During 2Q16, PE/VC investments aggregated US$3.6 billion across 164 deals as compared to US$4.4 billion across 147 deals in the previous quarter. The decline in investments was despite a 12% increase in the overall deals volumes during the quarter. Big-ticket deals (US$50 million and above) reduced from 29 deals (US$3.4 billion) in 1Q16 to 13 deals (US$2.4 billion) in 2Q16 leading to this decline in the headline numbers. Furthermore, the declining trends in investments over the last few quarters and l`] `]Y\daf] fmeZ]jk ^gj Õjkl log imYjl]jk g^ l`] year indicate that 2016 is likely to report decline in investments as compared to 2015. Investments in early-stage/start-up space, especially, in the e-commerce sector, continued its downward trend. From a sector perspective, with e-commerce not as active as in 2015, technology dominated the charts, both in terms of volume as well as value, accounting for 23% of total deal volume and 29% of total deal value in 2Q16 with 38 deals worth US$1.1 billion. The largest deal for the quarter was also in the technology sector worth US$825 million (buyout of Mphasis by Blackstone). Real estate was the second-largest sector both in terms of volume and value with 18 deals worth US$424 million. Fundraising also reported a slowdown at US$942 million raised during the quarter as compared to historic high of US$2.1 billion raised in 1Q16, a 55% decline. Oman India Joint Investment Fund (OIJIF) led Foreword In this edition 2Q2016 Key economic indicators 2 Funds 4 Investments 5 Tax and regulatory updates 11 Outlook 19 Private equity roundup is a quarterly newsletter on the trends and prespectives related to private equity (PE) activity in India. the fundraising with a US$250 million second fund. Top Õn] ^mf\k [gfljaZml]\ lg YhhjgpaeYl]dq 0( g^ l`] lglYd ^mf\k jYak]\ af *I).& >gmj gml g^ l`] lgh Õn] ^mf\jYak]k were in the form of follow on fundraises. Sector-agnostic funds accounted for 68% of the total capital raised, up from 44% during the 1Q16 and 2Q15. Real estate- focused funds accounted for only 9% of the total value, down from 41% in the previous quarter. There were 13 new fundraise plans announced worth US$2.1 billion in 2Q16. The largest was from Nalanda Capital, which plans to raise a new US$620 million fund. The quarter also witnessed a slowdown in the total value g^ ]palk \]khal] ]pal ngdme]k j]eYafaf_ ÖYl& L`] \][daf] of 49% from the previous quarter was primarily because of absence of large exits. 1Q16 saw one billion-dollar plus exit (ATC Tires exit by KKR). The largest exit in 2Q16 was Equitas Holdings’ IPO with PE investors selling their shareholding worth US$224 million. In terms of number of deals, exit through open market deals dominated the chart with 18 deals, which was more than double as compared to the previous quarter. Absence of large strategic transactions was also prominent in 2Q16. The quarter also saw several important developments on the tax and regulatory side, the key ones being Ye]f\e]fl g^ l`] Af\aY%EYmjalamk lYp lj]Ylq$ fglaÕ[Ylagf of indirect transfer rules, passage of Finance Bill, 2016 etc. We have included a summary of key tax and regulatory developments later in this document. Private equity roundup
Transcript
During 2Q16, PE/VC investments aggregated US$3.6 billion across 164 deals as compared to US$4.4 billion across 147 deals in the previous quarter. The decline in investments was despite a 12% increase in the overall deals volumes during the quarter. Big-ticket deals (US$50 million and above) reduced from 29 deals (US$3.4 billion) in 1Q16 to 13 deals (US$2.4 billion) in 2Q16 leading to this decline in the headline numbers. Furthermore, the declining trends in investments over the last few quarters and
year indicate that 2016 is likely to report decline in investments as compared to 2015. Investments in early-stage/start-up space, especially, in the e-commerce sector, continued its downward trend.From a sector perspective, with e-commerce not as active as in 2015, technology dominated the charts, both in terms of volume as well as value, accounting for 23% of total deal volume and 29% of total deal value in 2Q16 with 38 deals worth US$1.1 billion. The largest deal for the quarter was also in the technology sector worth US$825 million (buyout of Mphasis by Blackstone). Real estate was the second-largest sector both in terms of volume and value with 18 deals worth US$424 million. Fundraising also reported a slowdown at US$942 million raised during the quarter as compared to historic high of US$2.1 billion raised in 1Q16, a 55% decline. Oman India Joint Investment Fund (OIJIF) led
Foreword
In this edition
2Q2016
Key economic indicators 2
Funds 4
Investments 5
Tax and regulatory updates 11
Outlook 19
Private equity roundup is a quarterly newsletter on the trends and prespectives related to private equity (PE) activity in India.
the fundraising with a US$250 million second fund. Top
were in the form of follow on fundraises. Sector-agnostic funds accounted for 68% of the total capital raised, up from 44% during the 1Q16 and 2Q15. Real estate-focused funds accounted for only 9% of the total value, down from 41% in the previous quarter. There were 13 new fundraise plans announced worth US$2.1 billion in 2Q16. The largest was from Nalanda Capital, which plans to raise a new US$620 million fund. The quarter also witnessed a slowdown in the total value
of 49% from the previous quarter was primarily because of absence of large exits. 1Q16 saw one billion-dollar plus exit (ATC Tires exit by KKR). The largest exit in 2Q16 was Equitas Holdings’ IPO with PE investors selling their shareholding worth US$224 million. In terms of number of deals, exit through open market deals dominated the chart with 18 deals, which was more than double as compared to the previous quarter. Absence of large strategic transactions was also prominent in 2Q16.The quarter also saw several important developments on the tax and regulatory side, the key ones being
of indirect transfer rules, passage of Finance Bill, 2016 etc. We have included a summary of key tax and regulatory developments later in this document.
