The Grant Thornton India Watch Index underperformed against its peer indices in Q2 2012 due to falls in the energy, mining and infrastructure sectors. Domestic M&A deal activity in India remained strong in Q2 2012, totaling $1.3 billion across 89 deals. However, cross-border M&A deal activity slowed, totaling only $5.1 billion due to ongoing global economic uncertainties. Private equity investment in India also declined in Q2 2012 compared to the previous year, totaling $1.8 billion across 102 deals.

1. In association with
Issue 17 JULY 2012
India Watch
Welcome to the Summer edition of Grant
Thornton’s India Watch, in association with the
London Stock Exchange
In this issue we highlight that the Grant Our guest contributor, Adam Forshyth,
Thornton’s India Watch Index underperformed research Director at Arden Partners, highlights
against its peer indices but it remained resilient how continued demand for power in India is
over the year. It appears that energy, mining and driving opportunities for companies with secured
related infrastructure companies are taking the coal stocks and renewable energy capabilities.
biggest falls. Lastly, Anshu Khanna, Partner at Walker,
The second quarter of 2012 saw domestic deal Chandiok & Co, gives us an update on the
activity reinforcing the local belief in the India international and local concerns on the proposed
growth story by clocking up a total of 89 deals, General Anti-Avoidance Regulations (GAAR)
amounting to USD 1.3 billion. Cross border deal and explains how these may affect cross-border
activity, however, mirrored ongoing global woes deals, foreign investments into India and domestic
and economic uncertainty, to notch up only USD business transactions.
5.1 billion worth of deals for the quarter. Private If you would like to discuss any of the matters
Equity for the quarter also saw a fall, clocking up arising in this issue or how Grant Thornton’s
USD 1.8 billion in deal value. South Asia group can help you please contact us.
We take a look back over the last 6 months
and review what progress and developments
have taken place in India’s economy. In the first
three months of 2012 India’s economy grew at
its slowest rate since 2003 with GDP growth of
only 5.3%. For the financial year to March 2012,
India’s real GDP fell to around 6.5%, down from
8.4% in the previous financial year.
Anuj Chande Munesh Khanna
Partner, Corporate Finance Senior Partner
and Head of South Asia Group Grant Thornton India LLP
Grant Thornton UK LLP T +91 22 6626 2600
T +44 (0)20 7728 2133 E munesh.khanna@in.gt.com
E anuj.j.chande@uk.gt.com

2. India Watch - Issue 17 July 2012
Grant Thornton’s India Watch
Index remains resilient over the
year despite India’s slower growth
In the second quarter of 2012, it was clear that
investor uncertainty in respect to India had
manifested itself. While the Grant Thornton
India Watch index underperformed against
its peer indices in the quarter, the year to date
performance remains encouraging.
130
120
–– GT India Watch – ALL
110
–– FTSE 100
–– FTSE AIM ALL-SHARE
–– GT India Watch – smaller caps
100 –– FTSE ASEAN
–– FTSE AIM 100
–– FTSE AIM UK 50
90
80
Jan 2012 Feb 2012 Mar 2012 Apr 2012 May 2012 Jun 2012
Source: Thomson Datastream
2

3. India Watch - Issue 17 July 2012
If the figures for our India Watch Small Caps million TEUs (twenty foot equivalent units) build * The India Watch Index
consists of 31 Indian
are taken as representative, a good performance for container shipping, and a recent shareholder companies listed on AIM or
against the FTSE AIM ALL-SHARE and FTSE dispute over Matheran Realty concludes, Eredene the Main Market (excluding
GDRs). We only consider
AIM 100 can be seen, with the India Smaller are set to enter Q3 with great prospects. companies to be Indian if
Caps Index closing four and five points ahead Resilience in the sector wasn’t shared by they are domiciled in India
and/or foreign companies
respectively. A few clear winners and losers can real estate and investment firm HIRCO, whose holding Indian assets or
Investment companies
be seen in the index figures for this quarter: we 32-point fall was approaching that of firms who
with Indian promoters. The
reported in Q1 that no real sector trends had had taken the largest hit. While mining specialists index has been created via
Datastream, a Thomson
emerged and while the biggest rises in this quarter Kolar Gold ended the quarter 37 points down, it Reuters product and is
are fairly diverse, it appears that energy, mining was the energy sector that appears to have borne weighted by Market Value.
