved.
Render professional or consultancy services.
Undertake export/ import trading activities.
Regulatory/ Legal Framework
Regular filings to be made with the ROC.
Own manufacturing activities not permitted.
Taxed @ 42% (including surcharge) of profits of Indian branch.
Page 49

51. Setting up a Wholly Owned Subsidiary
Key Considerations
Incorporation of an Indian company – private or public.
Specific FIPB approval to be sought if investment does not qualify for
automatic approval.
Corporate tax @ 35%.
Nature of the Company
Private company to have a minimum of 2 members and a minimum paid up
capital of Rs. 1,00,000/- (approx USD 2,000).
Public company to have a minimum of 7 members and a minimum paid up
capital of Rs. 5,00,000/-. (approx USD 10,000).
Public Company has more corporate compliances but can list on stock
exchange
Page 50

52. Setting up a Joint Venture Company
Key Considerations
Approval requirement depending on sector, in which investment is made.
Taxation as applicable to an Indian company.
Both, the principal investment and the income are allowed to be repatriated
outside India without restrictions.
Dividend taxable in the hands of the shareholder.
Page 51

53. Joint Venture or Wholly Owned Subsidiary
Key Considerations
Meetings
ROC filings
Labour And Employment
Taxation
Taxation of foreign personnel in India
Tax treaties
Page 52

54. Other Routes to Invest in India
Key Considerations
Technical Collaboration
Investing in an existing Indian company
Fresh issue of shares by an Indian company
Purchase of existing shares in an Indian company by way of transfer
Foreign Institutional Investor
Page 53

55. Strategic Framework
• Sustainable Advantages
Do I need to leverage India? • Changing Global Economy
• Future Growth of India
• Organization Design
How can I create an India Entry • Finding Partners
Strategy? • Implementation
• Statutory Compliance
• Due Diligence
How do I manage risks in India?
• Legal Aspects
• Risk Management
• Culture & Communication
How do I grow my operations in India? • Creating Incentives
• Monitoring Investment
Page 54

56. Due Diligence - The Bottom Line
Page 55

57. Doing Due Diligence US vs. India
Page 56

58. Ten Tips to Successful Due Diligence
1. Know the mindset of the target company
Comprehensive information required for the due diligence process is not readily
available with the Indian companies due to lack of detailed management information
system. For example, detailed schedule of margins by product and by customer may
not be easy to come by with these companies. The forecasting methodologies of such
small and medium sized Indian companies are not very robust, often leading to
simplistic projections. The forecasts tend to be aggressive, without a track record to
boot.
2. Understand key differences in doing a due diligence in the western countries
and in India
Going in for a due diligence process with the right expectations is a critical success
factor for US investors. The quality of financial statements, financial infrastructure
and business and business process will be lower and less explicit than western
investors are accustomed to. This results in the need to explore more risk areas and
take more time for the due diligence.
Page 57

59. Ten Tips to Successful Due Diligence (E&Y)
3. Listen for the word “N0'”:
Asian culture is less direct in some respects. Western investors rarely hear their
Indian counterparts say “no” even though they do not mean “yes''.
4. Look out for Hidden Skeletons:
Inadequate disclosures impede the ability to access critical information that might
alter the investor's perception with regard to the value of the company, environment
issues and aggressive tax positions among others.
5. Evaluate Corporate Governance:
Companies are slowly realizing the importance of corporate governance and some of
the leading organizations are benchmarking to global standards. Some others are
moving towards improvement.
6. Keep an Eye on Related Party Transactions:
As a hangover of the licensing raj, Indian businesses are generally structured as
conglomerates or group businesses which create extensive related party transactions.
Page 58

60. Ten Tips to Successful Due Diligence (E&Y)
7. Avoid Legal Minefields
Weak corporate governance is compounded with tardy legal systems where dispute
resolution often remains a distant goal..
8. Communicate with Care
In any transaction, communication must be handled with utmost care. Sensitivity to
Indian culture with regard to dealing with the owners who are also the entrepreneurs
of the company will help to make the venture more rewarding.
9. Manage the Control Freaks
It is often observed that founding members of a start-up will refuse to give up control
and settle for a minority ownership stake (a common condition for many start-ups in
exchange for Private Equity funding).
10. Think Global, Act Local
Firms with a presence in India have a distinct edge due to their wide networks of
contacts and experience of the Indian business environment.
Page 59

61. Drill Down Due Diligence
Page 60

62. Taxation
• Companies incorporated in India are treated as Indian companies for taxation
• There exists a Double Taxation Avoidance Agreement with 65 countries
• Peak Custom duty has been reduced to 15%
• Tariff to be aligned with ASEAN levels
• Value Added Tax introduced in some States from 1st April 2005
• Transparency in Tax Structure: Online/ ICT Applications
• Differentiation - domestic company vs. foreign company
• Facts - Wealth tax rate of 1%; tax year April to March
Tax rates in India
The above rates are exclusive of the currently applicable surcharge of 2.5% on the tax
and an education cess of 2% on the tax as well as the surcharge. In case of a domestic
company the surcharge applicable is 10%.
Page 61

