Foreign investors are setting sights on new markets with stable tax regimes through which to route their investments into India, according to speakers at this year’s IFLR India M&A Forum in Mumbai.
India and Mauritius signed a new deal in May to amend the 1983 India-Mauritius Treaty, with both sides agreeing on the removal of the existing tax exemption for gains from the transfer of Indian securities by a Mauritius resident.
According to panellists this has already resulted in foreign investors seeking to restructure their India-bound investments through Singapore, which has a more stable tax regime.
“The changes to the Indo-Mauritius tax treaty have been a game changer in the way in which foreign investment in Indian joint ventures is being structured,” said Delano Furtado, partner at Trilegal in Mumbai. He added that the tax structuring aspects of such investments will change considerably going forward.
Furtado pointed to the long-term capital gains tax exemption available under the Indo-Mauritius tax treaty as the primary reason most joint ventures in India have been routed through Mauritius. But with the amendment made to the treaty, the capital gains tax exemption is being taken away in a phased manner and will expire in April 2019.
KEY TAKEAWAYS
India and Mauritius signed a new deal earlier this year to amend the 1983 India-Mauritius Treaty, with both sides agreeing on the removal of the existing tax exemption for gains from the transfer of Indian securities by a Mauritius resident;
Many foreign investors are currently reviewing their investment structures in existing joint ventures;
Some are contemplating restructuring their investments through the Southeast Asian hub;
Technology-led or regional expansion-driven partnerships are the two broad areas that have brought JVs together in India in recent years;
An issue raised by the panel concerned the lack of due diligence conducted by JV parties prior to signing a term sheet.
Many foreign investors are currently reviewing their investment structures in existing joint ventures. Furtado pointed out that they are seeking to restructure their investments before April 2017, when any capital gains from the disposal of shares acquired before April 2017 are grandfathered.
Given that India has a favourable tax treaty with Singapore, under which the sale of shares of an Indian company from Singapore is tax-exempted, Furtado told the panel that many are contemplating restructuring their investments through the southeast Asian hub.
But some are concerned by the lack of due diligence conducted by JV parties prior to signing a term sheet.
Furtado told the panel that many clients had come to him with a term-sheet already signed assuming they could implement the transaction as specified in the document.
In cross-border JVs, foreign parties are often not clear about their rights associated with a 26%, 50%, or a 76% stake in an Indian target JV company making it difficult to negotiate their respective shareholding in the JV.
“There is an impression that people don’t spend the time, which is required, on the sort of planning before they get into these arrangements,” said Kapoor. He added that the lack of proper preparation is one of the major reasons why JVs occasionally fail. Anubhav Kapoor, general counsel and company secretary at Tata Technologies, also pointed to the low success rate of joint ventures in India, with public data showing that 50% of them don’t deliver the expected yields.
Exiting a JV
Technology-led or regional expansion-driven partnerships are the two broad areas that have brought JVs together in India in recent years, according to Kapoor. This was echoed by Furtado who pointed out that most JVs seen in recent years have been strategic JVs in sensitive fields such as insurance and defence, which remain tightly regulated.
“(Foreign and domestic) JV partners are collaborating to leverage their market and domain expertise, state of the art technology and know-how,” said Furtado. But he added that exiting a JV in India by way of liquidation is generally painful and could take up to three or four years under the current insolvency laws and regulations.
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"JV partners are collaborating to leverage their market and domain expertise" |
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Shareholders and nominee directors also encounter problems when trying to liquidate a company in India, ranging from employee dues, lenders to tax and regulatory fines. Shareholders regularly recover very little - or nothing - while having to fund the liquidation process.
“This painful experience...discouraged fresh investment in the country,” said Furtado.
The preferred exit mechanisms continue to be put and call options and recent regulatory changes have helped clear the ambiguity around their enforceability in cross border JV transactions.
See also
IFLR India M&A forum: key takeaways
India’s first aerospace joint venture
FDI reform raises compliance issues