Title: Indian Clients and Indian Assets
1Indian Clients and Indian Assets June 4, 2007
Bijesh Thakker
2Topics
- 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?
3- What do Swiss Banks, Independent Asset Manager
and Trust-Companies need to bear in mind when
dealing with Indian Clients
4- India The New Trillion Dollar Economy
- and Opportunities
5Strong and Optimistic GDP Indicator
9.2
GDP Growth Rate
6Strengthening Rupee
- The rupee has appreciated about 8.4 in 2007
Rupee Equivalent of 1 USD
40.5
Exchange Rate - INR vs USD
7Bullish Stock Market
14,471
BSE Sensex
BSE sensex
8Favourite Destination For Inbound / Outbound
Investments
24.4
USD billion
17.0
6.3
0.04
0.8
3.2
1.6
3.5
0.6
0.9
1.5
3.9
3.5
1.4
January to April
Inbound
Outbound
9Opportunities 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
10Opportunities in Financial Services
- Highest return on equity in Asia
19.3
14.7
13.0
age of Return on Investment
Countries
Source US Department of Commerce
11Opportunities in Financial Services
- Lowest average of gross bad loans
15.05
13.08
11.80
9.73
8.18
age of Gross Bad Loans as Share of Total Loans
Countries
Source Moodys Investor Services
12- Financial Market Supervision in India
- Regarding Cross Border Services
13Indian 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
14Specialized 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
15Specialized 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
16Specialized 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
17Specialized Indian Laws You Must Know (4/8)
- Outbound Investment Rules
- Outbound investment rules sophisticated but
liberalized - 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
18Specialized 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
19Specialized Indian Laws You Must Know (6/8)
- Contract Law
- Indian contract law based on English common law
but codified - Privity of contract principal
- Breach of control delayed claims
- Awards are small and delayed
- Nominee holding controlled by separate legislation
20Specialized 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
21Specialized 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
22- Limitations on Financial Services Provisions
23Limitations on Financial Services Provisions
- Advisory on inbound / outbound investment
strategy - Assistance in deployment of funds
- Investment structures - successful product
offering against limitations
24Advisory 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
25Assistance in Deployment of Funds
26Assistance 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
27Assistance 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
28Investment Structures - Successful Product
Offering Against Limitations (1/3)
29Investment Structures - Successful Product
Offering Against Limitations (2/3)
30Investment Structures - Successful Product
Offering Against Limitations (3/3)
31- Specialized Tax Efficient Structuring
32Specialized Tax Efficient Structuring
- Investment structuring relevant for capital gains
- Commonly used DTAAs
- India Mauritius
- India Singapore
- India Cyprus
33Specialized Tax Efficient Structuring
Monitor
Monitor
34Case 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
35Case 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
36Case 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
Subject to obtaining of necessary approvals
37- Secrets of Successful Indian
- Financial Arrangements
38Secrets 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
39Secrets 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
40Secrets 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
41Secrets 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
42Questions?
BIJESH THAKKER Managing Partner MUMBAI n
DELHI n BANGALORE
Mumbai Office Delhi Office Bangalore
Office Nirmal, 20th Floor A/320 Unit No. 706,
Carlton Tower Nariman Point Defence Colony No.
1, Airport Road Mumbai 400 021 New Delhi 110 024
Bangalore 560 008 Tel (91 22) 6630 8000 Tel
(91 11) 2433 9776 Tel (91 80) 2526 5776 Fax
(91 22) 6630 8100 Fax (91 11) 2433 3545 Fax
(91 80) 2526 4357
43Glossary (1/2)
- 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
44Glossary (2/2)
- 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