Private equity roundup
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positive territory during the quarter leading to an improvement in the BSE Sensex. It recovered by almost 8% to close the quarter in positive territory at 26,525 after dipping to around 24,685 at the beginning of 2Q16. India remains one of the few bright spots in the global economy and with monsoon forecast looking good; there has been strong positive sentiment in the markets also demonstrated by successful IPOs in the last few months.
The rupee, however, continued its depreciating trend against the US dollar, in line with other global currencies. The dollar maintained its safe haven status amidst global uncertainty and excessive money printing by European and Japanese central
Key economic indicators banks. The rupee ended the quarter lower by 2% at INR67.62/US dollar. However, the rupee maintained its relative strength
economic environment in India as well as the turmoil other economies have been facing. The rupee strengthened marginally (0.5%) against the Euro to end the quarter at INR75.02/euro.
The World Bank expects India’s GDP growth rate to be maintained at 7.6% in 2016–17 followed by a moderate acceleration in 2017–18. This will be aided by improvement in rural demand as well as urban consumption on the back of strong monsoon and wage hikes of government employees following the seventh pay commission.
FundsThe quarter reported a marginal slowdown in the fundraising activity after achieving all-time high numbers in 1Q16. India-focused PE/VC funds raised US$942 million of capital in 2Q16, registering a 55% decline from the previous quarter and 51% decline when compared to the same period last year.
Oman India Joint Investment Fund (OIJIF) topped the charts with
27% of the total amount raised during the quarter. State General Reserve Fund (SGRF) and State Bank of India (SBI) have jointly committed a total of US$200 million to the fund and rest of the money is being raised from domestic and foreign institutional investors.
In line with the trends over the last couple of years, 12 out of the total 14 fund raises during the quarter were follow-on funds (aggregating $931 million). This clearly reinforces LP’s preference for experience and track record.
Sector-agnostic funds accounted for 69% of the total capital raised, up from 44% during 1Q16 and 2Q15. Real estate focused funds accounted for only 9% of the total value down from 41% in the previous quarter.
There were 13 new fundraising plans announced worth US$2.1 billion in 2Q16. The largest announcement was from Nalanda
Capital with plans to raise a new US$620 million fund, which will increase its AUM to US$1.5 billion. This was followed by a US$500
fund. The next largest announcement came from Motilal Oswal Financial Services for a US$300 million fund to invest in small to mid-sized companies. This will be Motilal Oswal’s third sector-agnostic growth capital fund with a focus on deals in the range of
so far.
There are a total of US$131 billion (as of September 2015) of problem loans (including bad debts, restructured loans and written-off assets) in the Indian banking system that potentially present a
distressed assets funds was a non-starter in India so far. Following the RBI’s focus on cleaning up public sector bank balance sheets and enabling regulatory actions such as the passage of the new bankruptcy law, approval of 100% FDI in ARCs etc., PE funds are lining up to tap the stressed asset opportunity. Several leading global and local fund managers are either actively pursuing this opportunity or setting up their related ventures including ARCs in India. These include KKR, CPPIB, Apollo Global, JC Flowers, Kotak, Edelweiss, Ajay Piramal group, ICICI Ventures etc.
Figure 8: Top Five India-focused funds raised during 2Q16
Name Fund-focus Value (US$ million) New / Follow on fund
Oman India Joint Investment Fund II Sector-agnostic 250 Follow-on
ICICI Venture: India Advantage Fund Series 4 (IAF4)
Sector-agnostic 190 Follow-on
IDG Ventures India fund III Sector-agnostic 150 Follow-on
Matrix India II Early-stage and expansion deals in 110 Follow-on
Source: Public sources and EY analysis
Figure 7: Quarterly India fundraising (US$ billion)
InvestmentsThe quarter saw US$3.6 billion invested across 164 deals, lower than the investments over the previous four quarters and also compared to 2Q15 (US$5.3 billion across 189 deals). The decline in value was due to drop in the number of big-ticket deals.
Both volume and value of big-ticket deals (US$50 million and above) in 2Q16 (13 deals amounting to US$2.4 billion) declined as compared to the previous quarter (29 deals amounting to US$3.4 billion). Out of the 13 big-ticket deals, there were 7 deals of US$100 million and above (aggregating US$2.0 billion). The average and median deal size stood at US$29 million and US$8 million, a marginal decline from the previous quarter’s US$36 million and US$9 million, respectively.
The largest deal in the quarter was Blackstone’s purchase of 60.5% controlling stake in Mphasis Limited (IT Services business) from Hewlett Packard for US$825 million, closely followed by
Cartica Capital’s US$308 million worth of secondary purchase of shares in Eicher Motors. Technology, automotive and chemicals dominated the large deal space accounting for 70% of big-ticket
e-commerce, which accounted for 64% of the big-ticket deal activity in the previous quarter.
