An edited version of this article appeared in FTSE Global Markets, Issue 46, November 2010
Tom Carey, Corporate Partner at Carey Olsen, examines the growing relationship between Guernsey and India in the investment funds sector.
India's economy is expected to expand by 8.5% this year, according to Morgan Stanley and, while China's economy is four times bigger at the moment, India's growth rate could overtake China's by 2013 if not before. Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth and a country of 1.2 billion people and one of the youngest working populations in the world – it isn't any wonder really that investors are focussing on India.
The Economist cites the two reasons India will outstrip China. The first is demography – China's population is aging while India's is a young and growing workforce. In 2020 the median age in India will be 28 compared with 38 in America, 45 in Western Europe and 49 in Japan. The working-age population will increase by 136 million in India by 2020.
The second is democracy. The publication points out that while the government may be weak the system has promoted a business freedom which has resulted in millions of new entrepreneurs all given licence to do their own thing.
Many pundits see a risk in India's infrastructure problems – as evidenced by the build up to the Commonwealth Games - and might think there is a hesitancy to invest as a consequence. However, the converse could be said to be true. There are opportunities for investors with the promise of high yields if India gets it right. The Indian government is part way through a commitment to spend $500 billion to 2012 and that pace is likely to speed up as the Indian government gets better at inducing private investors to inject capital.
The opportunities for investors are often within India's burgeoning information economy.
Call centres might be the public face of this knowledge-intensive society but behind the scenes there are banks, consumer giants, software providers, renewable energy initiatives and many other sectors looking for brains at a cheaper cost than in the West. India's government is doing its best to broaden its educational offering to meet this voracious demand. These young entrepreneurs are tapping into a wealth of international support on offer such as Microsoft assisting Indian businesses to improve information technology infrastructure. Goldman Sachs is spending $100m on female entrepreneurs – many of them in the emerging markets. Certainly the entrepreneurs in India are shaping new markets such as mobile video games and online karaoke.
Guernsey companies are increasingly being used as listed vehicles, whether on the main market of the London Stock Exchange (LSE), the Alternative Investment Market (AIM) of the LSE or elsewhere. Indeed, the promotional body for Guernsey's finance industries (GuernseyFinance) takes India's potential very seriously. Indeed Guernsey Finance has sent, and will be continuing to send, delegations to the key cities with a view to "drumming up" new business.
It would be wrong to paint a picture of a flood of new work from Indian businesses courting European and US investors. It is more of a steady flow but this will grow as the region grows and it will take Guernsey with it as the jurisdiction gains in reputation for experience and expertise when dealing with the structures best suited for investing in India.
Guernsey has not seen much, or indeed any, work where Indian investors are looking for overseas opportunities. They are very much concentrating on the domestic market at present but as the wealth grows, and the entrepreneurs seek new opportunities, Indian investors may indeed look elsewhere. For Indian businesses right now is much more about finding the right jurisdiction with the appropriate structures to facilitate raising the capital needed. Guernsey is attractive for a number of reasons not least the access to European and UK investors and the ease and expertise available in the island to assist with listings on AIM and the LSE.
A Guernsey structure
The type of structure for making investment into India that Guernsey lawyers have seen is the establishment of a Guernsey-registered holding company with a wholly-owned subsidiary, based in Mauritius, and the operating company based in India. The shares of the Guernsey holding company are then placed with UK and European institutional investors and listed on the LSE or AIM.
A Guernsey-registered holding company mitigates many of the tax issues and gives the business respectability that may not be achieved by solely using Mauritius. The double tax treaty entered into between Mauritius and India means that a foreign credit in respect of the tax suffered in India may be offset against the Mauritian liability, subject to local requirements. The consequence of which is that Mauritian tax may be payable by the Mauritian company on dividends received from the Indian company at a possible maximum effective rate of 3%. Dividends paid by the Mauritian company will generally not be liable to tax in Mauritius nor will they be subject to Mauritian withholding tax.
Typically any dividends which are paid out by a Guernsey holding company will, where the company has exempt status, be exempt from income tax in the island (except, in certain circumstances, where dividends are received by shareholders who are resident in the island). No withholding tax will be payable on the dividends to shareholders who are not resident in the island. Essentially the island offers a tax neutral platform through which to raise capital for the Indian based business. In other words incorporating in Guernsey will not add to any taxes which are otherwise due.
So where is the investment going?
Of course, whenever there is talk of the opportunities for investment in India Bollywood is never far from being a cited example. The Indian Film Company Limited (IFC) is a Guernsey-registered company established as a closed-ended investment fund. The Indian Film Company was admitted to the AIM market in 2007 and on admission raised £55 million in order to invest in a diverse portfolio of Indian films targeted at audiences across varying genres, languages and budgets. The deal was notable as IFC is the leading film investment company listed on AIM.
On the securities side, the Indian bank ICICI recently established ICICI Ventures in Guernsey. The fund's objective is to invest in Indian equities and it raised £50m from European and UK investors.
On the private equity side Alchemy and Ashmore Group plc established the AA Indian Development Capital Fund as a joint venture. This Guernsey registered limited partnership which is a feeder fund for an underlying Mauritius based fund raised commitments of $80m with a view to partnering with management teams to build the next generation of Indian companies.
More recently renewable energy is an area where investors are looking to India with interest. Due to the economic and population growth over recent years, there is a marked deficit of energy supply and as a result wind energy is being seen as a profitable source of renewable energy in India. The Indian government has created legislation which has enabled an attractive tariff and fiscal structure for private sector investors which has stimulated the growth of this type of industry in the country allowing the demand for energy to be satisfied.
Investors can see the benefits of this type of investment in India because it is private enterprise alone driving the investment and there is no need for a government subsidy unlike in Europe where subsidies are the norm. Not having to rely on subsidies to generate returns removes one of the risks in terms of the long term pricing of electricity.
For instance, Indian Energy Limited (IEL), an independent producer of electricity and power, is constructing large wind farms all over India. IEL's aim is to become the largest provider of wind energy in the country and the group currently owns and operates 41.2MW across two wind farms - one on the Gadag plains in Karnataka and another, newly commissioned, farm at Theni, Tamil Nadu. IEL is looking to acquire a portfolio with an aggregate of 300 MW of annual generating capacity by the end of the 2012-13 financial year.
IEL is a Guernsey registered company and was admitted to AIM in 2009. Through the AIM listing IEL wanted to open the company up to a wider investor audience, raise capital to acquire further wind power assets and purchase a new wind farm in India. Many of the investors were from UK institutions.
This trend for renewable energy investment in India has continued with Caparo Industries and its associates floating Caparo Energy Limited on AIM in October 2010 . The company is registered in Guernsey and acts as the ultimate holding company of Caparo Energy India and other members of the group.
The group is focused on becoming one of the leading independent power producers in India. The company seeks to generate predictable and long-term cash flows by building up a portfolio of wind power generating assets in the Indian wind energy market, which it believes to be currently fragmented. The group intends, in due course, to acquire and develop a portfolio of wind farms with a target total annual generating capacity of up to 5,000 MW.
Guernsey's expertise in the Indian market has received a ringing endorsement from this recent admission to AIM which goes beyond the general platitudes of political stability, smooth regulatory environment and experienced business community.
For more information about Guernsey's finance industry please visit www.guernseyfinance.com.
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