Indian Clients and Indian Assets

1
Indian Clients and Indian Assets June 4, 2007
Bijesh Thakker
2
Topics

• India The New Trillion Dollar Economy and
  Opportunities
• Financial Market Supervision in India Regarding
  Cross Border Services
• Specialized Indian Laws You Must Know
• Limitations on Financial Services Provisions
• Specialized Tax Efficient Structuring
• Secrets For Successful Indian Financial
  Arrangements
• Watch Out on Regulatory Issues
• Cultural Issues
• Questions?

3

• What do Swiss Banks, Independent Asset Manager
  and Trust-Companies need to bear in mind when
  dealing with Indian Clients

4

• India The New Trillion Dollar Economy
• and Opportunities

5
Strong and Optimistic GDP Indicator

9.2
GDP Growth Rate
6
Strengthening Rupee

• The rupee has appreciated about 8.4 in 2007

Rupee Equivalent of 1 USD
40.5
Exchange Rate - INR vs USD
7
Bullish Stock Market

• 4th largest in Asia

14,471
BSE Sensex
BSE sensex
8
Favourite Destination For Inbound / Outbound
Investments
24.4
USD billion
17.0
6.3
0.04
0.8
3.2
1.6
3.5
0.6
0.9
1.5
3.9
3.5
1.4
January to April
Inbound
Outbound
9
Opportunities in Financial Services

• India has one of the strongest financial sector
  with low systemic risk
• The USD 28 billion Indian financial sector has
  grown at around 15
• Overall banking sector is growing by 18 and is
  projected to grow by 20 in the next 1 year
• India has one of the 10 fastest growing
  population of HNIs globally

10
Opportunities in Financial Services

• Highest return on equity in Asia

19.3
14.7
13.0
age of Return on Investment
Countries
Source US Department of Commerce
11
Opportunities in Financial Services

• Lowest average of gross bad loans

15.05
13.08
11.80
9.73
8.18
age of Gross Bad Loans as Share of Total Loans
Countries
Source Moodys Investor Services
12

• Financial Market Supervision in India
• Regarding Cross Border Services

13
Indian Legal System An Overview

• India a common law country
• Well-developed legal system, established during
  British rule, prior to independence
• Almost all laws written in English higher courts
  conduct proceedings in English
• Judicial remedy is fair, but delayed

14
Specialized Indian Laws You Must Know (1/8)

• Foreign Exchange Control
• Investment Rules Inbound/Outbound
• Banking and Financial Services Laws
• Contract Laws
• Tax Laws
• Dispute Resolution Laws

15
Specialized Indian Laws You Must Know (2/8)

• Foreign Exchange Control
• India is regulated by exchange controls
  inflow/outflow of money has rules
• Exchange controls monitored by Reserve Bank of
  India (RBI), Indias federal bank, based in
  Mumbai with regional offices throughout India
• Foreign Exchange Management Act, 1999 (FEMA)
  circulars issued by the RBI govern all
  transactions
• Foreign exchange on capital account transactions
  continues to be regulated, subject to general or
  specific exemption

16
Specialized Indian Laws You Must Know (3/8)

• Inbound Investment Rules
• Sophisticated but liberalized inbound investment
  rules
• Invest through
• Foreign Institutional Investment (FII) Route
• Foreign Direct Investment (FDI) Route
• Other schemes for Non Resident Indians (NRIs)
• FDI regulations substantially liberalized
• No prior Government permissions are required for
  FDI, except in certain cases

17
Specialized Indian Laws You Must Know (4/8)

• Outbound Investment Rules
• Outbound investment rules sophisticated but
  liberalized
• Resident Indians not permitted to hold assets
  outside India except under special schemes
• Resident Indian companies permitted to hold
  assets outside India subject to regulations

18
Specialized Indian Laws You Must Know (5/8)

• Banking and Financial Services Laws
• Sophisticated banking and finance laws
• RBI is the central regulatory and supervisory
  authority for Indian financial system
• Other important regulators - Finance Ministry,
  Securities Exchange Board of India (SEBI),
  Registrar of Companies (ROC)
• Foreign banks set up regulated in India
• Financial services sector detailed
  regulation/capital injection thresholds

19
Specialized Indian Laws You Must Know (6/8)

• Contract Law
• Indian contract law based on English common law
  but codified
• Privity of contract principal
• Breach of control delayed claims
• Awards are small and delayed
• Nominee holding controlled by separate legislation

20
Specialized Indian Laws You Must Know (7/8)

• Tax Laws
• Well developed tax laws
• DTAA with 71 countries
• India not an OECD signatory but DTAAs based on
  general principles laid down in model OECD draft
• FDIs mostly routed through Mauritius and
  Singapore to avail of capital gains benefits

21
Specialized Indian Laws You Must Know (8/8)

• Dispute Resolution Laws
• Choice of Law enforceability of proper law of
  contract
• Choice of Jurisdiction subject to court having
  inherent jurisdiction
• Arbitration Conciliation Act, 1996 based on
  UNCITRAL Model Law
• Singapore and London - favourite venues for
  arbitration

22

• Limitations on Financial Services Provisions

23
Limitations on Financial Services Provisions

• Advisory on inbound / outbound investment
  strategy
• Assistance in deployment of funds
• Investment structures - successful product
  offering against limitations

