Mergers, Foreign Collaborations and Financial Innovations in a Global Economy

International Tax Conference on Cross Border Transactions

Theme Presentation

November 2005

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

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Part I: India and the global economy

3

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 7,000 Cumulative FDI (USDmn) FDI (USDmn) 40,000 6,000 5,000 35,000 30,000 4,000 25,000 20,000 3,000 15,000 2,000 10,000 1,000 5,000 Source: Reserve Bank of India 4

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 5

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 Dismantling Protectionism

Average imports tariffs have reduced from 53% in 1988 to 18% In 2002

Strong Infrastructure

Avoid direct government involvement Allowing FDI Sound regulatory framework (TRAI, CERC) Introduction of competition

Financial Sector Reforms

Sound regulatory base in banking, insurance and securities Securitisation Act Strengthening creditors’ rights, debt restructuring efforts

Fiscal Reforms

Removal of distortionary taxes Migration to VAT regime Simplicity and low cost of compliance

Disinvestment

Major successes include VSNL, BALCO, CMC, Maruti Udyog, GAIL, ONGC, NTPC Progress by state governments as well

Globalisation

Reduced barriers to movement of goods and capital Well-poised to exploit the Internet 6

India: Cost competitiveness

    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

Peak Import duty reduced to 15%

55 50 45 40 35 30 25 20 15 10 Source: Budget documents

Price structure comparison between India and China: higher taxes main difference

100 14-16 4-7 3-4 2-5 2-5 67-72 India Indirect taxes Source: McKinsey Global Institute, CII Import duties* Labour Produc-tivity Interest costs 7 Others** China

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

1400 1200 1000 800 600 400 200 0 No of engineering colleges (LHS) Annual enrollment, million (RHS) FY 98 FY 99 FY 00 FY 01 FY 02 FY 03 Source: GOI 0.4

0.35

0.3

0.25

0.2

0.15

0.1

0.05

0

Cisco announces US$1.1bn investment in R&D base

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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 9

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

(%) 15-19 20-24 25-34 35-44 45+ Source: NRS

% of population (2003)

10.6

10.0

17.1

12.8

18.3

2003

84.3

76.9

67.9

58.6

45.2

2002

76.1

70.2

57.4

46.9

36.9

Age profile Age group

< 14 15-24 25-39 40-59 > 59

Popn (mn)

Source: India Census 2001 363.61

189.98

228.27

167.39

79.36

(%)

35.3% 18.5% 22.2% 16.3% 7.7% 10

… 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 Rural

Other food 22% Other non-food 29% Vegetables 6% Milk & milk products 8% Cereals 18% Clothing & footw ear 8% Fuel & light 9% Source: NSS Report 2003, ICICI Securities Research

Urban

Other food 20% Vegetables 4% Milk & milk products 8% Cereals 10% Fuel & light 9% Other non-food 42% Clothing & footw ear 7% Source: NSS Report 2003, ICICI Securities Research 11

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

RoCE WACC Rf FY96 FY97 FY98 FY99 FY00 FY01 FY02 Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100) FY03 FY04 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Free cash flow mantra

500 FCF Net D/E (RHS) NWC/ Sales (RHS) 400 300 200 100 0 -100 -200 -300 FY96 FY97 FY98 FY99 FY00 FY01 FY02 Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100) Capex FY03 FY04 80% 70% 60% 50% 40% 30% 20% 10% 0% 12

Part II: The trends

13



International Investors have reposed faith in the Indian Economy …

As per a study conducted by AT Kearney, India ranks among the top 3 in global FDI Confidence Index

Cumulative FDI Inflow

India has witnessed a strong inflow of FDI in the last 5 years, USD mn 8000 75000 Cumulative FDI FDI  Growth opportunities in India have attracted global investors including VC funds investors and private equity 6000 4000 2000 55000 35000 15000 – PE Investments worth over USD1.75bn in FY2005 (USD 1bn in 0 1995 96 Source: RBI 1996 97 1997 98 1998 99 1999 00 2000 01 2001 02 2002 2003 2004 03 (R) 04 (P) 05 (P) -5000 1HFY06) and exits of over USD 545mn (USD 939mn in

FDI Confidence Index

India ranks 3 rd in global FDI Confidence Index 1HFY06) China USA India UK Ger France A us HK Italy Japan 0 Source: A T Kearney 0.5

1 1.5

2 2.5

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… which is reflected in bullish capital markets

  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

Performance of Emerging Market Economies

India has delivered superior returns over the last year Country India South Korea Indonesia Hong Kong FTSE Taiwan Thailand Dow Jones Malaysia Y-o-Y Return PE Ratio 51.69% 50.38% 15.76% 12.46% 11.91% 6.83% 5.98% 2.36% 1.30% Source: Bloomberg, Returns as on Oct 7, 2005 16.38

12.06

12.29

13.82

13.03

15.02

10.89

16.33

15.54

15

Stock Markets are Witnessing a Bull Run, USD mn

21000 FII Inflows MF Inflows Sensex 8600 8100 15000 7600 7100 9000 3000 6600 6100 -3000 5600 -9000 5100 -15000 Jan-05 Feb-05 Mar-05 Apr-05 Sources: SEBI, www.moneycontrol.com

