India's Economic Evolution: Trends, Reforms & Opportunities

1. Mergers, Foreign Collaborations and Financial Innovations in a Global Economy International Tax Conference on Cross Border TransactionsTheme Presentation November 2005

2. Agenda Part I: India and the global economy Part II: The trends Part III: The Regulatory Framework Part IV: The Tax Framework Part V: Concluding Remarks

3. Part I: India and the global economy

4. The Drivers of the Global Economy Engines of growth • US and Europe are expected to grow at 2-4% • Brazil, Russia, India and China are going to be the next big drivers of the global economy • In less than 40 years, the BRIC companies could be larger than the G6 in dollar terms • Among BRICs, India will be the fastest growing and will rank behind China and USA by 2033 GDP of BRIC countries, in 2003 US$bn, Source: Goldman Sachs BRIC report The movement of capital • Higher growth will lead to higher returns • Increased demand for capital will mean more fund flows in these countries • Accompanying shifts in spending would provide significant opportunities for global companies Cumulative FDI Inflow India has witnessed a strong inflow of FDI in the last 5 years Source: Reserve Bank of India

5. Why India ? • Sweeping reforms post liberalization • Cost competitiveness • Large scientific research capabilities • Reforms in key growth areas like infrastructure and power • Demographic changes • Indian companies are warming to the concept of shareholder value

6. India: Sweeping reforms post liberalization The economic reforms process has been a key source of convergence among the political parties, with every successive government taking the reforms forward Average imports tariffs have reduced from 53% in 1988 to 18% In 2002 • Sound regulatory base in • banking, insurance and securities • Securitisation Act • Strengthening creditors’ rights, • debt restructuring efforts Dismantling Protectionism Financial Sector Reforms • Avoid direct government • involvement • Allowing FDI • Sound regulatory • framework (TRAI, CERC) • Introduction of competition Strong Infrastructure • Removal of distortionary taxes • Migration to VAT regime • Simplicity and low cost of • compliance Fiscal Reforms • Major successes include VSNL, • BALCO, CMC, Maruti Udyog, • GAIL, ONGC, NTPC • Progress by state governments • as well Disinvestment • Reduced barriers to movement • of goods and capital • Well-poised to exploit the • Internet Globalisation

7. 100 14-16 4-7 3-4 2-5 2-5 67-72 India Indirecttaxes Import duties* LabourProduc-tivity Interest costs Others** India: Cost competitiveness Peak Import duty reduced to 15% • Increasing participation limits for FII and FDI in different sectors • Lower custom tariffs leading to competition and lower prices • More than half of cost diff between India & China is on account of high tariffs and taxes • FTA with Thailand, CECA with SG, moving towards pact with ASEAN Source: Budget documents Price structure comparison between India and China: higher taxes main difference China Source: McKinsey Global Institute, CII

8. India: Large scientific research capabilities • More than 100 companies outsource R&D facilities from India • GE, Monsanto, Eli Lily, to name a few have largest facilities outside US, in India • Well established IT and ITES services market with CAGR of > 50% in last 5 yrs • IT exports touch US$ 22bn in 2004, form 20% of total exports (goods+services) Skilled workforce: 0.36m engineers are certified every year Source: GOI Cisco announces US$1.1bn investment in R&D base

9. India: Key reforms in growth areas • Significant milestones in infrastructure developments over last 5 years • New Telecom Policy of 1999 led to rapid penetration of telephony • Government initiated NHDP at a cost of US$13.2bn (Phase 1&2) until 2008 • Phase 3 to add another 10,000km by 2012 • Plans to extend further by another 26,000km • Electricity Act 2003 improves investment scenario in power sector • US$ 62bn of investments only in generation until 2012 • Additional investments in T&D and generation could push total to US$150bn • Development of new airports and upgradation of major airports • Private sector participation in ports • Increased investments in mining (oil & gas, coal, minerals) • NELP progressing well • Private / Foreign participation in iron ore, coal into last lap of evolution