24
Advisory on Inbound/Outbound Investment Strategy

• If provided from outside India no registrations
  required in India but watch out on tax issues
• If provided from a base in India -investment
  advisory services considered a non fund based Non
  Banking Financial Companies (NBFC) activity
• Subject to minimum capitalization requirement of
  USD 0.5 million

25
Assistance in Deployment of Funds

• Regulatory Touch Points

26
Assistance in Deployment of Funds in India (1/2)

• Mandatory registration with SEBI required for
  providing following services
• Asset Management
• Net worth of atleast INR 100 million (USD 2.2
  million)
• Portfolio Management
• Net worth of atleast INR 5 million (USD 0.11
  million)
• Above activities considered as NBFC activities
  under FDI guidelines

27
Assistance in Deployment of Funds in India (2/2)

• Minimum capitalisation norms for financial
  services
• 51 USD 0.5 million, to be invested upfront
• 51 to 75 USD 5 million, to be invested upfront
• 75 to 100 USD 50 million out of which USD 7.5
  million to be invested upfront and balance over
  24 months

28
Investment Structures - Successful Product
Offering Against Limitations (1/3)

• Inbound Investments

29
Investment Structures - Successful Product
Offering Against Limitations (2/3)
30
Investment Structures - Successful Product
Offering Against Limitations (3/3)

• Outbound Investments

31

• Specialized Tax Efficient Structuring

32
Specialized Tax Efficient Structuring

• Investment structuring relevant for capital gains
• Commonly used DTAAs
• India Mauritius
• India Singapore
• India Cyprus

33
Specialized Tax Efficient Structuring
Monitor
Monitor
34
Case Study - A

• Mr. X, a non-resident wants to invest in real
  estate
• FDI in real estate permitted subject to certain
  conditions
• Routes for investment
• Direct investment subject to FDI guidelines
• NRI in personal/individual name
• OCBs
• SPVs floated by NRIs
• Property fund
• Mortgage

Subject to guidelines RBI approval required
at the time of enforcement
35
Case Study - B

• ABC, a foreign corporate wants to invest in
  Indian unlisted companies
• Routes for investment (direct or through DTAA
  preferred countries)
• Direct investment subject to FDI guidelines

36
Case Study C

• XYZ, a foreign corporate wants to invest on the
  Indian stock exchange
• Routes for investment (direct or through DTAA
  preferred countries)
• Investment as a FII or a sub account of a FII
• Investment through PN route

Subject to obtaining of necessary approvals
37

• Secrets of Successful Indian
• Financial Arrangements

38
Secrets of Successful Indian Financial
Arrangements (1/4)

• 2 Success Mantras
• Remember to watch out on regulatory issues
• Understand Indian culture to which you would come
  close

39
Secrets of Successful Indian Financial
Arrangements (2/4)

• Watch out on regulatory issues
• Indian regulators well informed, educated,
  experienced and powerful respect their
  territory
• India has a disclosure based regime of
  regulations
• Disclosures under Section 187C of Companies Act
  required incase of nominee shareholders
• Benami/nominee transactions illegal
• Exchange control violations earlier criminal
  offence - since 2000 civil offence

40
Secrets of Successful Indian Financial
Arrangements (3/4)

• Understand Indian culture
• Family tends to be large but ability to divide to
  be provided
• Senior members remain powerful but conservative
• Wealth may not be measured by outward material
  surroundings/actual wealth
• Young Indians are global citizens - know banking
  and finance well and are willing to shift for
  right product/country/currency mix
• Indians remain at heart saving oriented, but
  increasingly willing to leverage for better
  return
• Confidentiality and discretion universally
  appreciated, patience even more

41
Secrets of Successful Indian Financial
Arrangements (4/4)

• Offshore family trust structure most openly
  kept secret
• Discretionary trusts widely used
• Not tested regulatory waters yet in India on FEMA
  compliance

42
Questions?
BIJESH THAKKER Managing Partner MUMBAI n
DELHI n BANGALORE
Mumbai Office Delhi Office Bangalore
Office Nirmal, 20th Floor A/320 Unit No. 706,
Carlton Tower Nariman Point Defence Colony No.
1, Airport Road Mumbai 400 021 New Delhi 110 024
Bangalore 560 008 Tel [phone] Tel
(91 11) 2433 9776 Tel [phone] Fax
(91 22) 6630 8100 Fax [phone] Fax
(91 80) 2526 4357
43
Glossary (1/2)

• ADR American Depository Receipt
• BSE- Bombay Stock Exchange
• DTAA- Double Taxation Avoidance Agreement
• ECB- External Commercial Borrowings
• FCCB - Foreign Currency Convertible Bond
• FEMA- Foreign Exchange Management Act, 1999
• FDI- Foreign Direct Investment
• FII- Foreign Institutional Investor
• FIPB- Foreign Investment Promotion Board
• GBL1- Global Business License Type 1
• GDP- Gross Domestic Product
• GDR - Global Depository Receipt

44
Glossary (2/2)

• HNI- High Networth Individual
• LLCs- Limited Liability Companies
• LLPs- Limited Liability Partnerships
• NRI- Non-Resident Indian
• NBFC- Non-Banking Financial Companies
• OCBs- Overseas Corporate Body
• OECD- Organisation for Economic Co-operation and
  Development
• PN- Participatory Notes
• RBI- Reserve Bank of India
• ROC- Registrar of Companies
• SEBI- Securities and Exchange Board of India
• UNCITRAL- United Nations Commission on
  International Trade Law