To avoid distortion of index
and related infrastructure companies are taking the brunt of the fall. Essar Energy continues to trends, the two largest
the biggest falls. disappoint, with consistent underperformance market cap entities, Essar
Energy and Vedanta
Clear winners in Q2 come from real estate that reflects overall poor results since its entry to Resource, are excluded.
investment, media and support services. DQ the index in Jan 2011. Biofuel producer Nandan ** Data sourced from
Thomson Reuters.
Entertainment performed particularly well, Cleantec and power generator OPG Power
especially against the backdrop of their recent Ventures both suffered sharp falls compared
history. The animation specialists gained five with their year to date, but it was Mytrah
points in Q2 after struggling in 2011 to keep costs Energy and Oilex that took the greatest shocks,
under control. This means DQ Entertainment 42 and 62 points down respectively. Mytrah’s
finish with a year to date index of -5, a good announcement to expand total wind assets to
performance given last year’s problems. Delivery 500MW by March 2013, and Oilex’s resumption
of higher profit margins on distribution and the of studies into prospective wells in Gujarat state,
developments in their IP work have made a big may well help to increase confidence over the next
difference this quarter. two quarters.
Financial services company EIH continue to
impress, with a solid two-point rise in Q2 and
an encouraging 67-point increase from Jan 2010
to date. Their offering of a diversified Indian
private equity portfolio, with exposure weighted
towards infrastructure and real estate, is the cause
of confidence among their directors that their
underlying portfolio has yet room to mature and
realise further cash distributions.
With a slim two-point rise in Q2 but a healthy
seven-point rise in year to date, real estate
Anuj Chande
investment company Eredene perhaps reflects the Partner, Corporate Finance
same confidence in infrastructure investment in and Head of South Asia Group
India. As the company continues work to secure Grant Thornton UK LLP
T +44 (0)20 7728 2133
investment in the Ennore Port project – a 1.5 E anuj.j.chande@uk.gt.com
3

4. India Watch - Issue 17 July 2012
Changing trends - Domestic
deal momentum continues to
score over cross border activity
Q2 2012 saw domestic deal activity reinforcing local belief in the India
growth story by clocking a total of 89 deals, amounting to USD 1.3 billion, as
against 86 deals at USD 1 billion for the corresponding quarter in 2011. Cross
border deal activity, however, mirrored ongoing global woes and economic
uncertainty, to notch up only USD 5.1 billion worth of deals for the quarter
as against USD 11 billion worth of deals for Q2 2011. Private Equity for the
quarter also saw a fall, clocking up USD 1.8 billion in deal value, as against
USD 2.9 billion for the corresponding 2011 quarter.
Deal summary: April - June 2012
Q2 Deal Summary Volume Value (USD billion)
Year 2010 2011 2012 2010 2011 2012
Inbound 21 32 41 4.29 6.74 3.61
Outbound 62 53 24 4.63 4.26 1.46
Cross Border 83 85 65 8.92 11.00 5.07
Domestic Internal Restructuring 114 86 89 2.53 1.00 1.26
MA 197 171 154 11.45 12.00 6.32
PE 66 120 102 1.39 2.90 1.80
QIP 17 2 1 1.69 0.13 0.00
Grand Total 280 293 257 14.53 15.03 8.12
April – June 2012 MA dealscape the continued European Union worries that
MA deal values for Q2 2012 registered an spooked investors throughout the quarter, along
overall decrease of about 47% from Q2 2011 at with speculation of a ‘Grexit’, the spectre of
USD 6.32 billion, with the fall being attributable widespread defaults and volatile stock markets,
to a considerable dip in cross border deal activity, could have proved a deterrent, at-least in the near
despite sustained momentum in domestic MA. future, to Indian companies looking to acquire
Cross border MA deal values in Q2 2012 targets abroad.
fell about 54% vis-à-vis 2011 levels for the Domestic deal activity continued to show
same quarter. Structurally high food inflation, resilience, posting a 26% increase in deal values in
high interest rates, slowing GDP, and poor Q2 2012 as compared to Q2 2011 levels.