Investments in e-commerce declined both in terms of volume and value from the previous quarter and from 2Q15, since the focus has progressively moved to sustainable business models. E-commerce recorded 20 deals worth US$242 million in 2Q16 as compared to 25 deals worth US$731 million in the previous quarter and 40 deals worth US$823 million in 2Q15. In this quarter, the largest investment in the e-commerce sector was made in Oravel Stays Private Limited (Oyorooms.com) worth US$100 million.
Source: Industry sources and EY analysis
Figure 10: Composition of PE deal volume by deal size
Minority growth investments accounted for 51.5% of total deal value in 2Q16. Contribution of start-up/early-stage investments dropped to 11.7% of deal value in 2Q16 as compared to 14.3% in 1Q16.
The value of growth/expansion deals (70 deals) declined by 32% from the previous quarter and increased by 66% as compared to 2Q15. In case of buyouts, total deal value increased
39% when compared to 2Q15. Blackstone’s buyout of Mphasis for US$825 million and Cube Highways and Infrastructure’s buyout of Madhucon Agra Jaipur Expressways for US$37.2
million were the largest buyout deals in the quarter. The strong
prefer to acquire majority stakes for effective value creation and independent decision making at the time of exits.
In terms of deal volumes, start-up/early-stage investments increased by 12% from the previous quarter and declined by 34% from 2Q15. Moreover, growth and expansion deal volumes increased by 30% from the previous quarter and 52% as compared to 2Q15. However, number of PIPE deals fell to just four from ten in the previous quarter and eight in 2Q15.
From a sector standpoint, technology accounted for 23% of total deal volume and 29% of total deal value in 2Q16. The number of deals increased from 29 (US$163 million) in 1Q16 to 38 (US$1.1 billion) in 2Q16. The prominent transactions in the technology space in this quarter were the buyout of Mphasis for US$825 million and the investment in Fractal Analytics of US$100 million. Real estate was the second-largest sector in 2Q16 in terms of both deal volume and value. However, its deal value declined by 52% as compared to the previous quarter.
ExitsIn line with the decline in investment activity, the exit value also declined by 49% in 2Q16 as compared to the previous quarter, primarily due to absence of large strategic exits. The
million) sold to Yokohama Rubber, Japan. The largest exit in 2Q16 was Equitas Holdings’ IPO with PE investors selling their shareholding worth US$224 million.
The quarter also witnessed a slowdown in the exit activity in comparison to last year. Exit volume declined 25% to 44 exits in 2Q16 from 59 exits in 2Q15, while exit value declined by 61% to
US$1.1 billion in 2Q16 from robust proceeds of US$2.7 billion in 2Q15.
However, the IPO market was quite active with four PE-backed IPOs in 2Q16 and maintained the momentum picked up in the previous quarter. Due to the strong listing performance of PE-backed companies over the last 12 months, there is a robust list of IPOs of PE portfolio companies being lined up.
In terms of volume, percentage contribution of open market transactions saw a steep increase in both value and volume in 2Q16 over the previous quarter. This was accompanied by a corresponding decline in contribution of strategic sales (1.5% from 70%) over the same period.
There were 18 open market exit deals worth US$367 million in 2Q16 up from seven such transactions worth only US$20 million in 1Q16.The value of PE-backed IPOs more than doubled to US$418 million in 2Q16 from US$176 million in 1Q16. In contrast to the open market and IPO activity, the proceeds from strategic exits saw a sharp decline to US$17 million (11 deals) in 2Q16 from US$1.5 billion (16 exits) of proceeds in 1Q16. Similarly, buybacks declined to almost half at US$157 million (5 deals) in 2Q16 from US$327 million (9 deals) in 1Q16.
Figure 14: PE/VC investments in 2Q16 by sectors
Value (US$ million) Volume
Source: Industry sources and EY analysis
383948697399
148154
230242
292333
366424
1,050
Pharmaceuticals
CBP
Healthcare
Food and agriculture
Others
Logistics
Infrastructure
Retail and consumer products
Power and utilities
Ecommerce
Financial services
Chemicals
Automotive
Real estate, hospitality & construction
Technology
3445557991110
161820
38
Professional servicesLogistics
PharmaceuticalsInfrastructure
Media & entertainmentIndustrial products
Food and agricultureHealthcare
Retail and consumer productsOthers
EducationFinancial services
Real estate, hospitality & constructionEcommerceTechnology
Equitas Holdings Ltd.Fund, MicroVentures SPA, ARIA Investment Partners III LP, Sequoia Capital India III LP, WestBridge Ventures II LLC, Aquarius Investment Advisors India Pvt. Ltd., Helion Venture Partners II LLC, International Finance Corp., Netherlands Development Finance Co., Creation Investments Capital Management LLC
Initial Public Offering
224.4
Idea Cellular Ltd. Providence Equity Partners LLC Open Market 209.0
Au Financiers Foreign investors including Warburg Pincus, IFC, ChrysCapital, Kedaara Capital, Motilal Oswal PE
Secondary 112.5
Ujjivan Financial Services
Wolfensohn Capital Partners , Sarva Capital LLC, Elevar Equity Advisors Pvt. Ltd. , India Financial Inclusion Fund , International Finance Corp. , Netherlands Development Finance Co. , Unitus Equity Fund , Women World Banking Capital Partners L. P.
