India Business and Finance, April 17

What happened in the world's most complicated business ecosystem last week

The pitted highway linking Indian capitalism to the world.

1)  Investment impediments

Enthusiasm for India’s prospects may have reached a fever pitch but foreign investors in Indian stocks dumped $960m last week. As usual, there are many possible causes cited – tension in the Middle East, the lack of anticipated interest rate cuts in America, high valuations, the possibility that a surge in profit growth may be tapering off and on and on. There is never a shortage of possible explanations for these sorts of decisions.

But if you were a foreigner trying to engage with India, a strong case could be made that the biggest factor to douse enthusiasm was a mind-boggling twist in the Indian tax regime. For some, the change and surrounding uncertainty will surely make India, at least for now, untouchable, notwithstanding its growth, the profitability of its companies, the improvements in its infrastructure and its increasing capacity to produce the most valuable people in the world – capable, driven software engineers and computer scientists.

The underlying issue is that along with the usual investment challenges of finding an appealing venture at an appealing price, putting money into India requires an efficient channel. Engaging with India requires complying with complex, time-consuming requirements and then being exposed to complex, vacillating, tax requirements. Being clever, or fortunate, enough to solve the puzzle of India’s economy doesn’t matter if the effort is mired in a cesspool of regulations and taxes. The solution reached by many global investors was to go through Mauritius under the provisions of a signed with India in 1983 that had two benefits: it preempted capital gains taxes and over time fostered a compliance industry in Mauritius that could cope with Indian paperwork (for many, the more important achievement).

The first challenge to this approach came in 2016 when the capital gains tax benefit was eliminated for all but existing funds. Last week, news leaked that the treaty was further amended on March 7^th placing even the applicability for funds created prior to 2017 in doubt. There were, of course, numerous bewildering stipulations and Indian tax authorities added to the confusion by providing no clarity about the changes. Inevitably, the shift raised concerns about not only Mauritius but the laws surrounding investment from Singapore and a handful of European countries that also have tax treaties with favourable provisions.

On a merely practical level, the change will add costs and concerns – along with creating an invitation for India’s feared regulatory and tax departments to launch reviews. Some of these consequences are intended. India, unsurprisingly, would like money coming into the country to cease coming through intermediary locations but these only emerged because going directly into India has been so hard. To many, the change unfolding now concerning Mauritius will underscore that any method an outsider uses to invest in India may not be feasible. That conclusion is at odds with India’s stated desire to attract outside capital which could help its companies access low cost capital that would enhance their ability to take advantage of a moment when the world is shifting production away from China.

2) Nationality impediments

The apparent sacking of the French chief executive of Wipro has prompted some soul searching in the Indian press. Foreign executives are exceedingly rare at Indian firms, prompting numerous articles in the local press attempting to discern why this is the case. The word culture was cited frequently. Meanwhile, a study by Hurun Research suggested this does not work in reverse, with people born in India playing a founding role in 109 non-Indian unicorns (start-ups worth in excess of $1bn).

3) Compensation impediments

A survey of 400 companies, both public and private, by Deloitte showed compensation for chief executives has risen 40% since the lockdown but insiders were the biggest beneficiaries with raises disproportionately high for bosses whose families qualify as “promoters”, meaning they hold controlling shares in the company. The salary hikes for these executives were also less likely to be tied to achieving financial targets.

4) Production impediments

• Dixon, a fast-growing contract manufacturer located near Delhi,will purchase a majority stake in the Indian operations of a phone manufacturer, Ismartu India, which is a unit of Transsion Holdings, a Chinese company. As demonstrated with the recent agreement between China’s MG Motors and India’s JSW, Chinese companies are coming to the conclusion that growing in India means having an Indian partner.

• After having already acquired the Indian iPhone assembly operations of Wistron, a Taiwanese producer, Tata is apparently considering the acquisition of the Indian operations of an even bigger Taiwanese iPhone assembler, Pegatron.

• One area where China’s market share continues to grow (from huge to huger) is laptops, which reached 90% in January from a low of 65% in August, when the government threatened to impose a licensing regime. If China’s market share remains that high, the government will probably figure out some way to intervene. Dixon’s (the company noted above) is reportedly in discussions with foreign laptop producers to do domestic assembly.

5) In a world where home field advantage increasing matters…

Ola Cabs announced it will cease operating in Britain, Australia and New Zealand. In its home market of India, the company’s attention is shifting to electric scooters where it produces under a protective regulatory umbrella.

6) When being an outsider might be okay

Citroen became the first global car maker to export electric vehicles from India with 500 e-C3s shipped to Indonesia. The Indian government is doubtless thrilled since this fits within its broader strategy of transforming the country into a production hub for advanced electronic products. On April 21^st, Elon Musk is expected to meet with Prime Minister Narendra Modi and possibly announce a production deal linked to a change in Indian law which will allow electric vehicle manufacturers to import expensive cars into India at a dramatically reduced tariff in exchange for manufacturing commitments.

Other business trends

IT Services

Tata Consulting Services, one of the two most valuable companies in India, registered a 2% decline in the number of employees during its recently concluded fiscal year. This reflects the first contraction in 19 years and is a sign of tougher times in the IT world. However, TCS’s revenues nonetheless rose by just under 4% and profits rose 9%.

Bankruptcy

India’s bankruptcy courts processed 269 companies in the year concluding at the end of March, up from 19 in 2018 when the courts were first established. While ordinarily this could be seen as evidence that troubles in the corporate sector are growing, in India it reflects a real improvement in its ability to resolve ongoing problems.

Indian scholarship

India’s universities are churning out ever more research papers. One school that dominated in its sector was Saveetha Institute of Medical and Technical Sciences (in dentistry) - an achievement that seems to be echoed by many foreigners now coming to India for inexpensive, high quality, dental care. Two other institutions to receive high ratings were Jawaharlal Nehru University (in development studies) and the Indian Institute of Management Ahmedabad (business).

Wildlife, good intentions and life insurance

In the last decade, leopards have killed 203 people and tigers 61 in Uttarakhand, a northern Indian state. These animals fall under the Wildlife Protection Act. Their victims do not. As a step to ameliorate the resulting conflicts, the local government has introduced a compensation scheme. Families of people who have been attacked now receive Rs600,000 ($72,000), an increase from Rs400,000 ($48,000). There is even compensation paid for the loss of cattle (up to $24,000). The local population remains unmollified.

Hot markets

1. India is scorching and its economy is growing so it likely isn’t a surprise that Voltas, a large domestic air conditioner manufacturer, just recorded a record year, with 2m units sold, an increase of 35%.  The company’s share price is up 60% since the beginning of the year.

2. The Indian beverage business receives little explicit attention which is a mistake. Much is going on. I could not understand how the share price of Varun Beveridges, a Pepsi bottler, recently exploded (Pepsi is hardly new) until I was told about “Sting”, a relatively inexpensive energy drink introduced in 2017 that caught hold as a replacement for paan, a toxic combination of betel nuts and tobacco chewed by workers as a stimulant for jobs that involve endless days.

For people seeking a better alternative, numerous new products have recently entered the market, including a beer that was touted to taste like a mango milkshake and another like chutney. The most vibrant category recently seems to have been “health” drinks, which claim to have innumerable benefits. But this was a step too far. The Indian government may permit paan and mega-infusions of caffeine, but asserting that a product was virtuous crossed a line. Last week, India’s Ministry of Commerce announced there was no such category as a health drink under the law and blocked online retailers from including the category on their websites

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