SAARC Business Leaders Conclave: South Asia Regional Integration and Growth
November 17, 2005, New Delhi

Addressby Mr. Somak Ghosh, Country Head, Corporate Finance, YES BANK Ltd.

1) Becoming `laissez-faired'

As India's most respected 'blue turbaned sardar' walked the isles of parliament on July 24,1991, India awaited his statement with 'reformatory hope'. Under the Late Mr. Narasimha Rao's regime, Dr. Manmohan Singh was responsible for the reforms that 'laissez-faired' the Indian economy. He ended the 'licence-permit raj', which changed fundamentally, the way corporate India was used to thinking, and, with it, the lives of millions of middle class Indians.

When Dr. Manmohan Singh became finance minister, India's economy was in shambles, with an 'unsustainable' fiscal deficit close to 8.5 per cent of the gross domestic product, almost double of what it is, at present, a mammoth balance of payments deficit and foreign currency reserves at a perilous low of $1 billion, roughly equal to two weeks' imports. India was on the verge of 'bankruptcy'.

The crisis was seen as an opportunity to build a 'new India' and to take steps that ought to have been taken much earlier. A relevant statement from his budget delivery in 1991, quote "No power on earth can stop an idea whose time has come." Unquote.

The strong vision, the much needed 'reasonably' free hand with the minimum interference of the government and the historic budget of 1994 ensured the economy was well on its way to recovery. An environment of liberalisation was set in motion with creation of new jobs, new 'sunrise' sectors opened up to entrepreneurs and the foundation of an IT and telecom revolution.

Dr Singh has returned as the chief executive of a resurgent India -probably the best man to carry forward his 'own' legacy.

2) Continued liberalization - increased sources / structures for foreign investments

Continuing with the liberalization reforms and the 'open economy' model, India has become the 4th largest economy in Purchasing Power Parity terms. As India's GDP approaches INR 30 billion, the Government continues to recognize the key role of foreign investment in its economic development not only as an addition to domestic capital but also an important source of global alignment.

India is constantly attracting foreign investment from various 'sources' and in various 'structures'. Even the 'Bush' administration sees India, with its thriving services sector drawing U.S. jobs away through outsourcing to an educated, cheaper labour force, as a 'regional leader' with considerable influence in advancing the drive towards 'free trade'.

India has garnered several sources of foreign investments including Foreign Direct Investment Foreign Institutional Investment through Portfolio Investments Schemes, Non Resident Indian participation in equity/ debt capital markets, International capital raisings (equity, debt and convertible debt) and foreign multinationals making investments and setting subsidiaries in India.

Further, various structures such as amalgamations, mergers, acquisitions, earnouts and buyouts, conglomerate mergers, back-to-back mergers, etc have ensured limited entry barriers to foreign investors and multinationals. Cross Border Mergers & Acquisitions are necessary for the Indian industry to thrive and has gathered significant momentum enhancing global competency and world wide presence.

3) Highly structured/transparent regulatory regime

The Indian regulatory regime with respect to foreign investments, being internationally compatible is 'more than' supportive to make India an attractive FDI destination.

To step back, in August 24, 1982, India entered into a bilateral treaty with the Government of Mauritius, the purpose of which, as specified in the preamble, was the "avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment."

The India-Mauritius treaty is unique in the Indian context, since, under Article 13 and 10 of the treaty, India has forgone its taxing rights on capital gains realized by Mauritius residents on the sale of shares in Indian companies and dividends received by Mauritius residents are taxed at concessional rates.

Over the years, the Double Taxation Avoidance Agreements have been further structured to enhance transparency; however, there still exists a need to infuse 'stability' in the regime. In this direction, on June 29, 2005, the Indian Prime Minister Dr. Manmohan Singh and Singapore Prime Minister Mr. Lee Hsien Loong executed the omnibus Comprehensive Economic Cooperation Agreement including landmark provisions for free trade, movement of natural persons, bilateral investment promotion and improved DTAA norms.

The fundamental principles of tax treaties reflect the prudent and judicious stance of the Indian Revenue authorities for taxing income from foreign investments. However, it is felt that a comprehensive directive like the US IRS regulations be drawn up to reduce interpretational issues.

`Transfer pricing', another integral element of the regulatory regime, is inherent in the way the global economy is structured with sourcing and consuming destinations being different. The Indian regime has achieved a 'fine' balance between loss of revenues in the form of outflow of tax and making India an attractive investment destination by providing the necessary flexibility.

The Government of India, Ministry of Commerce & Industry has laid a liberal and transparent FDI policy under which, FDI upto 100 percent is allowed under the 'automatic route' in most sectors / activities. Further, major initiatives such as industrial decontrol, simplification of investment procedures, enactment of competition law, liberalization of trade policy and exchange regulations, safeguarding intellectual property rights, etc have evolved an investor friendly investment climate.

4) Emerging trends

The Indian capital markets have witnessed a 'secular' bull run in the last 3 fiscals. Foreign Institutional Investments have been on an 'upswing'. With approximately INR 390 billion of net investments in fiscal 2004, the same for fiscal 2005 increased to INR 440 billion. Considering the Indian equity markets still remain attractive on valuation, fundamentals and improving corporate governance standards, the inflows are expected to further augment.

The primary markets too have witnessed significant buoyancy. With current Securities & Exchange Board of India ('SEBI') regulations allowing upto 65 percent of the issue size to be subscribed by FII's and Non Resident Indians, the inflows have further swelled.

India's performance in FDI has shown significant improvement in the last few years. India's share of FDI Inflows among developing nations reached approximately 3% in the previous fiscal.

5) Revelation

With a 'resilient' external position -forex reserves of INR 6 billion, mid single digit inflation, growth rate twice the global rate in the past 2 decades, India is evidently witnessing increased FDI and FII inflows.

FDI caps in several sectors have been further relaxed to ensure greater foreign participation and global competitiveness. The FDI cap in telecom and asset reconstruction companies has increased to 49%, and to 100% in the real estate sector. The cabinet under the able leadership of honorable finance minister Mr. P. Chidambaram is considering further liberalization of foreign investment norms in key infrastructure sectors like airports, power trading and mining. Furthermore, the governments' stance to place PSU's on the blocks is also a step towards continued repositioning of corporate India.

SEBI's recent proposal to introduce 'stock futures' and 'margin trading' is a welcome development from the stand point of capital market inflows. Such measures infuse liquidity in the markets, boost trading volumes and reduce volatility.

I would like to conclude with the statement Mr. John Snow, U.S. Treasury Secretary made at the recently conducted Indo-US Financial and Economic Forum where the two nations discussed wide-ranging economic and financial cooperation initiatives. Quote "India should consider permitting more foreign entry into its markets in insurance, pensions and fund management to broaden the offering of services for consumers as well as attract capital. India has the potential to be `an economic powerhouse' in coming years if it uses its natural advantages of a youthful labour force, already equipped with English-language skills and an edge in vital information technology skills. India has lagged in attracting foreign direct investment but with well-directed reforms to ease foreign entry in financial services, retail and other sectors, the potential here has only been glimpsed." unquote.

I trust the sessions that follow would assist in identifying concerns that hamper cross border transactions and provide solutions for the same, as well as attempting to reduce interpretational issues and further develop the regulatory environment to augment investments.