Initial Public Offering
79.0
Parsvnath Estate Developers Pvt. Ltd.
Rising Straits Capital Investment Advisory Pvt. Ltd., Proprium Real Estate Special Situations Fund LP
Buyback 75.0
Thyrocare Technologies Ltd.
CX Partners Fund I Initial Public Offering
68.7
Cholamandalam Investment and Finance Company Ltd.
Creador I LLC Open Market 55.5
Parag Milk Foods Ltd. India Business Excellence Fund-I, IDFC Private Equity Fund III Initial Public Offering
46.3
Neptune Group, Swarajya
Milestone Domestic Scheme II, Milestone Fund LLC Buyback 42.0
ATS Realworth Pvt. Ltd.
ASK Real Estate Special Opportunities Fund Buyback 40.4
Figure 18: Select exits during 2Q16
Financial services and telecommunications sectors, which together had only one US$60 million exit in the previous quarter, contributed 65% of exit proceeds in 2Q16. In contrast to this,
to US$13 million (8 deals) in 2Q16 from US$213 million (10 deals) in 1Q16. Similarly, exits in the real estate sector recorded US$157 million (3 deals) in 2Q16 down from US$252 million (8 deals) in 1Q16.
Source: Industry sources and EY analysis
Figure 17: PE/VC exits in 2Q16 by sectors
Value (US$ million) Volume
Note: Others: Chemicals, Education, Business Services, Infrastructure, Pharmaceutical, Ecommerce, Information Technology
7
11
13
14
15
27
47
85
157
209
488
Retail and consumer products
Others
Technology
Cement and building products
Infrastructure
Media & entertainment
Food and agriculture
Healthcare
Real estate, hospitality & construction
Telecommunication
Financial services
2
2
2
2
3
3
3
3
7
7
8
Healthcare
Industrial products
Infrastructure
Media & entertainment
Education
Food and agriculture
Real estate, hospitality & construction
Retail and consumer products
Financial services
Others
Technology
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Tax and regulatory updatesIn 2Q16, there were a substantial tax and regulatory announcements, which could impact PE investments. After several years of negotiation, the India-Mauritius Double Taxation Avoidance Agreement (DTAA) was amended to give taxation rights on investments to India, a move that will impact the structuring of future investments. The government also renegotiated the India–Cyprus DTAA and rescinded the status of Cyprus as a non-cooperative jurisdiction. The much-awaited indirect transfer taxation related rules were
introduced toward boosting foreign investments in India such as liberalizing FDI regime for various sectors, amendments for FVCI investment permitting deferred consideration etc.
Tax sectionA. Tax updates
Lok Sabha approves Finance Bill 2016 with amendments The Finance Bill, 2016 (FB 2016 or Bill) was presented by the Finance Minister (FM) on 29 February 2016. In the wake of representations received from various stakeholders, while moving the Bill for approval by Lok Sabha (lower house of Parliament), the Finance Minister introduced amendments to FB 2016. The amendments are intended to address certain ambiguities and anomalies arising from language of proposals as contained in the original Bill, relieve hardships for taxpayers as well as bring clarity on the scope of certain provisions. The FB 2016, as amended, was approved by the Lok Sabha on 5 May 2016 and received President’s assent on 14 May 2016.
Key amendments include the following:
• Reduction in period of holding of unlisted shares from three years to two years, to qualify as a long-term capital asset, which was inadvertently missed out in the original Bill
• Clarifying ambiguity in withholding rate for distribution of exempt income by Alternative Investment Funds to
shall be made on distribution of exempt incomes to NR investors.
Indian tax administration amends Income Tax Rules to grandfather income from transfer of investments made before 1 April 2017 from application of General Anti Avoidance Rule (GAAR) provisions The ITL contains anti-avoidance provisions in the form of GAAR which provides wide powers to the Tax Authority to deal with impermissible tax avoidance arrangements. GAAR provisions
1 April 2017. The Central Board of Direct Taxes (CBDT) released
income tax rules dealing with GAAR provisions (GAAR rules).
grandfathering of income from transfer of investments made before 1 April 2017 from the application of GAAR. Additionally, GAAR Rules are also amended to provide that GAAR will apply to
In 2015, GAAR provisions under the ITL were made effective from 1 April 2017.
However, grandfathering provisions under GAAR rules were not
the GAAR rules. The rules make it clear that GAAR applies to all
the date of arrangement. It may be noted that the existing Rules provide for carve out exceptions in case of certain investments by Foreign Institutional Investors (FIIs) and non-resident investors in FIIs.
Indian Tax Administration issues indirect transfer rules
transfer (IDT) provisions of the ITL. This is subsequent to the draft indirect transfer rules released on 23 May 2016 for public consultation.
The ITL provides for taxation of IDT in India. The IDT provisions provide for taxation of gains arising from the transfer of share or interest in a foreign company (FCo) or foreign entity (FE) whose value is derived, directly or indirectly, “substantially” from assets located in India. The IDT provisions were further
“substantiality” threshold of 50%, taxation on proportionate
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basis i.e., to the extent of value of India assets, reporting obligation relating to IDT transactions, small shareholder exemption etc.