63. Tax Regime of India – Direct Tax
1. Corporate Tax – Domestic Company – 33.66%; Foreign Company – 41.82%
2. Dividend Tax – Company – 16.995% (w.e.f. Apr 1, 2007); Money Market Mutual
Fund – 25%
3. Minimum Alternate Tax
4. Capital Gains
5. Securities Transaction Tax
6. Taxation of know how fees in the hands of Foreign Companies –
Royalties/Technical fees payable to non-residents are taxed on net basis.
7. Fringe Benefit Tax (FBT) - ESOPs brought under FBT (w.e.f. Apr 1, 2007)
8. Banking Cash Transactions Tax – 0.1% to apply for withdrawals over INR 50,000
9. Double Tax Avoidance Agreements (DTAAs)
10. Other Direct Tax – Wealth Tax
11. Important concept – Transfer pricing and determination of arms length price
(“ALP”)
Page 62

64. Indirect Tax
1. Customs Duty
2. CENVAT (Excise Duty)
3. Sales Tax
4. Value Added Tax
5. Service Tax
6. Octroi Duty/Entry Tax
7. Stamp Duty
8. R&D Cess
9. Works Contract Tax
10. Turnover Tax
11. Purchase Tax
12. Secondary and Higher Education Cess
Page 63

65. Considerations in Determining Deal Structure
Ease of exit including any currency exchange restrictions, the impact of
Sarbanes-Oxley in the U.S. and overseas company listing requirements in India;
Relative valuations in the U.S. and India capital markets for the type of
investment, particularly a services business;
Ease of acquisition by the likely set of acquirers as an exit strategy;
Investor “comfort” with the limitations on preference shares under the India
Companies Act of 1956, as amended (the “Companies Act”); and
Location of “market pull” for the investee company.
Page 64

66. Exit through Strategic Sale
If the transferee is an Indian resident, then as per the FDI Regulations notified by the
RBI, if the investee company is listed at the time of exit, then the investor cannot
exit at a price that is higher than the prevailing market price of the shares. In case
the Indian company is unlisted at the time of such exit through a strategic sale, then
the exit price will have to be as determined by a chartered accountant or an
investment banker registered with SEBI. However, the RBI has carved out a specific
exemption from this exit pricing restriction for FVCIs registered with SEBI. Further, if
the strategic buyer happens to be another non-resident party, then again, the exit
pricing restrictions of the RBI will not be applicable.
Page 65

67. Exit Consideration
Capital Gains
No objection certificate required for new ventures – No objection certificate
from Indian Partner has been a key negotiation point for Foreign Company
having existing JV relationship in India. NOC has been made in-applicable for
new ventures by foreign company.
Shareholders agreement and implications thereof – right a first refusal, tag
along rights and drag along rights
Liquidation process – long drawn and court approval process
Page 66

68. Cash Repatriation
Capital and income arising from foreign investment in India can be freely
repatriated (except for cases where the investment is made on non-repatriation
basis), subject to provision of a no-objection certificate from the Indian revenue
authorities or a certificate from a chartered accountant confirming that taxes
payable, if any, are deposited into the Indian government treasury.
Page 67

69. Acquisition of Shares
Acquisitions may be made of an existing Indian company which may be
either a private or a public company.
Acquisition of shares of a public listed company is subject to the
guidelines of the Securities Exchange Board of India (SEBI)
Foreign investors looking at acquiring equity in an existing Indian
company through stock acquisitions can do so under the automatic
route.
Page 68

70. Foreign Technology Transfer
Foreign technology induction is encouraged by the Government both
through FDI and through foreign technology collaboration agreements.
No approvals are required in respect to all those foreign technology
agreements which involve:
a lump sum payment of up to USD 2 million
royalty payable up to 5% on net domestic sales and 8% on exports, subject to a
total payment of 8% on sales, without any restriction on the duration of royalty
payments.
Note - It is permissible for an Indian Company to issue equity shares against lump-
sum fee and royalty in convertible foreign currency
Page 69

71. Exchange Control Regulations of India
Exchange control is regulated under the Foreign Exchange Management Act,
1999 (“FEMA”)
Foreign exchange transactions have been divided into two broad categories –
current account transactions and capital account transactions.
The Indian rupee is fully convertible for current account transactions, subject
to a negative list of transactions that are prohibited/ require prior approval.
The exchange control laws and regulations for residents apply to foreign
invested companies as well.
Repatriation of Capital
Foreign capital invested in India is generally repatriable, along with capital
appreciation, if any, after the payment of taxes due on them, provided the
investment was on repatriation basis.
Page 70