governance and policy paralysis have contributed
to an under-whelming outlook for India for
the short term, causing foreign entities to put
their India investment plans on hold. Similarly,
4

5. India Watch - Issue 17 July 2012
Top MA deals: Q2 2012
Acquirer Target Sector Domestic/Crossborder USD million
Hongkong and Shanghai The Royal Bank of Scotland - retail and Banking and financial services Inbound 1,895
Banking Corp commercial banking businesses in India
Piramal Healthcare Decision Resources Group Pharmaceuticals, healthcare and biotech Outbound 680
Mitsui Sumitomo Insurance Max New York Life Insurance Banking and financial services Inbound 530
Company Limited Company Limited
India Hospitality Corp Adelie Food Holdings Limited FMCG, food and beverage Outbound 350
Sony Pictures Television Multi Screen Media Media, entertainment publishing Inbound 271
Roquette Freres Riddhi Siddhi Com Processing Private FMCG, food and beverage Inbound 190
Limited - Starch business of Riddhi Siddhi
Gluco Biols
Ybrant Digital Limited PriceGrabber, LowerMyBills, IT ITeS Outbound 175
ClassesUSA.com
Bharti Airtel Qualcomm India Pvt. Limited Telecom Domestic 165
Fairfax Financial Holdings Thomas Cook - India operations Travel and Tourism Inbound 163
Limited
Aditya Birla Nuvo Limited Pantaloon Retail India Limited (PRIL) - Retail Domestic 160
Pantaloon format of business
MA sector focus
Top MA sectors: April - June 2012
Banking and financial services (BFSI) contributed
39% of deal activity by value in Q2 2012,
followed by pharma, healthcare and biotech
(12%), FMCG, food and beverage (9%), IT
and ITeS (8%) and media, entertainment and
publishing (6%).
The BFSI sector’s performance was spurred
by two cross border deals - Mitsui Sumitomo’
strategic stake purchase in Max New York
Life Insurance Ltd for about USD 530 million,
and HSBC’S deal to buy the Indian retail and
commercial banking businesses of Royal Bank
of Scotland for USD 1,895 million. Factors
Banking and financial such as the extended timelines to obtain branch
services [39%] licenses from the Reserve Bank of India by
foreign banks, low banking and financial services
Pharmaceuticals,
penetration in the country and fundamental
healthcare and biotech [12%]
growth opportunities in the Indian economy
FMCG, food and beverage [9%] have made the Indian BFSI sector an avenue for
both domestic consolidation and foreign interest.
IT ITeS [8%]
However, the sector has also seen some stress in
Media, entertainment and the form of deteriorating asset quality due to bad
publishing [6%] loans to sectors such as aviation, and domestic
and overseas liquidity constraints. It will be
Others [26%]
5

6. India Watch - Issue 17 July 2012
interesting to watch how the sector performs in second half of the year onwards, the former being
terms of deal activity in the second half of 2012. driven by attractive asset valuations, and the
The biggest deal in the pharma, healthcare and latter by potential government measures to ease
biotech sector was Piramal Healthcare Limited’s FDI. The retail sector could also see heightened
acquisition of the US based Decision Resources activity once clarity is achieved on FDI in multi
Group for approximately USD 680 million. The brand retail.
impending patent cliff in the US, as well as rising The above deal rationales demonstrate that
research costs, lower drug approval rates and whilst cross border activity might have slowed
mounting regulatory pressures in the developed down significantly, India’s fundamental growth
markets have long been considered to fuel Indian story remains strong. Ironing out governance and
MA activity in the pharmaceutical sector. structural issues could give the dealscape a much
The Indian media, entertainment and needed shot in the arm.
publishing sector has demonstrated growth in the
last few years due to headroom provided by rising Private Equity: Signs of a cautious slowdown
disposable incomes, strong consumption in tier Private Equity (PE) for Q2 2012 fell by 38% to
two and three cities, under-penetration and the total USD 1.8 billion, as compared to USD
fast-growing new media businesses. It is therefore 2.9 billion for Q2 2011. The total deal values for
not surprising that the sector saw players such Q2 2012 have also registered a fall as compared
as Eros International Plc and Sony Pictures to Q1 2012, which saw USD 2 billion worth
Television increasing their stake in Indian entities. of deals. While it may be too early to draw a
The FMCG, food and beverage sector saw conclusive trend for PE for 2012, it seems that
an interesting deal in India Hospitality Corp’s PE investments have temporarily slowed down,
acquisition of Adelie Food Holdings Ltd, a most likely due to the economic and regulatory
ready-to-eat food products supplier in the UK, uncertainties currently clouding India.
