Mergers & acquisitions (M&A) are likely to be the favoured route for foreign direct investment flows into India in the year 2017 as market consolidation is expected in sectors facing a cash crunch, such as e-commerce and telecommunications. Tax-related worries continue to trouble foreign investors as they look forward to incentives in the forthcoming Union Budget in order to take a call on investments in the country or to forge new ventures. The ‘FDI Report 2016,’ prepared by the Financial Times, noted that the biggest change in green-field FDI (for starting new ventures) in 2015 globally was the near tripling of green-field FDI into India, with an estimated $63 billion pouring in.
For the first time, India was the global leader for FDI in 2015, overtaking the U.S. (which had $59.6 billion of green-field FDI) and China ($56.6 billion), the report pointed out. The UNCTAD-World Investment Report 2016 ‘FDI overview’ showed that (inbound FDI though) cross-border M&A — in terms of ‘sales (net)’ — in India fell to $1.4 billion in 2015 from $7.54 billion in 2014. However, experts said there will be a pick up in cross-border M&A activity in 2017. The year 2016 saw Russia’s state-owned oil giant Rosneft and a consortium led by physical commodities trading group Trafigura entering into a $13 billion-deal to acquire Essar Oil’s refining and retail assets, as well as Vadinar port and related infrastructure. The deal was billed as India’s largest inbound foreign direct investment.
Dipankar Bandyopadhyay, Partner at the law firm ‘Verus’ and an M&A expert, said: “An increase in FDI inflows through M&As is likely in stressed sectors such as e-commerce and telecom. Renewable energy sector is likely to see M&A deals, but it could also attract green-field investments.” He added that “the new insolvency and bankruptcy regime will also facilitate the sale of distressed assets, thereby a jump in M&A activity.” Among the concerns over taxation is a recent clarification made by the Central Board of Direct Taxes (CBDT) on indirect transfer provisions under the Income Tax Act.
The indirect share transfer norms were brought in following transactions where control over Indian assets and businesses was transferred indirectly through offshore transfers. Pointing out that in 2015 the Government had provided a safe harbour to small investors holding less than five per cent and without any management control, Abhishek Goenka, Tax Partner, PwC, said while this was welcome, most funds and Foreign Portfolio Investors want an extended safe harbour on the premise that as long as investors do not have any control of the fund, the indirect transfer provisions should not apply. Additionally, if indirect transfer provisions were to apply, in many cases it would result in double taxation, he said, adding that the recent CBDT clarification, however, stated that no further relaxation or exemptions will be provided. “It would be good if the Government can take a pragmatic view and go back to the intent of the legislation and provide relief against possible double taxation where investors exit or are redeemed,” Mr. Goenka said.
Make In India
The government data showed that India received a record $55.4 billion worth FDI in 2015-16. Commerce & Industry Minister Nirmala Sitharaman had informed Parliament in July that the `Make In India’ (MII) initiative was launched in September, 2014 to promote India as a global manufacturing hub and attract investments. She added that thereafter, during October, 2014 to May, 2016, the FDI equity inflow increased by 46 per cent — from $42.31 billion to $61.58 billion in comparison to the previous 20 months (February, 2013 to September, 2014).
However, a ‘policy brief’ prepared by K.S. Chalapati Rao, Professor (Retd.), Institute for Studies in Industrial Development, and Biswajit Dhar, Professor, Jawaharlal Nehru University, said: “Our analysis of the (FDI) inflows strongly suggests that, contrary to the optimism expressed by many, the MII programme may not have yet made an impact in terms of attracting FDI into the focus sectors.” “Further, the reported investments should be examined from the points of (i) adding fresh domestic production capacities (including meaningful indigenisation), (ii) net addition to capital instead of round-tripping of funds remitted abroad on one pretext or the other, (iii) the monetary value of all the incentives and exemptions availed and (iv) …delayed reporting and gross inaccuracies.”