72. Legal Matters
Legal Matters
Dispute Resolution
Intellectual Property Protection
State Governments
Company Income Tax
Page 71

73. Dispute Resolution
Special Economy Courts
Industrial Tribunal - employee disputes
Tax Tribunal - tax disputes
Debts Recovery Tribunal - debts disputes
Local Lawyer
Responsible for legal issues in our company
Page 72

74. Intellectual Property
Special Protection Activities
Handbook of copyright law
Cooperation with police academy
Workshops and seminars for department chiefs
Page 73

75. State Governments
Responsibility
Registration
13 procedures to register
a company
Responsible for Necessary
Infrastructure
Offices
Electricity
Internet and telephone
connection
Water supply
Offer National Industry Parks
Page 74

76. Outsourcing to India
Apart from India’s …
robust communication infrastructure;
large English-speaking workforce;
low labor costs and overheads; and
appropriate time-zone difference with the West,
… India has the following advantages to offer:
The brand equity built by the software services sector in India which exports software to
95 countries around the world.
Faster adoption of well-defined business processes resulting in higher productivity gains.
India has state-of-the-art technologies for total solutions: outsource turnkey projects.
India has a stable government and is one of the world's 10 fastest-growing economies.
Page 75

77. Business Process Outsourcing
Business Process Outsourcing (BPO) is the delegation of one or more IT-intensive
business processes to an external provider that in turn owns, administers and
manages.
The selected process based on defined and measurable performance criteria.
Business Process Outsourcing (BPO) is one of the fastest growing segments of the
Information Technology Enabled Services (ITES) industry.
Page 76

78. Cost and Quality Advantages
Outsourcing to India is now more about high quality rather than cost
Indian companies are fast scaling up to match or surpass international
quality standards and are ensuring that they stay ahead through stable
quality systems and continuous quality improvement.
Page 77

79. Legal Considerations
Outsourcing through Ownership Model
Owning the Intellectual Property
Enforcing the Contract
Protecting Trade Secrets and IP
Liability
Tax Considerations
Employment Issues
Page 78

80. Owning Intellectual Property
Key Considerations
Indian copyright law may apply
Standard “works for hire” clause may not viable
Patent protection unlikely
Some concerns on fair use provisions for pre-existing IP
Page 79

81. Enforcing the Contract
Key Considerations
Customers want home jurisdiction and governing law.
Arbitration v. Court - from an enforcement perspective.
Execute an onshore contract with the subsidiary.
Avoiding Indian courts other than for injunctive relief.
Very few disputes have arisen.
Page 80

82. Protecting Trade Secrets & Intellectual Property
Key Considerations
India’s piracy rate is misleading.
No specific statute for data protection and privacy.
Common law remedies and jurisprudence applicable.
Indian service companies follow safe harbor provisions.
Injunctive & equitable relief reasonably easy.
Need for forum shopping for IP friendly court.
Not easy to enforce employee restrictions.
Criminal remedies are an option.
Page 81

83. Liability Issues
Key Considerations
Indirect & consequential damages very unlikely.
No damages culture in Indian courts.
Liquidated damages possible if reasonable.
Enforcement of SLA type penalties can be a challenge.
Exchange control laws may prevent payment.
Page 82

84. Tax Considerations
Some structures may fall foul of tax considerations
Export requirement
Receipt in foreign exchange
Change in tax regime could alter pricing marginally
Will the income tax holiday go away?
New service tax on BPO companies
PE issues arising from supervision and equipment
Investment structuring for outsourcing to subsidiary
Transfer pricing regime yet to stabilize
Page 83

85. Employment Issues
Key Considerations
Requirements for layoff of employees onerous.
Messy employment requirements rarely followed.
BPO Companies may be affected.
Government policies on women working at night.
Government policies on flexible hours, holidays, etc.
Stock options - restrictions on purchase of foreign stock.
Recent skirmishes on IP related employee movement.
Not easy to restrict employees.
Some visa & immigration problems both ways.
Page 84

86. Strategic Framework
• Sustainable Advantages
Do I need to leverage India? • Changing Global Economy
• Future Growth of India
• Organization Design
How can I create an India Entry • Finding Partners
Strategy? • Implementation
• Statutory Compliance
• Due Diligence
How do I manage risks in India?
• Legal Aspects
• Risk Management
• Culture & Communication
How do I grow my operations in India? • Creating Incentives
• Monitoring Investment
Page 85