for a reported USD 350 million, signaling the Top sectors for PE in the quarter included IT
readiness of Indian companies to establish a ITES (18%), pharma, healthcare and biotech
global presence. (15%), power and energy (14%), BFSI (13%)
Other sectors such as oil and gas, which and hospitality (8%). However, PE investors
were top performers in Q2 2011, have shown who look at long term returns, have also
muted performance in the corresponding 2012 invested in those sectors of the Indian economy
quarter. This could be attributed to the current that currently have a huge demand and supply
policy regime and the failure of some projects to mismatch (power and energy), and massive
obtain clearances from several ministries such as potential due to a burgeoning middle class with
environment and forests, and defence. rising disposable incomes (hospitality).
Other sectors such as power and aviation are
expected to see heightened deal activity from the
Top PE deals: Q2 2012
Investor Investee Sector USD million
Morgan Stanley Continuum Wind Energy Power and energy 210
APG - pension fund Lemon Tree Hotels Hospitality 130
Warburg Pincus Future Capital Holdings Banking and financial services 112
Advent International Corporation CARE Hospital Pharmaceutical, healthcare and biotech 105
TA Associates Omega Healthcare Management IT ITeS 93
Services BPO unit
Indivest Pte Limited - Government of Marico Limited FMCG, food and beverage 75
Singapore Investment Corporation
Pte Limited
Sequoia Capital Global Equities Just Dial Pvt Limited IT ITeS 61
ChrysCapital Intas Pharmaceuticals Limited Pharmaceutical, healthcare and biotech 56
NYLIM Jacob Ballas Super Religare Laboratories Pharmaceutical, healthcare and biotech 50
KKR TVS Logistics Services Logistics 48
6

7. India Watch - Issue 17 July 2012
Outlook for H2 2012
Top PE sectors: April - June 2012
Notwithstanding the rather dismal MA, and
lackluster PE performance for Q2 2012 quarter,
this could well be the proverbial darkest hour
before the dawn.
The end of June 2012 saw some welcome and
rapid reprieves – clarifications on GAAR not
being applied on a retrospective basis, an arrest
of the free-fall of the rupee and the resumption
of responsibility for the finance ministry by
the Prime Minister Manmohan Singh, who was
instrumental in India’s economic liberalisation in
1990. From a valuation perspective, analysts now
deem India to be trading at historically low levels,
IT ITeS [18%] and hence see attractive multiples. Further, India’s
domestic demand remains strong, thanks to rising
Pharmaceuticals, consumption levels and increasing purchasing
healthcare and biotech [15%] power – in 2011, India rose to third place globally
Power and energy [14%] in terms of purchasing power parity, only
behind USA and China, with reports suggesting
Banking and financial that India will continue to be the third largest
services [13%] economy in 2015. The combination of these
Hospitality [8%] factors could be a renewed interest in
Indian entities by foreign players and higher
Others [31%] inbound activity.
Key drivers of outbound MA such as strong
balance sheets, the need to look beyond home
markets and attractive valuations continue to
exist, even if the current economic uncertainty
in the European and American markets may
have put the cross border ambitions of Indian
companies temporarily on hold. Factors such as
the recent unveiling of a plan to address
Europe’s distressed banking sector by European
leaders could, if successful, see a rebound in
outbound MA.
Finally, if the momentum demonstrated so far
by domestic deal activity also sustains in H2 2012,
the dealscape may see a turnaround in the latter
half of 2012. However, the industry will also
keep a wary eye on headwinds such as a possible
increase in fuel prices, deterioration of the
With special
European situation, lackluster demand for exports
thanks for their
from other nations such as US, and – much closer
contribution to
home – poor monsoons.
Ankita Arora
and Sowmya
Karthik Balisagar
Valuations Manager and Assistant
Ravikumar of the
Head of Valuations South Asia Group Grant Thornton
Grant Thornton UK LLP India Dealtracker
T +44 (0)20 7865 2475
team.
