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

Part I: India and the global economy

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

Cumulative FDI Inflow

India has witnessed a strong inflow of FDI in the last 5 years
7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY2004 FY1991 FY1992 FY1994 FY1995 FY1996 FY1997 FY1998 FY1999 FY2000 FY2001 FY2002 FY2003 FY1993

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 (USDmn)

FDI (USDmn)

40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 -

Source: Reserve Bank of India

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

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
- Avoid direct government

- Sound regulatory base in

Financial Sector Reforms

banking, insurance and securities - Securitisation Act - Strengthening creditors rights, debt restructuring efforts

Strong Infrastructure

involvement - Allowing FDI - Sound regulatory framework (TRAI, CERC) - Introduction of competition

- Removal of distortionary taxes

Fiscal Reforms

- Migration to VAT regime - Simplicity and low cost of

compliance

- Major successes include VSNL,

Disinvestment

BALCO, CMC, Maruti Udyog, GAIL, ONGC, NTPC - Progress by state governments as well

- Reduced barriers to movement

Globalisation

of goods and capital - Well-poised to exploit the Internet

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

FY96

FY97

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

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

Import duties*

Labour Produc-tivity

Interest costs

Others**

China

Source: McKinsey Global Institute, CII

FY06

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 FY 98
Source: GOI

No of engineering colleges (LHS) Annual enrollment, million (RHS)

0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

FY 99

FY 00

FY 01

FY 02

FY 03

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

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

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

Age profile
2003 84.3 76.9 67.9 58.6 45.2 2002 76.1 70.2 57.4 46.9 36.9

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

Popn (mn) 363.61 189.98 228.27 167.39 79.36

(%) 35.3% 18.5% 22.2% 16.3% 7.7%

Source: India Census 2001

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 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%

Urban
Other food 20% Vegetables 4%
Clothing & footw ear 8%

Vegetables 6% Milk & milk products 8% Cereals 18%

Other non-food 42%

Fuel & light 9%

Milk & milk products 8% Cereals 10% Fuel & light 9%

Clothing & footw ear 7%

Source: NSS Report 2003, ICICI Securities Research

Source: NSS Report 2003, ICICI Securities Research

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India: Unlocking shareholder value

Universal restructuring : Top 100Midcap 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 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

Free cash flow mantra

500 400 300 FCF Net D/E (RHS) NWC/ Sales (RHS) Capex 80% 70% 60% 50% 40% 30% 20% 10% 0% FY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 FY04

(Rs bn)

200 100 0 -100 -200 -300

Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100)

Source: CMIE; Note: ex IT, Pharma & Banks (BSE 100)

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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 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)
Cumulative FDI Inflow
India has witnessed a strong inflow of FDI in the last 5 years, USD mn
8000 Cumulative FDI 6000 4000 2000 0 1995- 1996- 1997- 1998- 1999- 2000- 2001- 2002- 2003- 200496 97 98 99 00 01 02 03 (R) 04 (P) 05 (P) Source: RBI FDI 55000 35000 15000 -5000 75000

FDI Confidence Index

India ranks 3rd in global FDI Confidence Index
China USA India UK Ger France A us HK Italy Japan 0 0.5 1 1.5 2 2.5

Source: A T Kearney

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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

Stock Markets are Witnessing a Bull Run, USD mn

FII Inflows 21000 MF Inflows Sensex 8600 8100 7600 7100 6600 3000 6100 -3000 5600 -9000 5100 4600 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05

15000

9000

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

-15000 Jan-05

Sources: SEBI, www.moneycontrol.com

Performance of Emerging Market Economies

India has delivered superior returns over the last year
Country Y-o-Y Return PE Ratio India 51.69% 16.38 South Korea 50.38% 12.06 Indonesia 15.76% 12.29 Hong Kong 12.46% 13.82 FTSE 11.91% 13.03 Taiwan 6.83% 15.02 Thailand 5.98% 10.89 Dow Jones 2.36% 16.33 Malaysia 1.30% 15.54
Source: Bloomberg, Returns as on Oct 7, 2005

Total Equity Holdings of MFs and FIIs

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

Aug-05

15

India Inc. is on a second wave of investments

Industrial growth catching up with services after a long gap

Industrial and Services Growth

Industrial growth has complemented growth in services Industry growth Services growth 12 10 8 6 4 2 0 Jun- Oct- Feb- Jun- Oct- Feb- Jun- Oct- Feb- Jun02 02 03 03 03 04 04 04 05 05
Source: CSO

Automobiles, Capital goods, Engineering & construction, metals

lead industrial growth

Strong correlation between business confidence index (BCI) and capex

NCAER BCI and Capital Goods output

Capex is closely related to the Business Confidence Index
170 40 NCAER BCI 140 Capital goods (RHS) 30 20

BCI at record high indicates strong

(Index)

capex cycle into near future

110

10 0

Power, Oil & Gas, Metals, Automobiles, Textiles, Construction

80 -10 50 -20

May-93

May-94

May-95

May-96

May-97

May-98

May-99

May-00

May-01

May-02

May-03

May-04

driving investments

Source: NCAER, CSO

16

May-05

(% chg YoY)

underpinned by domestic capital raising

Companies are tapping primary Primary Market Issuances equity markets for financing a First half of 2006 has already witnessed issuances of over USD 1.6 bn large number of expansion with many more issues in the pipeline Issue Amount USD mn No: of issues projects 6000 50
Issue Amount
4000 3000 2000 1000 0
FY 2001 Source: Prime Database FY 2002 FY 2003 FY 2004 FY 2005 * Data till September 30, 2005 FY 2006*

