Published Editorial

Investors keen about various asset classes in India

June 2016

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Rajiv Memani
CEO and Country Managing Partner, EY

India’s macroeconomic fundamentals have had a stable record and investor sentiment is more positive now, said Rajiv Memani, Chairman of the E&Y’s Global Emerging Committee.

Many sectors like automobile and building space are seeing demand uptick. While the Index of Industrial Production (IIP) has disappointed, a good monsoon is very crucial for revival of economy, he told CNBC-TV18’s Shereen Bhan.

“Large appetite to invest in various asset classes is there,” Memani said, adding, there is no shortage of liquidity in the global market. He expects fund flows to continue into India over coming months.

Domestic economy is also on a consolidation path now. Memani said more activity is visible across sectors and USD 8-10 billion transactions are expected in every quarter of current fiscal.

The only sector that will see decline in capital will be e-commerce, he added.

Alongwith financial sector, it is the tax side that has seen positive movements. “Tax story is significantly better,” he said adding “Lot of (tax) clarifications are coming through.” However, there is still lot to do on the tax side.
Below is the transcript of Rajiv Memani's interview with CNBC-TV18's Shereen Bhan.

Q: We were just talking about the dismal Index of Industrial Production (IIP) numbers, not a great start to the financial year, it continues to be patchy. What’s your own sense about the strength of the economy? You talk to the who’s who of business, what you picking up? 

A: I think there is definite sense that things are improving, but I don’t think it’s sort of thumbs up overwhelming, suddenly things will change, but people can see the green shoots most companies that I talked to, more sector that I interact with clearly see an uptick, whether it is on the auto sector, whether you see the building products sector people are starting to see slight uptick, but there will be ups and downs. The monsoons are very, very crucial on how things go, but obviously these numbers are really disappointing, but overall if I was to talk to most companies and get their sense on what happening on the ground and if you look at data of what’s happening in each sector, clearly there is increase, it’s a very mild increase not a strong increase.

Q: Absolutely, we are seeing that across different sectors auto was one that you talked about where there is an improvement in sales, but what about confidence, what about the mood, what about the appetite to invest, to acquire. What’s the sense that you get on that front?

A: Definitely things are getting better, there I would probably be more assertive because that’s more long term and I think as people look at the macroeconomic fundamentals of India, they clearly today have now had a stable track record if you compare it with what’s happening in the world, it is clearly far more positive. If you look at asset classes if you look at private equity as an example, the number of large exits that have happened and the successful initial public offering (IPO) that have happened in the last 12 months and some big exits, some big buyouts. Clearly, there is a lot of appetite to invest in certain asset classes. If I look at foreign direct investors (FDI) they are now getting more active in India scouting for opportunities because there is no shortage of liquidity around the world. I think people are looking at where they can invest long term and where can they get the opportunities going. If I look at domestic business also they are gradually getting ready, consolidation is in the air. We can see consolidation starting to happen. We are seeing some businesses gradually getting out off 2-3 years of slumber either because of commodities prices going up or regulatory clearances coming through and I can now see some domestic companies starting to be active and trying to be more proactive rather to start looking at consolidation. Also stressed asset as a class through structured finance, to some of the initiatives that we talked about in the banking sector there seems to be more activity around that, so definitely on the deal side, on the traction side, on green field side there is likely to be much more activity in the next 12 months. I would say that even today we are starting to see USD 8-10 billion of transactions happening.

Q: USD 8-10 billion of overall transaction.

A: Overall transaction every quarter. If I look at one sector where there is definitely a slowdown as compare to 2015 is the e-commerce internet sector. There definitely there is going to be some or maybe significant amount of reduction in capital that came in, but almost all the other sectors whether it could be chemicals, could be building products, could be manufacturing, pharmaceuticals. We will see probably much greater activity.

Q: You were talking about FDI and given that you feel confident about deals as well. Do you think that we are likely to see significant FDI coming in for instance the insurance sector, any new sort of money coming into the insurance sector?

A: As it is if you look at it India has been the largest recipient of FDI over the last 12-18 months, that’s story has started and that will continue. It will be across sectors, in insurance definitely the Foreign Investment Promotion Board (FIPB) clearances starting to happen, companies trying to accelerate, realignment of shareholdings happening. Financial services per se as a sector even if you look at the new banks that are coming through. If you look at some of the IPOs like Ujjivan and others that have happened, which have been really, really successful, housing finance where we are seeing lot of capital coming through. I think financial services overall as a sector will continue to attract a large amount of capital, but the capital story is there. I mean FDI investment in the last 18 months has probably been the highest.

Q: The capital story is looking good, what about the tax story. The government is saying the right thing, you are a part of a committee as well that is recommending what ought to be done on the tax front to the government. There have been several sort of clarity, pre-circular that have been issued by the government as well. How is thing on the ground when we talk about tax because clearly that has been the key concern when we talked about investing in India?

A: If you go back two years, three years, four years I think one of the biggest issue is especially from 2011-2012 onwards that investors, business people and the fact that ease of doing business and tax issues. When this government came in there was a lot of hope that something significant remarkable, revolutionary is going to happen, but clearly it has taken time for things to change, but I would say in the last 12 months I have probably seen more activity on the tax side in a positive way than what we are seeing in many years put together. If you look at the big decisions, the big decisions were the government not appealing in the Supreme Court the Vodafone transfer pricing decision, solving the Mauritius conundrum. Now you may like it or you may not like it, but it was an issue but they have dealt with it upfront, in a prospective fashion.

Q: Do you think concerns of investors are being allayed on the Mauritius front?

A: There are still some issues that people will have, but at least I would say substantially the concerns have been allayed. Now people may like the answer, but at least there is predictability.

Q: But is there clarity also on general anti-avoidance rule (GAAR) now and life with GAAR starting next year?

A: So GAAR what the government was doing is basically they are now trying to solicit specific examples from companies and trying to put together responses for that. Basically, what they want to do is to come out with a very detailed FAQ kind of thing, when GAAR comes in and also they have put very high thresholds in terms of when GAAR can be applied. It is not that any assessing officer can just come in and apply GAAR. The thresholds that have been applied the kind of process one has to follow before you invoke GAAR that also is pretty high. It is something which is going to change things. It is something that’s happening around the world, but I would say the way they are approaching it right now is much better, but coming back to your earlier question, I would say that even in terms of procedural issues number of assessments on number of these shocking kind of demands that used to be raised earlier that’s dramatically come down. 

If I just look at transfer pricing, earlier transfer pricing the number of assessments that went in for scrutiny were much, much higher. They have changed the policy. They have made it risk based assessment. If I talk to a client, if I talk to all our partners, colleagues and everything the number of cases that are facing scrutiny assessment in transfer pricing has come down. Lots of contentious issues for example whether investment portfolio, whether that is capital gains or business income or when you look at income from EPC contracts whether it can be classified association of persons or not, so a lot of clarifications are coming through. At least whenever we are engaging with the tax authorities, with the policymakers, with the Ministry of Finance they are listening, they are understanding and if they agree and understand that this is a real issue and if one can come with a solution than I think they are very quick to try and see how they can implement it.