E karthik.balisagar@uk.gt.com
7

8. India Watch - Issue 17 July 2012
An update on the Indian economy
In this economic update we take a look back over the last six months and review
what progress and developments have taken place in India’s economy.
In the first three months of 2012 India’s likely consequences of these corruption scandals
economy grew at its slowest rate since 2003 being that many prospective investors will either
with GDP growth of only 5.3% in comparison feel that India’s risk profile is now too high for
to the same period in 2011 – well below analyst significant capital deployment or that valuations
expectations and a decline of around 80 basis will need to be knocked back considerably to
points from the previous quarter (October 2011 account for the increased risk.
to December 2011). On a positive note however, and as reported in
The wider view of India’s economic position the Economist:
also shows a substantial decline in economic “IKEA, a Swedish furniture chain, boosted
growth. For the financial year to March 2012, morale by saying it would invest up to
India’s real GDP fell to around 6.5%, down from €1.5 billion ($1.9 billion) in India—although
8.4% in the previous financial year. on closer inspection that sum was spread over
many years. Coca-Cola followed suit with the
So what has been the cause of this decline? announcement of an additional $3 billion in
Persistently high inflation has dogged India’s investment, taking the total earmarked for India
economy for a number of years now and even by 2020 to $5 billion. A ratings agency proved
with a near-monthly increase in the country’s oddly helpful, too: on June 25th Moody’s signalled
key interest rate recently (although it was kept at it would not follow Standard Poor’s and Fitch,
8% in the last meeting of India’s central bank), which have both warned of a possible downgrade
inflation continues to be a significant thorn in of India to junk status. Its rating, which hovers
the side of India’s economy and its quest for just within investment grade, remains stable, the
stabilisation and increased growth. agency said.”
The value of the rupee against the dollar has In addition, there is further hope following the
also played a material part in the destabilisation recent resumption of responsibility for the finance
of India’s economy over the last few months in ministry by the Prime Minister, Manmohan
particular. As reported by the BBC, since July last Singh. Pranab Mukherjee, the previous finance
year, the Indian rupee has seen one of the biggest minister, left his position on 26 June following a
declines among Asian currencies against the dollar terrible time in office – overseeing a substantial
– dropping by more than 27%. The depreciation decline in India’s growth rate, spiralling inflation
of the rupee, coupled with a backdrop of rates and failing to put in place a suitable solution
declining global demand and high inflation (as for India’s budget deficit. The hope in Premier
highlighted above) has made the creation of a Singh comes from his previous track record as
platform from which sustainable and increasing finance minister, a position he held in 1991, when
economic growth can be achieved, incredibly he was the driving force behind the opening up
challenging. of India economy to foreign investment and the
While India’s government has attempted to initiation of the privatisation of public
introduce new policies to help battle the country’s sector companies.
economic decline, many analysts feel there is a The extent to which the appointment of
major lack of impetus as well as a clear, realistic Premier Singh as finance minister will help
growth plan. In addition, some important new reverse the country’s current economic prospects
economic reforms (particularly those which will will be seen in time but it will certainly be seen
allow greater foreign investment in India) have as a move forward for many within India and
been delayed, for over a year, amid the on-going the wider global economy. If Premier Singh
corruption scandals which continue to cast a dark is able to implement the much needed policy Munesh Khanna
shadow over India’s political arena and further reforms prior to the next general election in 2014, Senior Partner
increase the risk profile of the country for many India’s economy outlook is likely to improve Grant Thornton India LLP
T + 91 22 6626 2600
of those international institutions interested in considerably.
E munesh.khanna@in.gt.com
investing in Asia’s third largest economy. The
8

9. India Watch - Issue 17 July 2012
Indian power
– the next five years
Despite threats to India’s GDP growth, power be opportunities for new capacity developers who
demand in India remains resilient. Against this, can secure coal or who do not need it.