May-05 Jun-05 Jul-05

Total Equity Holdings of MFs and FIIs

Aug-05 Sep-05 Increased institutional buying in the stock markets 50 45 MF FII 40 35 30 25 20 80.95% 81.63% 15 10 5 18.37% 19.05% 0 USD bn Aug-04 Feb-05 Source: AMFI, SEBI ; Mutual fund data for only pure equity funds 75.10% 24.90% Aug-05 4600

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 12 Industry growth Services growth 10 8 6 4 2 0 Jun 02 Source: CSO Oct 02 Feb 03 Jun 03 Oct 03 Feb 04 Jun 04 Oct 04 Feb 05 Jun 05

NCAER BCI and Capital Goods output

Capex is closely related to the Business Confidence Index 170 140 110 80 50 NCAER BCI Capital goods (RHS) 40 30 20 10 0 -10 -20 Source: NCAER, CSO 16



…underpinned by domestic capital raising …

Companies are tapping primary equity markets for financing a large number of expansion

Primary Market Issuances

First half of 2006 has already witnessed issuances of over USD 1.6 bn with many more issues in the pipeline Issue Amount USD mn No: of issues projects 6000 50 4,915 5000 – A record USD 4.9 bn of equity 4,087 40 4000 raised in FY 05 demonstrating 30 3000 the depth of markets 2000 1,690 20 238 – Virtuous cycle of larger IPOs 1000 568 232 10 leading to increasing inflows by QIBs; especially FIIs 0 FY 2001 Source: Prime Database FY 2002 FY 2003 FY 2004 FY 2005 * Data till September 30, 2005 FY 2006* 0 – 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 17

… 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 IPO/FPO DR FCCB 100% 90% 12.90% 3.00% 32.56% 80% 40.63% 70% 12.11% 60% 50% 22.77% 84.10% 40% 30% 55.33% 20% 10% 36.60% 0% FY 04 FY 05 FY 06* Source: Prime Database (Excluding Sponsored ADR Issues) * Data till September 30, 2005 18

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 countries banks across 13 Finest pricing among offshore medium term loans

June 2005

Reliance Industries Limited

Syndication of term loan USD 350,000,000 19

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 20



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 21

Indian Corporates are Seeking International Acquisition Opportunities to Reach Global Size

Target Name

Television-tube Business Natsteel Asia Pte Ltd Flag Telecom Group Ltd DSI Financial Solutions Pte Tyco Global Network Tata Daewoo Commercial Vehicle Co. Ltd Trevira Gmbh

Acquirer Name

Videocon International Ltd Tata Steel Ltd Jun 05 Aug o4 Reliance Gateway Net Private Oct 03 HCL Technologies Ltd Videsh Sanchar Nigam Ltd Nov 04 Nov 04

Date Announced Total Value (USD mn) Industry

291 284 191 157 130 Manufacturing Steel Telecom Software Telecom Tata Motors Ltd Reliance Industries Limited Nov 03 Jun 04 118 97 Auto Textile 22

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

Target Name Acquirer Name

BPL Mobile Cellular Ltd I-flex Solutions Ltd Indian Phone Ventures ACC GECIS Global Aircel Televentures Ltd Flextronics Software Sys Ltd Digital Globalsoft Ltd Hutchison Telecommunications Nov 05 Oracle Corp Aug 05 Hutchison Telecommunications Feb 05 Holcim Jan 05 US Based Private Equity Firms Non 04 Afk Sistema Flextronics Intl Ltd Feb 05 Jun 04 Hewlett-Packard Co Dec 03

Date Announced Total Value (USD mn) Industry

1,152 Telecom 779 Software 592 Telecom 583 Cement 500 BPO 450 Telecom 399 Software 304 Applications Software 23

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 Rs mn Inbound Deals

24

2003 Value

581.7

Deals

12

2004 Value

116.3

Deals

21

2005 Value

455.6

Outbound

23 1338.4

21 668.1

30 1081.4

Total 47 1920.1

33 784.4

51 1537

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 24

Emerging Trends- Private Equity

  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 Private Equity Investments in India ( US$ mn) 1,000 900 800 700 600 500 400 542 917 300 200 197 100 99 Q1-2004 Q2-2004 Q3-2004 Source: Business Today, August 2005 Q4-2004 413 Q1-2005 526 Q2-2005 25

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 26

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., manufacturer of flywheel ring gears – – a leading 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 27

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

September 2005

Bharti Televentures

Sale of 10% equity stake to Vodafone Plc.

Rs 21,350,000,000  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 28

Part IV: The Regulatory framework

29

Investment in India – Alternatives

Portfolio Investment Investment In India by Foreigners Foreign Direct 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)

Automatic Route – Through RBI Foreign Direct Investment Approval Route – Through FIPB

30

Investment in Existing Companies

Investment in Existing Company Unlisted entity 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

 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 31

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 32

Part V: The Tax framework

33

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% 34

Tax Regime – Issues Carry Forward of Losses

 Can be carried forward and set off against future profits up to 8 years  No carry backward of business losses

Special Tax Treatment

 100% Tax exemption for Export Oriented Units (EOUs)

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 35

Tax Regime: Taxing the Foreign Corporate Non-residents

 Royalties, Fees from technical services, Income from GDRs, dividends, interest, etc. taxed at variable rates  Applicability of MAT?

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

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 36

Part VI: Concluding Remarks

37

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 38