The strong economic and trade links between Singapore and India are here to stay.
At the inaugural India Infrastructure Forum co-hosted by the Confederation of Indian Industry and the Singapore Exchange, Magnus Bocker (CEO of the SGX) was reported to have commented that he expected the trend in capital raising by Indian companies on the SGX to continue, noting that Indian issuers are currently the 3rd largest issuer of bonds on the SGX with over US$60 billion in circulation and that Religare Health Trust, which raised S$500 million in its October 2012 IPO, was SGX’s 5th India-related securities listing.
Our island state remains India’s 2nd largest investing country, remitting approximately US$90 billion in foreign direct investments (FDI) between April 2000 and January 2013, accounting for approximately 10% of total FDI inflow into India. While growth has slowed to a decade low of 5% and investor focus has shifted in recent times to other emerging economies in the Asian region, there remains much to be said for the India story - economists and fund managers remind us of the emerging educated middle class and pool of talent as growth engines that will continue to drive expansion of the domestic market. The IMF continues to believe that India’s GDP growth will average 7.7% until 2017.
Private equity (PE) investments into India in the last decade are believed to approximate US$50 billion and to have accounted for up to 40% of total FDI inflow. A recent study by the Associated Chambers of Commerce and Industry of India suggests that a quarter of FDI constitutes re-investments by foreign investors, demonstrating a long-term commitment to their Indian investee companies.
While PE investments dropped 56% in Q1 2013, PE deals into Indian companies worth US$2.1 billion were announced in May 2013, the highest since January 2008 though the figures are no doubt propped up by the US$1.26 billion investment by the Qatar Foundation Endowment with telecom major Bharti Airtel. Through the current sluggish PE cycle, EY estimates that there are nonetheless at least 25 to 35 PE deals occurring every month, many backed by global PE players with plenty of dry powder reserves. The top 5 deals this year 1 (which accounted for 35% of deal value) involved Blackstone, HDFC Property Fund and GIC Special Investments (GIC SI). The real estate, consumer2, IT, banking and financial services sectors are seeing greater deal activity compared to the F&B, manufacturing, textiles, education, healthcare and life sciences sectors.
Every one of these PE deals would invariably be funded through an offshore holding entity. Despite the post-Vodaphone developments in Indian case law and tax rules to weed out Mauritius-structured investments using Mauritius SPVs as mere commercial ‘conduits’ (and, perhaps more subtly, clamping down on wealthy Indian residents ‘round-tripping’ their funds back into India via Mauritius), Mauritius remains the offshore favourite, seeing 38% of cumulative FDI inflows between April 2000 and Jan 2013 being channelled through it.
Singapore ranks ahead of the UK, Japan and US in 2nd place with approximately 10% of cumulative FDI inflow, up from 3% in 2006-2007. The benefits offered under the Singapore-India Double Taxation Agreement (DTA) and Comprehensive Economic Co-operation Agreement (CECA) ensure that dividends issued by Indian companies are not further subject to taxation in Singapore and secondly, for the same capital gains exemption set out in the Mauritius treaty (arising from sale of shares in an Indian company by a Singapore resident) but with a ‘substance’ requirement that international tax authorities are increasingly looking for when analysing structures put together on tax planning grounds. In essence, the Singapore entity / fund must not be a shell or conduit entity and the CECA rules provide for deemed ‘substance’ if the entity / fund is listed or has annual operations expenditure of at least S$200,000 in the preceding 24 months.
A recent update to the Singapore DTA now permits exchange of information in line with OECD guidelines, a move which institutional investors will view positively as a step in the right direction to buttressing Singapore’s already well-regarded reputation as an international finance centre.
Singapore makes good sense as a place to live and work in. Fund managers would no doubt be aware that funds established in Singapore under the Enhanced-Tier Fund Management Incentive Scheme could enjoy tax exemptions on specified income if the fund is managed by a Singapore–based manager in respect of certain designated investments. The fund management company can similarly avail itself of a concessionary income tax rate of 10%, compared to the corporate rate of 17%. These initiatives, coupled with the island state’s excellent infrastructure, quality of life and progressive market regulations has seen assets under management being managed out of Singapore reach S$1.34 trillion by end-2011, with more than 80% of these funds being raised from international sources and 60% being invested in the Asia-Pacific region.
Coupled with an ever-growing network of 20 free trade agreement 3 and 71 DTAs (which are useful if downstream investments into other jurisdictions are contemplated out of Singapore), the island state is well-placed to continue attracting India-bound investments from being structured through Singapore.