a significant barrier to entry has arisen: access It is also likely that more imported coal will
to coal. This will slow supply of new capacity, put upward pressure on electricity prices. Even
maintain a power deficit and put upward pressure despite the recent fall in global coal prices, they
on prices, despite the threat of lower growth. remain some 36% above the price of Indian coal
Companies that have secured access to coal, or after adjusting for differences in calorific value
those that are not dependant on it, are now in a and transportation. The use of more imported
strong position to benefit from better pricing and coal in the Indian fuel mix will raise the average
continued growth opportunities for new projects. cost of production. Additionally some of the
Power shortages remain a problem across larger power producers bid for contracts on the
India. Despite adding a record amount of new basis of very low cost Indonesian coal. Indonesia
capacity in 2011/12, the gap between peak has subsequently introduced legislation to
power demand and available capacity increased link the price of exported coal to international
from 9.8% to 10.6%. Recent press reports have benchmarks, damaging the economics of these
highlighted significant power cuts with some contracts. There is now considerable pressure
areas of Uttar Pradesh, Uttarakhand and Andhra from the power companies to have contracts
Pradesh facing outages of between four and nine revised upwards.
hours a day. The pressure for price increases may be
In order to address this problem, India is tempered by weaker global coal prices although
planning to add almost 100GW of new power they would have to fall a lot further. Upward
capacity over the next five years to an installed revisions may also be limited by the ability
base of 200GW. If successful it will be adding of the State Electricity Boards (SEBs) to pay
more than the total installed capacity in the UK. for increases. However, with 16 SEBs in the
However, almost 60% of the new capacity is process of implementing end-user tariff increases
targeted to come from coal generation and coal themselves, there is scope for the prices paid to
supplies have come under pressure. generators to improve in the long run.
While there is political will to improve coal In summary, the continuing deficit means
supplies, we think there will still be a coal deficit opportunities to bring new capacity to the market
across the next five years. Coal India Limited will will remain and the upward pressure on prices
improve production but the significant planned means that the potential rewards for doing so
increase in capacity means that the power sector should improve. Of course any new capacity will
will still need more imported coal. Imports of either need secured coal supplies or not depend
coal to the power sector could potentially double on coal. As a result we see opportunities for
to meet the demands of new capacity. companies with secured coal (either in India or
A problem then arises because Indian power abroad) and for companies developing
stations have been designed for low calorie, high renewable capacity.
ash Indian coal and are limited in the amount of
higher calorie imported coal that they can burn.
While new stations will be more flexible, policy
is that, with the exception of specific coastal
stations, they retain the ability to burn all Indian
coal if required. This factor will limit the total
amount of new capacity that can be added. Adam Forsyth
As a result, even if we factor in a lower GDP Research Director
growth rate of just 6%, a power deficit is likely to Arden Partners
T +44 (0) 20 7614 5952
remain despite the corresponding lower growth
E adam.forsyth@arden-partners.com
in peak demand. This means that there will still
9

10. India Watch - Issue 17 July 2012
GAAR: A dynamic move in
the right direction?
Internationally, tax avoidance has been recognised as an area of
interest and several countries have expressed concern over tax evasion
and avoidance. Tax payers across the world arrange their business/
affairs in a way that gives them maximum tax advantage. On one
hand, tax authorities look at these transactions carrying a reduction
in tax liability with a jaundiced eye while taxpayers label the same
transactions as genuine ‘tax planning’. This difference in approach
and outlook becomes the subject matter of debate and may turn into
protracted litigation.
Currently India has specific anti-avoidance it provides a legitimate exit route for investors
provisions engraved both in the domestic tax is not relevant for the purpose of determining
laws and in some of the tax treaties through the commercial substance.
‘limitation of benefits’ clause. The Indian Finance GAAR is one of the proposals which is facing
Minister, in the Union Budget 2012 proposed maximum criticism from within and outside India.
General Anti Avoidance Regulations (GAAR), one The question arises while similar provisions also
of the most significant contemporary tax reforms exist in other countries. Why is there so much hue
being pursued by the Indian policymakers. and cry about Indian GAAR proposals? A possible
Though in the final Finance Bill, its applicability answer may be that the issue is not whether India
has been deferred by a year to 1st April 2013, we should have GAAR or not, but more around
all know that GAAR has made a debut in India the possibility of its misuse and ineffective
and it is a reality now even though effective after implementation.
a year. The current dispute resolution system in
Taxpayers, domestic and foreign, will witness a India, wide powers of Indian tax officials and
paradigm shift in the empowerment and approach their unpredictable assessment of cases worry the
of tax authorities in India towards taxation international community (especially considering
of transactions, structures and arrangements. GAAR’s wide scope and lack of proper guidelines
GAAR provisions may impact cross border deals, to avoid its misuse).