Pursuant to the above, the CBDT has now issued rules and forms as required under the ITL (IDT Rules). The IDT Rules provide for valuation mechanism, determination of proportionate income, forms for reporting compliance and details of documents to be maintained by the Indian concern in respect of IDT transactions. These IDT Rules come into force from 28 June 2016.
accepting the transfer value as the basis for determining value of share /interest in FCo/ FE, when the transfer is between non-connected parties; reporting compliance by a designated Indian entity to relieve other Indian entities etc.
The IDT Rules, however, continue to have a fair share of challenges. Illustratively, while the taxation is directed to be in proportion to assets located in India, the Rules provide that, in case of valuation of a share of an Indian company or interest in a
entity (whether located in India or outside India) are required to be taken into account; the obligation on the Indian entity to maintain and furnish prescribed information is far too onerous and is not relieved even when the IDT may be exempt by virtue of the tax treaty applicability or small shareholder exemption
back of liabilities in determination of FMV, which, in most cases creates an anomaly, as the commercial valuation would be after considering the liabilities. Furthermore, the absence of clarity about the treatment of preference share capital or operating liabilities in this regard will add to complexity and litigation.
Indian tax administration exempts “start-ups” from premium taxation on issue of shares The Indian Tax Laws (ITL) provides for taxation of premium beyond the fair market value (FMV) received by a closely held company (CHC), on issue of shares to residents in India (Premium Taxation). Under this provision, CBDT is empowered to notify any class of persons, paying consideration towards issue of shares to which the premium taxation would not apply.
was issued by the CBDT, for notifying such “class of persons” being resident persons making contribution towards shares of “start-up” company.
closely-held start-up company from a resident investor in excess of its FMV, would not be taxable in India.
adds to the list of measures undertaken by the Government to give a momentum to the Indian start-up ecosystem. These measures will pave the way for a wider set of funding measure as most of the funding rounds in these start-ups are made on basis of future projections.
CBDT amends rules on non-furnishing of PAN by non-residents and prescribes alternative documents
on amendment of the rules for granting relaxation from withholding of higher rate of tax for certain payments made to NRs where Permanent Account Number (PAN) issued by the Indian Tax Authority of such NR is not available.
As per the amended rule, non-reporting of PAN by NR deductees would not attract a higher withholding rate in respect of payments in the nature of interest, royalty, fees for technical services and payments on transfer of any capital asset, subject to furnishing of the following details and documents to the deductor:
i) Name, e-mail id, contact number;
of which the deductee is a resident
outside India from the Government of that country or
of his residence and in case no such number is available, then a unique number on the basis of which the deductee
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Committee. It relieves the burden on the parties of obtaining the PAN for NR deductees in India to avoid higher withholding of tax and, thereby, improves the ease of doing business with India.
becomes relevant where the payment is liable to withholding tax either under the ITL or the applicable tax treaty at a rate
way of lower tax rate or exemption from taxation in India, the ITL currently requires an NR to furnish a TRC and/or additional information and also maintain documents substantiating the information contained therein. Hence, it appears that compliance currently made for availing tax treaty relief is likely
B. Tax policy
Amendment to the India-Mauritius DTAA A protocol was signed between India and Mauritius on 10 May 2016 at Port Louis, Mauritius amending the extant tax treaty. The key features of the protocol are as under-
• �
1. With effect from FY 2017-18 (tax year 1 April 2017 to 31 March 2018), India shall have taxation rights on capital gains arising from alienation of shares of an Indian resident company, acquired on or after 1 April 2017.
2. For shares acquired prior to 1 April 2017, the exemption from tax in India as currently available would continue to apply.
3. For a transition period of 1 April 2017 to 31 March 2019, the tax rate will be limited to 50% of the domestic
Protocol.
4. Taxation in India at full domestic tax rate will take place from FY 2019-20 onwards.
• �
1. A Mauritius resident (including a shell/ conduit
reduction in tax rate during the transitory period if it
business test.
2. A resident is deemed to be a shell/ conduit company, if its total expenditure on operations in Mauritius is less than INR 2.7 million (Mauritian Rupees 1.5 million) in the immediately preceding 12 months
• �
1. Interest payments made to a Mauritian resident will be subject to 7.5% withholding tax
2. The exemption for interest payments to banks has been removed. Mauritian resident banks earning interest from India will also be subject to withholding tax in respect of debt claims/ loans made after 31 March 2017. Interest income earned prior to that shall be exempt from tax in India.
• The Protocol also provides for updating of Exchange of Information Article as per international standard, provision for assistance in collection of taxes, source-based taxation of other income, amongst other changes.
• These amendments provide much sought clarity to the investors as Mauritius was one of the key jurisdictions for foreign direct investments in India. This may lead to some
gains exemption under the India-Singapore DTAA is co-terminus with the India Mauritius DTAA and any amendment to the same may have consequences for Singapore based structures also.
