Indian Clients and Indian Assets

June 4, 2007
Bijesh Thakker

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?

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

India The New Trillion Dollar Economy and Opportunities

Strong and Optimistic GDP Indicator

% 9.2%

GDP Growth Rate

4

Strengthening Rupee
The rupee has appreciated about 8.4% in 2007

Rupee Equivalent of 1 USD

40.5

Exchange Rate - INR vs USD

5

Bullish Stock Market

4th largest in Asia
14,471

BSE Sensex

BSE sensex
6

Favourite Destination For Inbound / Outbound Investments

24.4

17.0

6.3
0.04 1.6 3.2 0.8 0.6 1.5 1.4 0.9 3.5

3.5 3.9

January to April

Inbound

Outbound

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

Opportunities in Financial Services

Highest return on equity in Asia

19.3
%age of Return on Investment

14.7 13.0

Source: US Department of Commerce

Countries

Opportunities in Financial Services

Lowest average of gross bad loans

15.05
11.80 9.73 8.18 13.08

Countries

10

Source: Moodys Investor Services

Financial Market Supervision in India Regarding Cross Border Services

11

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

12

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

13

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

14

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

15

Specialized Indian Laws You Must Know (4/8)

Outbound Investment Rules

Outbound investment sophisticated but liberalized

rules

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

16

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

17

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 claims

of

control

delayed

Awards are small and delayed

Nominee holding controlled by separate legislation

18

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

19

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

20

Limitations on Financial Services Provisions

21

Limitations on Financial Services Provisions

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

22

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

23

Assistance in Deployment of Funds

Regulatory Touch Points
Inbound FIPB (if not automatic route) RBI Outbound RBI

SEBI
ROC

24

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

25

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

26

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

Inbound Investments
Objective Investment on stock exchange Limitation Foreign residents/citizens not permitted to participate Exchange control and FDI sectoral cap Investment Structures/Products

PNs issued by FIIs Sub account of a FII

Direct investment in Indian ventures

FDI compliant investment by bank owned Special Purpose Vehicles (SPVs) based on: Investment backed by offshore securities/deposits Offshore call & put arrangement

27

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

Objective Raising funds internationally for inbound investments Limitation

Investment Structures/Products

Exchange control regulations Outbound investment guidelines FDI guidelines ECB guidelines ADR\GDR\FCCB guidelines

Offshore joint ventures/ wholly owned subsidiaries raise funds through Private equity Preference shares Borrowings for investment in Indian equity Offshore floats such as ADRs/GDRs/FCCBs

28

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

Outbound Investments
Objective Outbound investment by corporates Limitation Outbound investment guidelines Investment Structures/Products

Offshore joint ventures/ wholly owned subsidiaries raise funds through Private equity Leveraging funds from overseas through specially structured instruments All transactions except certain transactions such as purchase of lottery tickets, football pools, etc.

Outbound investment by individuals

USD 100,000 per person per year Solicitation of such deposits by foreign banks requires prior RBI approval

29

Specialized Tax Efficient Structuring

30

Specialized Tax Efficient Structuring

Investment structuring relevant for capital gains Commonly used DTAAs

India Mauritius India Singapore India Cyprus

31

Specialized Tax Efficient Structuring

Country
Mauritius Singapore Cyprus

Favorable tax provision under the DTAA

Capital Gains Tax exemption available Has to be a GBL1 company Capital Gains Tax exemption available Cannot be a shell company Capital Gains Tax exemption available Has to be a Cyprus resident
Monitor Monitor

32

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 * * **

33

* **

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

34

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

*
35

Subject to obtaining of necessary approvals

Secrets of Successful Indian Financial Arrangements

36

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

37

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

38

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

39

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

40

Questions?

BIJESH THAKKER Managing Partner

MUMBAI Mumbai Office Nirmal, 20th Floor Nariman Point Mumbai 400 021 Tel : (91 22) 6630 8000 Fax : (91 22) 6630 8100

DELHI

BANGALORE Bangalore Office Unit No. 706, Carlton Tower No. 1, Airport Road Bangalore 560 008 Tel : (91 80) 2526 5776 Fax : (91 80) 2526 4357

Delhi Office A/320 Defence Colony New Delhi 110 024 Tel : (91 11) 2433 9776 Fax : (91 11) 2433 3545

Glossary (1/2)

42

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

Glossary (2/2)

43

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