Slide 1

Investing in Emerging Markets – Where Does India Feature?

Investing in Emerging Markets 2011 The Harvard Club, New York City

Mohit SarafSenior Partner

November 29, 2011

Slide 2

United Nations Conference on Trade and Development’s (“UNCTAD”) World

Investment Prospects Survey 2010–2012

Where does India rank as a prospective FDI destination?

Rank Economy

1 China

2 India

3 Brazil

4 US

5 Russian Federation

Slide 3

Will India measure up?

o W i l l t h i s p r e d i c t i o n b e c o m e a t r e n d ?

o W i l l t h e f o r e c a s t s h o l d i n t h e s h o r t

t e r m ?

o W h a t a s s u m p t i o n s s u p p o r t t h e

f o r e c a s t ?

o W h a t i s t h e i n s i d e s t o r y ?

Slide 4

What is a good place to start?

• World Bank’s comparative survey titled Doing Business 2012

Slide 5

BRIC BY BRIC(and how they stack up)

RankUNCTAD

Doing Business

Starting Business

Getting Credit

Protecting Investors

Paying Taxes

Trading Enforcing Contracts

1 China 91 151 67 97 122 60 16

2 India 132 166 40 46 147 109 182

3 Brazil 126 120 98 79 150 121 118

4 US 4 13 4 1 72 20 7

5 Russia 120 111 98 111 105 160 13

Slide 6

Ease of starting a business - Challenges

China 151

India 166

Brazil 120

US 13

Russian Federation

111

• Sector specific framework of prohibitions, approval requirements, investment caps, investment

conditions and exclusions.

• Ability to find a “best-fit” solution within a restrictive and fluid regulatory matrix.

• Exchange control regime

• Changing goalposts – “put options”. Occasional blips can cause impediments.

Slide 7

Ease of starting a business - Opportunities

China 151

India 166

Brazil 120

US 13

Russian Federation

111

• Reform: A liberal trajectory• Very few industries where FDI is prohibited. • Foreign exchange reserves have gone up from USD

5 Billion in 1991 to USD 312.90 Billion in June 2011.

Emerging Sectors:

• Aerospace and Defense (offset obligation)• Automotive• Banking• Pharmaceuticals• Retail and consumers

Slide 8

Getting Credit - Challenges

China 67

India 40

Brazil 98

US 4

Russian Federation

98

• High interest rates: raised 12 times in 18 months.

• External commercial borrowings (“ECBs”):• regulates all-in costs,• restricts end use• stipulates long maturity periods• working capital loans not allowed• not permitted in capital markets, real estate or for• acquisition of other companies

• RBI imposes directed lending and provisioning norms (risk weights) on banks – this distorts credit flow.

Slide 9

Access to funding - Opportunities

China 67

India 40

Brazil 98

US 4

Russian Federation

98

• Strong framework of legal rights of borrowers and lenders (a score of 8 on the strength of legal rights index ranging from 0-10 where OECD average is 7).

• Incipient but vibrant Private Equity • Non Banking Finance Companies (NBFCs)• ADRs / GDRs / FCCBs

NBFCs

NBFCs enjoy a “light touch” regulatory regime. Concentrate on financial sector activities which banks and financial institutions may chose to ignore on account of heavier regulatory burdens – E.g. capital markets related funding, real estate funding and structured finance.

Slide 10

Protecting Investors – weaknesses and alternatives

China 97

India 46

Brazil 79

US 1

Russian Federation

111

• Strong protection: Minority investors, related party transactions.

• Systemic handicap – final verdict on a dispute.

• Arbitration has emerged as a powerful alternative.

• Bilateral Investment Treaties - party to over 60 BITS (though unfortunately not with yet with the US.

• Indo-US BIT on the anvil

• BITs tend to act as a check against unbridled exercise of executive power

Slide 11

Paying Taxes – Challenges and Improvements

China 122

India 147

Brazil 150

US 72

Russian Federation

105

On average, a company:• makes 33 tax payments a year, • spends 254 hours a year filing, preparing and paying taxes• pays total taxes amounting to 24.7% of profit.

Recent improvements:

• In 2011 introduced mandatory electronic filing and payment for VAT.

• In 2011 abolished the fringe benefit tax and improved electronic payment.

• Proposed induction of “Direct Tax Code 2010” by April 2012 which is expected to improve payment and filing efficiencies significantly.

• New indirect tax system proposed – remove multiplicity of taxes.

Slide 12

Double Taxation Avoidance Treaties

• India is a party to more than 80 DTATs

• Tax treaty analyses: A key consideration for investment into India.

• DTATs with Mauritius, Cyprus and Singapore are pre-eminent - currently

relieve capital gains on disposal of Indian investments.

• Mauritius, accounts for an overwhelming 42% of the aggregate foreign

direct investment in India (next in the pecking order are: Singapore 9%, USA

7%, UK 5%)

• Vodafone’s disposal of its Indian JV assets has brought into question the

efficacy of capital gains insulation available under the Mauritius treaty.

Slide 13

Enforcement of contracts – Challenges

China 16

India 182

Brazil 118

US 7

Russian Federation

12

• A contract enforcement:• requires 46 procedures• takes 1420 days• costs 39.6% of the value of the claim

• 30 million cases pending in Indian courts.• 11 judges per million compared to the

recommended norm of 50.

• Taking recourse to international commercial arbitration

• Excluding Indian procedural law under the arbitration agreement and choosing arbitral venue outside India.

Negate above by:

Slide 14

Thank You.

Mohit SarafSenior Partner

Luthra & LuthraLaw Offices

Mumbai | New Delhi | Bangalore

Email : msaraf@luthra.com