Cyprus Government announces re-negotiation of India-Cyprus tax treaty, status of Cyprus as non-cooperative jurisdiction to be rescinded retrospectivelyOn 29 June 2016, the Ministry of Finance (MoF) of Cyprus made an announcement whereby India and Cyprus concluded the re-negotiation of the DTAA between the two countries and an agreement was reached upon all the pending issues on treatment of Cyprus as a non-cooperative jurisdiction or a
NJA would be rescinded retrospectively from 1 November 2013. Also, the amended tax treaty would provide for source-based taxation of capital gains subject to grandfathering of investments made prior to 1 April 2017.
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The Announcement of Cyprus MoF comes along with various other developments on cross-border taxation in India. There had been media reports in the past on renegotiation of India-Cyprus tax treaty and efforts made by Cyprus Government to resolve
Removal of Cyprus from blacklist of NJAs came as a relief to the taxpayers transacting with the persons located in Cyprus as presently the taxpayers are required to go through the hassles of increased compliance, higher withholding etc.
Shift to source-based taxation on capital gains on sale of shares and grandfathering of previous investments is consistent with the amendment recently made to the India-Mauritius tax treaty. The Announcement was however, silent on other amendments agreed in the tax treaty and action from the GoI on this development was keenly awaited.
Pursuant to the above, Indian tax administration then released a Press Release dated 1 July 2016 (the Press Release). The Press Release is broadly in line with the announcement made by the Cyprus MoF.
on the positive development with Cyprus. However, the actual impact of the development can be evaluated once the re-negotiated treaty is signed and the NJA status of Cyprus is
CBDT issues instructions on characterization of income from transfer of unlisted sharesCharacterisation of income arising from sale of securities as “capital gains” or as ”business income” has been a vexed issue and a subject matter of litigation. There are several judicial precedents on this aspect, which have established certain subjective principles to distinguish shares held as investments from those held as stock-in-trade. Further, CBDT, vide its Instruction No. 1827 dated 31 August 1989 and Circular No. 4/2007 dated 15 June 2007 provided some guidance for determining whether shares could be construed to be held as ‘stock-in-trade’ or as ‘capital asset’.
With a view to reduce litigation and maintain consistency in the tax authorities approach, CBDT had issued a circular in February 2016 which provided that income arising from transfer of listed shares and securities which are held for more than twelve months would be taxed under the head ‘capital gains’ unless
the taxpayer itself treats these as stock-in-trade. Further, the circular stated that in any other case, the nature of transaction shall continue to be decided on the basis of the existing CBDT circulars issued in this regard.
Further to the above, CBDT has now issued a circular, dated 2 May 2016, stating that the income arising from transfer of unlisted shares would be considered under the head “capital gains”, irrespective of period of holding except in the following
view:
• The genuineness of transactions in unlisted shares itself is questionable;
• The transfer of unlisted shares is related to issue pertaining to lifting of corporate veil;
• The transfer of unlisted shares is made along with the control and management of underlying business.
The directives issued by CBDT puts to rest a long drawn controversy over the treatment of income arising from sale of unlisted shares as ‘capital gains’ or ‘business income’ which
unlisted securities including Alternative Investment Funds, angel investors, private equity funds, venture capital funds, etc. However, the carve-out of the scenario where transfer of shares along with transfer of control and management of the underlying business could lead to fresh controversy on the subject. There are contrary judicial precedents on whether the transfer of shares could be construed as transfer of business
is necessary to bring absolute certainty for the investors.
Good and Services TaxThe Ministry of Finance has released the Model GST Law on 14 June 2016. The release of the Model GST Law has provided much needed visibility and a window for the industry to understand the GST framework and provide the necessary
and ease of doing business.
Further, the Constitution Amendment Bill was tabled before the Rajya Sabha in the Monsoon Session of the Parliament which commenced on 18 July 2016. The Constitution Amendment Bill was passed by the Rajya Sabha on 3 August 2016 making GST implementation over the short term a realistic possibility.
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C. Judicial precedents
Bombay HC upholds non-taxability of capital gains on transfer of shares of the company where part of the consideration is contingent The Bombay High Court (HC) recently ruled in the case of Mrs. Hemal Raju Shete (Taxpayer) on the issue of taxability of capital gains on transfer of the shares of the company where part of the consideration was receivable in the future, subject to occurrence of a contingency.
Under the agreement to sell, the Taxpayer and her family members (sellers) transferred shares of the company to the purchaser against payment of consideration, payable upfront. The agreement also contemplated the entitlement of the sellers to additional consideration payable over a period of four years,
the subject matter of transfer, subject however, to the covenant that the aggregate consideration was not to exceed INR 200 million. The Tax Authority levied capital gains with respect to the consideration of INR 200 million, rejecting the Taxpayer’s claim to compute capital gains with respect to the amount actually due and received in the year of transfer.
The HC held that deferred consideration, which is linked to the future performance of the company, is dependent upon uncertain events, which is contingent and has not accrued in the year of execution of the agreement. No part of the deferred consideration is, therefore, chargeable to tax in the year of execution.
Furthermore, the HC also accepted taxability of deferred consideration as capital gain income in the respective year of accrual.
In a share acquisition deal, it is not unusual that, besides upfront
agree to payment of additional consideration basis the future performance of the underlying company. From the seller’s perspective, while there may be no dispute on taxation of the
dilemma persists with regard to the point of time at which capital gains tax liability triggers in relation to the additional or the deferred consideration receivable in subsequent years and the year in which it is taxable.