10. India: Demographic changes have …. • Almost half the population is under 25 years • Literacy levels among young significantly high • Impact of mass media is potent • Legacy savings nest of US$600bn+ • Time to ditch the adage ‘Indians live poor but die rich’ Literacy levels Age profile (%) Source: India Census 2001 Source: NRS

11. … changed consumption patterns • Rising share of spend on ‘new services’ and lifestyle • Savings rate remains high @ 24% • Penetration of media, higher literacy and a nascent credit culture underpin the transition Consumer expenditure pie Source: NSS Report 2003, ICICI Securities Research Source: NSS Report 2003, ICICI Securities Research

12. India: Unlocking shareholder value • Universal restructuring : Top 100…Midcap 200… down to SMEs • Relearned the mantra post liberalisation: ROCE > WACC ! • Focus on de-gearing and free cash flows • Operating rates near peak – Cement, Automobiles, Steel, Mining, Electricity • Well positioned for modular, ‘high yield’ capex phase • Job creation - Manufacturing renaissance • Textiles, Tourism, Pharma R&D, Ad industry joins IT/ITES in globalisation/ outsourcing • PSUs : ‘employment boomers’ of 70s’ to retire over next 3-5 years The ROCE transformation Free cash flow mantra Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100) Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100)

13. Part II: The trends

14. International Investors have reposed faith in the Indian Economy … Cumulative FDI Inflow India has witnessed a strong inflow of FDI in the last 5 years, USD mn • As per a study conducted by AT Kearney, India ranks among the top 3 in global FDI Confidence Index • Growth opportunities in India have attracted global investors including VC funds and private equity investors • PE Investments worth over USD1.75bn in FY2005 (USD 1bn in 1HFY06) and exits of over USD 545mn (USD 939mn in 1HFY06) Source: RBI FDI Confidence Index India ranks 3rd in global FDI Confidence Index Source: A T Kearney

15. … which is reflected in bullish capital markets Stock Markets are Witnessing a Bull Run, USD mn • Strong rally in the market in spite of minor hiccups along the way • Superior returns attracting increased FII participation • Nearly 800 registered FIIs with a cumulative investment of over USD 39 bn • Equity Mutual Funds have emerged as strong players with AUM of about USD12 bn Sources: SEBI, www.moneycontrol.com Total Equity Holdings of MFs and FIIs Increased institutional buying in the stock markets Performance of Emerging Market Economies India has delivered superior returns over the last year Source: AMFI, SEBI ; Mutual fund data for only pure equity funds Source: Bloomberg, Returns as on Oct 7, 2005

16. India Inc. is on a second wave of investments … • Industrial growth catching up with services after a long gap • Automobiles, Capital goods, Engineering & construction, metals lead industrial growth • Strong correlation between business confidence index (BCI) and capex • BCI at record high indicates strong capex cycle into near future • Power, Oil & Gas, Metals, Automobiles, Textiles, Construction driving investments Industrial and Services Growth Industrial growth has complemented growth in services Source: CSO NCAER BCI and Capital Goods output Capex is closely related to the Business Confidence Index Source: NCAER, CSO

17. …underpinned by domestic capital raising … • Companies are tapping primary equity markets for financing a large number of expansion projects • A record USD 4.9 bn of equity raised in FY 05 demonstrating the depth of markets • Virtuous cycle of larger IPOs leading to increasing inflows by QIBs; especially FIIs • Primary markets remain active with a total of USD 1.7 bn equity raised by 35 companies in first 6 months of 2005-06 • The primary market will continue to remain active with a strong pipeline of issues expected to hit the market Primary Market Issuances First half of 2006 has already witnessed issuances of over USD 1.6 bn with many more issues in the pipeline Source: Prime Database * Data till September 30, 2005

18. … and overseas capital raising • Overseas fund raising options – GDR and FCCB gaining significant popularity Break up of Equity Capital Issuances Significant international investor participation through DRs and FCCBs Source: Prime Database (Excluding Sponsored ADR Issues) * Data till September 30, 2005