87. Culture
• Cultural Aspects
— Four major Religions: Major religions are Hindu, Muslim, and some Christians
— Diverse Languages: There are 15 recognized languages with Hindi as the official language
• Social Interactions
— Indian’s are very open and will ask personal questions
— The proper greeting is namaste or hello
— 3 feet of personal space, and gestures have different meanings
— Strong male hierarchy
• Entertainment Protocols
— Most meetings are between 11am and 4pm
— Always use the professional title
— An invitation to an Indian’s home should be taken seriously
Page 86

88. Business Conduct
Business cards are in English, and exchanged at the first meeting.
— Hindi … the major official language in India
— Different official languages in different states
— More than 20 languages spoken in India
— English => language of the international commerce
— What‘s your name? => English
— What‘s your good name? =>“Hinglish“
Gifts are also a popular custom, but adhere to religious observance.
The use of a respected 3rd person intermediary for introduction is recommended.
Plan meetings in advance, and do not make a tight time schedule.
Page 87

89. Think Local
The Indianized Chinese
KFC – Tandoori Chicken preferred to the ‘KFC experience’
McDonalds – ‘McVeggie Burger’ & ‘McAloo Tikki’
Domino’s – ‘Peppy Paneer’ & ‘Chicken Chettinad’
Pizza Hut / Pizza Express – spicing it up!
Page 88

90. Recruitment/ Retention Strategies
Recruitment
For every 5 openings, only 1 qualified candidate
Employees seen as internal “customers”
HR managers judged as salespeople- rather than administrators
Retention
Differentiating company from competitors
compensation and benefits tailored to particular job
Play on sense of togetherness
de-emphasize pay-for-performance
More important whether person liked and respected
performance ability not valued as strongly
Page 89

91. Negotiation
Preparation is a key to success in India.
Present issues in a hierarchical order
There is low sensitivity to time.
A relationship must be formed.
Negotiations should be at the highest level of the Indian organization.
Do’s Don’ts
Rely on written agreements, not Don’t be swayed by kindness
YES.
Don’t bring up business on the first
Modern India relies on contracts meeting.
Consider other firms. Don’t trust every manager as equal
Bring a group of negotiators.
Save concessions for strategic
implementation.
Page 90

92. Look for the word “No”
“We will see”
“I will try” Means “NO”
“Possibly”
Page 91

93. Monitoring Operations
Assess Performance
Keep Management Focused
Identify Areas for Improvement
Review Monthly Reports
Participate in Board Meetings
Attend Industry Conferences
Discuss Results with Management
Talk to Department Heads, Other Managers
Scan News Headlines
Analyze Industry Studies, Research
Check for Fraudulence, Inconsistencies
Page 92

94. About Virtus Global Partners
One of the Leading US-India Cross Border Transaction Advisory Firms
• We advise funds and corporations on US-India cross border transactions such as mergers
& acquisitions, strategic alliances, due diligence and market feasibility research
• Principals have several years of relevant industry experience in US and India, both
transactional and operational
• Strong capabilities in Global Strategic Consulting, Analytics, Knowledge Process
Outsourcing and Information Technology Services
• Headquartered in New York with offices in Mumbai, New Delhi, Chennai and Kolkatta.
Key transactions
Page 93

95. Our Approach to Cross Border Advisory
Review Strategy Assess and Plan Process Monitor and
Implementation Measure
• Key Business • Future Business
Requirements • Sourcing
Strategies, Goals • Current State
Financial portfolio Arrangements
and Objectives • Assessment
goals • Supply Chain
• Financial • Performance
Strategic Improvements
Portfolio • Measurement
Acquisition and • Financial Portfolio
Improvements (baseline and
Sourcing Goals Realignment
• Strategic going-forward)
Organization and • Strategic
Acquisition • • Reality Testing
Operating Model Acquisition
• Sourcing • Customer
Performance • Operational
Arrangements • Feedback
Management Improvements
• Key Issues & • Continuous
Outsourcing • IT process/ E-
Opportunities • Improvement
Opportunities commerce
Implementation Model
Strategic Acquisition and Sourcing Arrangement
E-commerce and Infrastructure
Business Process Improvements
Financial Portfolio Optimization
Organizational and Operating Model
Page 94

96. Our Office Locations
New York (Headquarters):
The Graybar Building
420 Lexington Avenue
Suite 300
New York, NY 10170
India Offices:
Delhi, India Mumbai, India
Building No. 8, 2nd Floor 4th floor, Electric Mansion
Tower-A Appasaheb Marathe Marg,
DLF Cyber City, Phase II Prabhadevi
Gurgaon - 122002 Mumbai - 400 025
Chennai, India Kolkata, India
V Floor, Karumuttu Centre FMC Fortuna, A-13 V Floor
634 Anna Salai 234/3A, AJC Bose Road
Chennai - 600 035 Calcutta - 700 020
Page 95