This HC ruling lays down that the general concept of accrual of income is also embedded in the provisions dealing with taxation of capital gains. Accordingly, even capital gain income cannot be said to have accrued until a taxpayer gets the right to receive the same.
The year of taxation of the deferred contingent compensation for transfer of capital asset is not free from doubt. While the present HC ruling favours the taxpayer, since it relieves the burden of retrospective taxation of the deferred consideration with reference to the year of transfer of the asset, one will need to watch further judicial/statutory developments in the matter.
Mumbai Tribunal rules contractually agreed
year basis (Mahindra Telecom.)A recent ruling of the Mumbai Bench of the Income Tax Appellate Tribunal (Tribunal) was in the case of Mahindra Telecommunications Investment Private Limited (Taxpayer) on
equity investment.
The Taxpayer, an Indian company, invested in 26% equity of another Indian company (ICo) where balance 74% was invested by a foreign company (FCo) under a shareholder agreement (SHA). The SHA ensured income to the Taxpayer by way of call option fee of 5.5% p.a. on equity payable by FCo. The terms of SHA as structured between the parties also ensured a “return” on equity @ 11% p.a. on compounded basis to the Taxpayer by way of share price on exercise of put option against FCo or call option by FCo anytime after three years of SHA or relaxation of Foreign Direct Investment (FDI) limits by Indian government, whichever is earlier.
Considering the peculiar terms of SHA which virtually ensured “return” on equity for the Taxpayer from FCo as part of sale price of equity shares any time in future and irrespective of the actual fair value of the equity shares, the Tribunal concluded that the “return” was characteristically no different from call option fee of 5.5% payable on annual basis. The “return” was
and, hence, taxable on year-on-year basis for taxpayer following mercantile method of accounting. The Tribunal held that the fact that such “return” was contractually receivable only upon sale of shares pursuant to exercise of put/call option and as part of sale price of shares was not relevant. This Tribunal ruling is based on peculiar facts and terms of SHA where the Tribunal noted that it virtually granted contractual right to the Taxpayer
Tribunal also noted the facts of the case to apply “substance over form” principle such that the assured compounded return is to be taxed on time basis though its actual realization may be at a future point of time.
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Regulatory section
Policy, 2016
certain changes in the extant policy on foreign direct investment (FDI) vide issuance of Press Note 5 (2016 series) by the Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry.
Policy for sectors including pharmaceuticals, defence and single-brand retail with a view to make India more investor friendly and an attractive FDI destination.
are as under:
1. Trading through ecommerce:
• FDI up to 100% has been permitted under Government approval route for trading, including through ecommerce, in respect of food products manufactured or produced in India.
2. Defence:
• Foreign investment beyond 49% was permitted under Government approval route subject to it resulting into access to modern and “state of art” technology in the
up to 100% in defence sector with Government approval required beyond 49% and condition of access to ‘state-of-art’ technology in the country for proposal beyond 49% has been now been done away with.
• FDI limit for defence sector has also been made applicable to manufacturing of small arms and ammunitions covered under Arms Act 1959.
The ratio of the ruling may be distinguishable in cases where an investor in equity shares is not insulated from the risks of
price not including the actual fair value of such shares on the date of exit.
• �route in broadcasting carriage services, earlier FDI in broadcasting carriage services beyond 49% required prior government approval.
• Further, infusion of fresh foreign investment, beyond 49% in a company not seeking license/permission from sectoral ministry, resulting in change in the ownership pattern or transfer of stake by existing investor to new foreign investor, will continue to require Government approval in broadcasting carriage services.
4. Civil aviation:
• �airport projects under automatic route.
• FDI Cap increased from 49% to 100% in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service with FDI up to 49% being permitted under automatic route and beyond 49% through government approval route.
5. Pharmaceuticals:
•
pharmaceuticals under automatic route and beyond 74% requires government approval.
6. Private securities agency:
• �being permitted under automatic route and beyond 49% and up to 74% through government approval route.
7. Animal Husbandry:
• �pisciculture, aquaculture and apiculture is currently allowed 100% under automatic route under controlled conditions. Now, requirement of ”controlled conditions” for FDI in these activities has been done away.
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Particulars Prior to amendment of the Regulation Post amendment of the Regulation
Earlier limit Revised limit
Deferment of purchase consideration on transfer of shares
For transaction between a resident seller and a non-resident buyer – Prior RBI approval required
For transaction between resident buyer and non-resident seller or vice-versa — permitted to the extent of 25% of total purchase consideration for a maximum period of 18 months from date of transfer agreement.
For this purpose, escrow arrangement is permitted for an amount to the extent of 25% of total purchase consideration for a maximum period of 18 months from the date of the transfer agreement.
However, total consideration paid will be compliant with applicable pricing guidelines.