investments into India by foreign institutional
investors and private equity funds, as well as day
to day business transactions. These provisions
are substantially overriding in nature and would
impact all restructuring and acquisitions. GAAR
provisions expressly clarify that the holding period
of a structure or arrangement and the fact that
10

11. India Watch - Issue 17 July 2012
Some of the emerging concerns, mentioned Conclusion
below, are dampening MA activity and the A country’s tax regime is a very significant factor
funding market. if not decisive factor for a foreign investor to invest
1 Very wide scope: Scope of Indian GAAR its funds in any jurisdiction. Today businesses
is very wide as it seeks to cover all the are looking at inorganic growth to achieve better
arrangements which have an element of ‘tax economies of scale, synergy and competency in the
benefit’ accruing to the taxpayer. form of business reorganisations. Therefore the
2 GAAR v treaty provisions: Proposed GAAR tax policies of the government need to be critically
provisions would apply even if the treaty framed as to achieve the purpose of tax reform and
provisions are more beneficial. A unilateral also to be positive to the business environment of
enactment of a new domestic tax law which the country.
is contrary to an existing treaty, without an Worldwide, GAAR has been criticised and
amendment to that treaty, could possibly be supported equally by international tax experts.
regarded as violation of international law and is The rule of law requires law to be certain and
generally known as ‘treaty override’. predictable, such that law abiding citizens are
As per the rules of legislative interpretation, aware of what is permitted and what is prohibited.
specific legislation overrides general legislation. While the concept of GAAR may be against this
Therefore, the argument may be taken that principle, to some extent, GAAR is important,
a change to a domestic law generally, which since it is not humanly possible to make laws
could be the case with GAAR, may not affect for each and every tax avoidance tool used by a
the treaty. However, in the absence of an anti- creative taxpayer.
avoidance provision under the treaty, reaction The success of GAAR lies in its judicious,
of India’s treaty partner countries needs to selective and sensible implementation. In the
be observed. Indian context, considering the aggression of tax
3 Wide powers of tax authorities: Tax authorities administration in some cases, the introduction of
are given powers to invoke GAAR by using GAAR may be worrisome to a tax payer unless
any one of the criterion which are vast as implemented in a balanced manner with adequate
well as ambiguous. Thus there is a need to safeguards for protecting the taxpayer. Tax payers
lay down more objective criteria and specific would keenly await draft subordinate legislation,
administrative guidelines for invoking which law makers expect would be open for
GAAR and to establish a reasonable level of public debate.
accountability for the tax authorities. The intent of the Indian lawmakers to legislate
4 Constitution of the Panel: It may be ideal if GAAR is progressive in so far as tax policy
certain industry experts are nominated for decisions are directed. However, an important
the Approving Panel who can bring in their question is whether, in the current context, the Anshu Khanna
expert knowledge/experience which can help introduction of GAAR is well timed, or if it is Partner Tax Regulatory
Practice
understanding the true business or commercial still a premature effort towards alignment with
Walker, Chandiok Co
purpose of a transaction. internationally accepted principles of T +91 40 6630 8240
anti-avoidance. E anshu.khanna@in.gt.com
11

12. About us
Grant Thornton UK LLP established a dedicated South Asia Group
in 1991 to serve Asian owned businesses in the UK as well as
those investing into and from the Indian subcontinent. We are
proud to be one of the first UK accountancy firms to focus on this
region.
We are widely recognised as one of the leading international firms
advising on India-related matters and have been in involved in every IPO
involving an Indian company on AIM, with the exception of the real estate
sector.
For those clients requiring advice in both the UK and India we offer a
seamless service building on the already strong and close relationship
between Grant Thornton UK LLP and Grant Thornton India.
International and emerging markets blog
As part of our commitment to remaining at the forefront of changes
and developments in regards to UK-India relationship we will be using
this space to post original thought leadership and research relevant to
the industry. The idea is to encourage discussion around these issues
and to open up new areas and debate.
To participate:
www.grant-thornton.co.uk/thinking/emergingmarkets
More information about our South Asia Group can be found at:
www.grant-thornton.co.uk/sectors/emerging_markets/south_asia
© 2012 Grant Thornton UK LLP. All rights reserved.
‘Grant Thornton’ means Grant Thornton UK LLP, a limited
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