19. Case Study 1: Reliance Industries Multi-currency Term Loan • US$ 350 mn multi-currency loan • Facility consists of a USD, Euro and JPY tranche • Syndicated with a consortium of 34 banks across 13 countries • Finest pricing among offshore medium term loans June 2005 Reliance Industries Limited Syndication of term loan USD 350,000,000

20. Case Study 2: Motherson Sumi’s FCCB • Asia’s first Euro denominated FCCB (deal size EUR 50 mn) • Conversion Premium of 50% • 5 yr, Zero Coupon, Bullet deal with issue at par • Redemption Premium of 126.77% ; YTM 4.8% • Call Option after 3 years with 130% hurdle and no greenshoe • Ideal from the Company’s standpoint • Currency provides a better match for its cash flows with nearly two thirds of production exported July 2005 Motherson Sumi FCCB Offering EUR 50,300,000

21. Growth Through Consolidation and Inorganic Expansion: Predatory India Inc • Large number of companies in India are looking at achieving growth through acquisition of companies in the US, Europe and Asia • Key aspect of acquisition of the customers of the target • Creation of value through usage of the manufacturing set up at a lower cost Indian location • Acquisition of a competency / technology • The potential Indian acquirers are evaluating the available opportunities on the following criteria • Reasonably large customer base including blue chip customers • Established technology • Reasonable size • Flexibility towards shifting of operations to India, if required, and a willing management

22. Indian Corporates are Seeking International Acquisition Opportunities to Reach Global Size

23. International Companies are also Seeking a Foothold in the Growing Indian Market

24. Emerging Trends- M&A • Cross-border M&A to continue • In-bound M&A in sectors like IT/BPO, telecom and manufacturing • Outbound M&A in pharmaceuticals, auto & auto ancillary, textiles, oil & gas • Buyouts driven by private equity funds expected to gain ground Source: Bloomberg; includes only completed transactions; average size and range calculated on deal values that are Publicly announced • Predominantly cash transactions • Stock is yet to see an emergence as a currency in cross border transactions

25. Emerging Trends- Private Equity Private Equity Investments in India ( US$ mn) • Private Equity boom in emerging markets • India’s phenomenal investment opportunities are attracting the likes of Carlyle and Blackstone • Well entrenched capital markets and ease of transactions ensure smooth exits for PE players • Buyouts driven by private equity funds expected to gain ground Source: Business Today, August 2005

26. Case Study 1: Tata Tea’s acquisition of Tetley • First Leveraged Buy-out ( Rs. 2,135 cr) • Instant access to Tetley’s worldwide operations, combined turnover at Rs 3,000 cr • Financial Innovation at its best • SPV created to ring fence risk with equity contributed by Tata Tea and Tata Tea Inc • Debt of 235 mn pounds raised in the form of long term debt and revolver; charge against Tetley’s brand and assets • Tata Tea’s exposure only to the extent of equity component of 70 mn pounds March 2000 Tata Tea Limited Acquisition of 100% equity stake in Tetley Tea (UK) INR 21,350,000,000

27. Case Study 2: Amtek Group’s Global Steps Phase I: Setting up a strong efficient base • Amtek Group is a leading player in auto ancillary business manufacturing connecting rods, crankshafts, gear shifter forks, etc Phase II: Acquires Domain Expertise in a niche • Sets up a joint venture with Benda Kogyo, Japan for manufacture of flywheel ring gears and flexplates Phase III: Acquires Smith Jones, Inc • Acquires Smith Jones, Inc., a leading manufacturer of flywheel ring gears • Present in the OEM and replacement market • Market share of around 40% in the USA • Acquisition catapults Amtek Auto into number three producer of ring gears in the world and provides access to key OEM customers December 2002 Amtek Auto Limited Acquisition of 100% equity stake in Smith Jones, Inc. (USA) Rs358,010,000