Amendment in FEMA regulations on
registered Foreign Venture Capital Investor (FVCI) An FVCI registered under SEBI (FVCI) Regulations, 2000 can without prior approval of the RBI, make investments in the following:
• Equity or equity-linked instruments or debt instruments, issued by an Indian company whose shares are not listed on a recognised stock exchange at the time of issue of the said securities/instruments and which is engaged in any of the following sectors;
a) Biotechnology
b) IT related to hardware and software development
c) Nanotechnology
d) Seed research and development
e) Research and development of new chemical entities in pharmaceutical sector
f) Dairy industry
g) Poultry industry
h) Production of bio-fuels
i) Hotel-cum-convention centers with seating capacity of more than 3,000
j) Infrastructure sector
• equity or equity linked instruments or debt instruments issued by a start-up, irrespective of the sector in which it is engaged;
• �Alternative Investment Fund (Cat-I AIF) or units of a scheme or of a fund set up by a VCF or by a Cat-I AIF;
• �the Reserve Bank.
The consideration for all investments by an FVCI can now be paid out of inward remittance from abroad through normal banking channels and also out of sale / maturity proceeds or income generated from investment already made as stated earlier. Previously, investments by an FVCI could be paid only out of inward remittance from abroad through normal banking channels.
which works towards Innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property;
RBI permits payment of share-transfer consideration on deferred basisRBI amended Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 as follows:
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Foreign Investment in units issued by Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and AIFs governed by the Securities and Exchange Board of India (SEBI) regulationsWith a view to rationalize the foreign investment regime for Alternative Investment vehicles and to facilitate foreign investment in collective investment vehicles for real estate and infrastructure sectors, the GoI has allowed foreign investment in the units of Investment Vehicles registered and regulated by SEBI or any other competent authority (includes REIT, InvIT and AIF).
Certain key amendments introduced are as follows:
1. A person resident outside India including a Registered Foreign Portfolio Investor (RFPI) and a Non-Resident Indian (NRI) may invest in units of Investment Vehicles.
2. A person resident outside India who has acquired or purchased units in accordance with the regulations may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI.
3. Downstream investment by an Investment Vehicle shall be regarded as foreign investment if either the Sponsor or the Manager or the Investment Manager is not Indian ‘owned and controlled’.
4. Furthermore, in case the Sponsors or Managers or Investment Managers are organized in a form other than companies or Limited Liability Partnerships (LLPs), SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled.
5. Downstream investment by an Investment Vehicle that is reckoned as foreign investment shall have to conform to the sectoral caps and conditions / restrictions as per the FDI Policy
Issuance of Rupee-denominated bonds overseasThe overall limit on the amount which can be borrowed by an
of rupee denominated bonds has been set at INR 50 billion
Further, it has been decided to reduce the minimum maturity period for Rupee denominated bonds issued overseas to three
Constitution of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT)
for constitution of NCLT and NCLAT with effect from 01 June 2016.
Initially, NCLT will have eleven Benches, two at New Delhi and one each at Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati, Hyderabad, Kolkata and Mumbai.
With the constitution of the NCLT, the Company Law Board (CLB) constituted under the Companies Act, 1956 stands dissolved. It appears that, to begin with, only powers of CLB and other powers under Companies Act 2013 (excluding reduction of capital, winding-up and compromise/arrangement) would be exercised by NCLT and appeal therefrom would be before NCLAT instead of High Court. Gradually powers of High Court under the Companies Act 2013 / 1956 relating to reduction of share capital, winding-up and compromise or arrangement (merger, demerger, and settlement) would get transferred to NCLT.
Insolvency and Bankruptcy Code 2016The Insolvency and Bankruptcy Code 2016, a law to amend and consolidate the laws relating to reorganisation and
and individuals in a time bound manner, received the President’s assent. The code is a vital reform that will make it much easier to do business in India.
Key highlights of The Insolvency and Bankruptcy Code 2016, are captured in the paper titled “ARCs – at the crossroads of making a paradigm shift”
OutlookAlthough, there has been a decline in the PE/VC investments as compared
year has already seen close to US$8 billion worth of investments across more than 300 deals. Before the peak achieved in 2015 (investments of US$19.4 billion), 2007 recorded highest PE investments at about US$17 billion. In that context, 2016 is still showing very strong numbers. India continues as one of the few bright spots globally, which in the context of the PE/VC industry is demonstrated by several indicators including successful fund raises by large India-focused fund managers, increase in commitments by large global funds including pension behemoths and sovereign wealth funds, improved IPO activity and improved strategic exit activity.
The government has also been steadily working on various fronts — (i) improving the investment regime by providing clarity on hitherto contentious tax and regulatory issues (India-Mauritius tax treaty, FDI relaxation, Indirect Transfer etc.) (ii) various policy initiatives (Bankruptcy law, GST etc.), (iii) improvement of core infrastructure (railways investment plan including DFCs, accelerating road construction, renewables and power
the government such as Make in India, Startup India etc., should bode well for the PE/VC industry and we expect robust PE activity going forward.
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About EY
EYEY is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 200,000+ people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
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• Private equity roundup is based on EY’s analysis of announced PE deals, as well as other PE related news and information reported in secondary sources and VCCEdge.
• PE deal values used in this document are based on those provided in press releases pertaining to deal announcements. The conversion rate (INR to US$) is based on the exchange rates prevalent on the date of the deal announcements.
Our teams work closely with you, offering incisive and proven industry experience coupled with integrated, objective practical advice and support to help you meet your needs. It’s how EY makes a difference.
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At EY, our Private Equity practice offers a broad range of services to assist you and your investee companies every step of the way - from your fund setup to the transaction life cycle
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