30

1,690 568 232 238

20 10 0

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

17

No. of Issues

A record USD 4.9 bn of equity raised in FY 05 demonstrating the depth of markets

5000

4,915 4,087
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 and overseas capital raising

Overseas fund raising options Break up of Equity Capital Issuances GDR and FCCB gaining Significant international investor participation through DRs and FCCBs IPO/FPO DR FCCB 100% significant popularity
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY 04 FY 05 FY 06*
84.10% 12.11% 22.77% 12.90% 3.00% 32.56% 40.63%

55.33% 36.60%

Source: Prime Database (Excluding Sponsored ADR Issues)

* Data till September 30, 2005

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Case Study 1: Reliance Industries Multi-currency Term Loan

US$ 350 mn multi-currency loan

June 2005

Facility consists of a USD, Euro and JPY tranche Reliance Industries Limited

Syndicated with a consortium of 34 banks across 13 countries

Syndication of term loan

Finest pricing among offshore medium term loans USD 350,000,000

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Case Study 2: Motherson Sumis FCCB

Asias first Euro denominated FCCB (deal size EUR 50 mn)

July 2005

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 EUR 50,300,000 Motherson Sumi

FCCB Offering

Ideal from the Companys standpoint

Currency provides a better match for its cash

flows with nearly two thirds of production

exported

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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 Acquirer Name Date Announced Total Value (USD mn) Industry

Television-tube Business Natsteel Asia Pte Ltd

Videocon International Ltd Tata Steel Ltd

Jun 05 Aug o4

291 284

Manufacturing Steel

Flag Telecom Group Ltd

DSI Financial Solutions Pte Tyco Global Network Tata Daewoo Commercial Vehicle Co. Ltd Trevira Gmbh

Reliance Gateway Net Private

HCL Technologies Ltd Videsh Sanchar Nigam Ltd

Oct 03
Nov 04 Nov 04

191
157 130

Telecom
Software Telecom

Tata Motors Ltd

Nov 03

118

Auto

Reliance Industries Limited

Jun 04

97

Textile

22

International Companies are also Seeking a Foothold in the Growing Indian Market
Target Name Acquirer Name Date Announced Total Value (USD mn) Industry

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 Oracle Corp Hutchison Telecommunications Holcim US Based Private Equity Firms Afk Sistema Flextronics Intl Ltd Hewlett-Packard Co

Nov 05 Aug 05 Feb 05 Jan 05 Non 04 Feb 05 Jun 04 Dec 03

1,152 779 592 583 500 450 399 304

Telecom Software Telecom Cement BPO Telecom Software Applications Software

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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 Deals Inbound 24 2003 Value 581.7 Deals 12 2004 Value 116.3 Deals 21 2005 Value 455.6

Outbound Total

23 47

1338.4 1920.1

21 33

668.1 784.4

30 51

1081.4 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

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Emerging Trends- Private Equity

Private Equity boom in emerging markets

Private Equity Investments in India ( US$ mn)

1,000 900 800 700 600 500 400 300 200 100 Q1-2004 Q2-2004 Q3-2004 Q4-2004 Q1-2005 Q2-2005 99 197 542 413 526 917

Indias 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

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Case Study 1: Tata Teas acquisition of Tetley

First Leveraged Buy-out ( Rs. 2,135 cr)

March 2000

Instant access to Tetleys worldwide operations, combined turnover at Rs 3,000 cr

Financial Innovation at its best

Tata Tea Limited Acquisition of 100% equity stake in Tetley Tea (UK)

SPV created to ring fence risk with equity contributed by Tata Tea and Tata Tea Inc

INR 21,350,000,000

Debt of 235 mn pounds raised in the form of long term debt and revolver; charge against Tetleys brand and assets

Tata Teas exposure only to the extent of equity component of 70 mn pounds

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Case Study 2: Amtek Groups Global Steps

Phase I: Setting up a strong efficient base

Amtek Group is a leading player in auto ancillary business manufacturing connecting

December 2002

rods, crankshafts, gear shifter forks, etc

Phase II: Acquires Domain Expertise in a niche

Amtek Auto Limited

Sets up a joint venture with Benda Kogyo, Japan for manufacture of flywheel ring gears and flexplates
Acquisition of 100% equity stake in Smith Jones, Inc. (USA) Rs358,010,000

Phase III: Acquires Smith Jones, Inc

Acquires

Smith

Jones,

Inc.,

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
27

Case Study 3: Vodafone enters India

Largest investment in the Indian telecom sector by overseas player (Deal Size: Rs 6700 cr)

September 2005

India is the third-largest mobile with 65 mn subscribers; growth of 54% Y/Y

Bharti Televentures Sale of 10% equity stake to Vodafone Plc.

Bharti is the fastest-growing mobile market in Asia with 14 mn subscribers

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

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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
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Investment in Existing Companies

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

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

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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%

A minimum alternate tax under Section

plus cess: 2%

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 Dividend Distribution Tax 14.025% DDT : 12.5% plus surcharge: 10% plus

percentages of expenditure

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

Securities Transaction tax (STT)

Weighted deduction benefit for biotechnology, drugs and pharmaceuticals Tax advantage of 7-8% as against 35% in developed countries

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 (shareswap) 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