28. Case Study 3: Vodafone enters India • Largest investment in the Indian telecom sector by overseas player (Deal Size: Rs 6700 cr) • India is the third-largest mobile with 65 mn subscribers; growth of 54% Y/Y • Bharti is the fastest-growing mobile market in Asia with 14 mn subscribers • 10% of Bharti at Rs 351/sh with 4.39% indirectly from Bharti Enterprises and 5.61% from Warburg Pincus • Exit for Warburg Pincus who originally invested US$ 300 mn for 18 % in 1999-2001 September 2005 Bharti Televentures Sale of 10% equity stake to Vodafone Plc. Rs 21,350,000,000

29. Part IV: The Regulatory framework

30. Investment in India – Alternatives Portfolio Investment • Portfolio Investment by institutional investors through Securities and Exchange Board of India Regulations • Requires registration with SEBI • Foreign Direct Investment is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling • FDI for virtually all items allowed through the automatic route under powers delegated to the Reserve Bank of India (RBI) and for the remaining items through Government approval • Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB) Investment In India by Foreigners Foreign Direct Investment Automatic Route – Through RBI Foreign Direct Investment Approval Route – Through FIPB

31. Investment in Existing Companies • If the investment is made in a listed entity, the Acquirer needs to comply with various provisions of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 Unlisted entity Investment in Existing Company Listed entity Unlisted entity • Fair valuation of shares to be performed by a chartered accountant as per the Guidelines issued by the Controller of Capital Issues Listed entity

32. Easing of Government Approval Process • FDI limits being eased up • 100% in all infrastructure projects, drugs and pharmaceuticals, hotels and tourism, etc • Currently at 74% in banking, telecom services, exploration and mining • 49% in civil aviation • 26% in insurance • Foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to foreign investors • RBI Notification: • Notification by the company to the RBI within 30 days of receipt of inward remittances • Filing the required documentation within 30 days after issue of shares

33. Part V: The Tax framework

34. Tax Regime – Taxing the Corporate • Domestic Company – 33.66% • Income tax: 30% plus surcharge: 10% plus cess: 2% • Foreign Company – 41.82% • Income tax: 40% plus surcharge: 2.5% plus cess: 2% • A minimum alternate tax under Section 115 JB(7.5% plus 2.5% plus 2.0%) is also imposed The Indian Corporate • Fringe Benefit Tax – 30.6% • FBT: 30% plus cess: 2% on certain percentages of expenditure • Dividend Distribution Tax – 14.025% • DDT : 12.5% plus surcharge: 10% plus cess: 2%

35. Tax Regime – Issues Special Tax Treatment • 100% Tax exemption for Export Oriented Units (EOUs) Carry Forward of Losses • Can be carried forward and set off against future profits up to 8 years • No carry backward of business losses Facilitation of R&D • Weighted deduction benefit for biotechnology, drugs and pharmaceuticals • Tax advantage of 7-8% as against 35% in developed countries Securities Transaction tax (STT) • STT levied at 0.02% • Abolition of long-term capital gains • Need to cover • Share buy-back • Shares transferred under open offer • Sale/transfer of shares under SEBI approved routes

36. Tax Regime: Taxing the Foreign Corporate Cross Border M&A • Transfer of shares in Indian company to a foreign entity (share-swap) not tax-neutral • Embargo on carry forward of losses under certain conditions • Asset purchase transactions are not tax neutral Non-residents • Royalties, Fees from technical services, Income from GDRs, dividends, interest, etc. taxed at variable rates • Applicability of MAT? Foreign Dividends and Capital gains • Dividends from foreign subsidiaries taxed at 35% • Profits from foreign subsidiaries taxed at 20% Controlled Foreign Corporations (CFC) • Foreign Income in a country with a tax rate lower than tax rate applicable to resident shareholders is classified CFC • CFC is taxed at the rate applicable to resident shareholders

37. Part VI: Concluding Remarks

38. Recap • The borders in a global economy are becoming seamless • India occupies a favorable place for foreign investment • Indian corporates are looking at opportunities abroad • Financial innovation has spawned a host of products • The Regulatory and the Tax framework • Foreign Investment in the form of FII/FDI • FII Investment requires SEBI registration • FDI Investment through (a) approval and (b) automatic route • Indian and Foreign corporates taxed differently • Tax structure needs to be streamlined to facilitate cross border transactions