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TREASURY MANAGEMENT IN INDIA A Treasurer’s Guide www.treasuryalliance.com ith more than 1.3 billion citizens, India is Contents Wthe largest democracy in the world and the fastest growing global economy at nearly 7.5%. It is also one of the most complex business 1. Introduction 3 environments for foreign companies to navigate. Strategy teams will produce power points 2. Business Models in India 6 touting the endless opportunities yet business people need only spend a few days to have 3. Banking Environment 7 experienced the broad spectrum of unending 4. Payment and Clearing Systems 9 challenges that are unique to India. India’s huge consumer market attracts interest 5. Working Capital and from every global company in the world. The Liquidity Management 14 highly educated work force has propelled India to a world class IT and IT services provider with 6. Regulatory 15 over 8 million people employed, the Pharma 7. Digitization 18 industry is now the 3rd largest producer in the world by volume, surprisingly India is the largest 8. Treasury Technology 21 exporter of milk in the world, and they even export over 25,000 tractors annually to the US! 9. Summary 23 DBS clients most often ask for advice and 10. Appendices 24 insight on India and China. In 2015 we pub- lished a Treasurers Guide to China and this document follows that model with insights on how to build a competitively advantaged busi- ness in India. DBS employs 78 analysts across 8 industries in Asia, providing insights and advice on topics ranging from monetary policy, to equity analysis, to geopolitical insights and risk assessment. For more information, visit us at dbsresearch.com. Tom McCabe Managing Director and Country Head, USA, DBS Bank © 2018 Treasury Alliance Group LLC. All Rights Reserved. Treasury Management in India—A Treasurer’s Guide 3 1. Introduction India is a country that is as hard to understand as it is The currency of India is the Rupee to ignore. You cannot ignore the second most populous (INR, locally Rs) which is issued country in the world with over 1.3 billion people that and regulated by the Reserve Bank occupies an area of more than 1.2 million square miles of India (RBI) Issue Department. and has a gross domestic product of $2.264 trillion The INR is a restricted currency which limits the ability of all enti- dollars.1 In purely business terms India demands atten- ties, particularly those outside of tion because of its large workforce and their potential as India to trade in INR and engage in customers. more than the simplest derivative transactions. The use of the INR Understanding India is another matter. India has been between parties outside of India an independent country since 1947 and currently has 29 is not permitted. From a treasury states, 7 union territories, 22 official languages and many management standpoint, the INR dialects. Home to legendary bureaucracies and a histori- can be used relatively freely within India but cannot figure in regional cally sclerotic judicial system there are rules, procedures treasury management schemes or and appeals processes for virtually every business multicurrency liquidity manage- activity. Many of these are unclear to those who are ment structures due to regulatory not specialists in the topic which adds to the time and constraints. expense of operating in the country. All of this makes sweeping generalizations about India both inaccurate and inappropriate. Reinforcing this overall message about the challenges in India is the World Bank’s “Doing Business Report 2018” that ranked India 100th out of 190 countries surveyed in terms of ease of doing business. Remarkably, this outcome is a 30 place improvement over the 2017 score. The improvement reflects tough decisions by the central government but the still low ranking is due to poor marks for areas such as starting a business, dealing with construction permits, registering property, trading across borders and enforcing contracts. 1 2016, Source: World Bank © 2018 Treasury Alliance Group LLC. All Rights Reserved. Treasury Management in India—A Treasurer’s Guide 4 In order to succeed in India an understanding of how to effectively incorporate cultural knowledge is essential and two particularly critical aspects should be noted. First, India is a country where relationships matter a great deal and this makes them an important part of the business cycle. Second, businesses are unusually hierarchical, an executive issues instructions and they are followed to the letter. Both characteristics make it important to have relationships near the top of an organization to get things done. The corporate treasurer of a firm doing business in India has no choice but to come to grips with all that it takes to be successful in India. Some multinationals have successfully established shared service centers in cities such as Bangalore, Hyderabad and Chennai due to the availability low cost talent. For most businesses there are often additional steps in the process of doing business in India and these are the subject of this guide. The first Treasury Prism is a digital tool step is to accept that operations in India will be struc- developed by DBS Bank that en- tured and operate differently than anywhere else. While ables corporate treasurers to model many treasury techniques such as cash sweeping can be potential treasury and cash man- performed within the country it is virtually impossible agement solutions on a country to integrate treasury operations in India with regional or regional basis. Treasurers input or global treasury structures such as participating in a information on cash balances, currency flows and other financial global multilateral netting arrangement. This does not parameters into the tool to receive make Indian treasuries unsophisticated or inefficient, it simulations of potential solutions makes them different. along with context sensitive advice and recommendations. The simu- The next steps involve developing an accurate financial lation results can then be used to footprint of current and planned operations in India and develop an appropriate treasury an understanding of what is permitted and recognized strategy. Prism users also have best treasury practice. With this information it is then quick access to the Knowledge Center for up to date information possible to develop and implement an effective treasury on various treasury topics. strategy. Access Treasury Prism at https:// treasuryprism.dbs.com. © 2018 Treasury Alliance Group LLC. All Rights Reserved. Treasury Management in India—A Treasurer’s Guide 5 This guide can be read as an integrated document or on a sectional basis for detail on a particular topic. The first section, Business Models in India is essential reading for those entering India for the first time as it deals with the types of company organizations that are possible in India, as well as the injection of capital, protection of Intellectual Property and the implications of the business models for corporate treasury. Further sections cover the banking environment includ- ing bank account types and options along with the payment and clearing systems used by corporates and individuals. There is a separate section on digitization, a trend that has already begun to transform the financial sector. This guide is written from the perspective of the corporate treasurer and as such also includes sec- tions on liquidity management, regulation and treasury technology. Following the summary there are a number of appendi- ces including useful websites, a glossary of terms and key tables likely to be of use to the corporate treasurer. © 2018 Treasury Alliance Group LLC. All Rights Reserved. Treasury Management in India—A Treasurer’s Guide 6 2. Business Models in India There are a number of different ways that businesses can operate in India ranging from simple direct sales companies to a fully incorporated local entity. Each has different implications for treasury operations. India has become much more open with regard to Foreign Direct Investment (FDI) and there are only eleven business sectors now where FDI is not automatic. This compares to an earlier environment where there were only fifteen business sectors where FDI was permitted. Many companies incorporate in India as wholly owned subsidiaries of the foreign parent while an emerging The US International Trade Admin- trend is to form a Limited Liability Partnership (LLP). istration in a 2017 website post Both of these options make the repatriation of surplus notes that India is a challenging funds more tax efficient once the local entity begins major economy with respect to to turn a profit and accumulate cash. Multinational the protection and enforcement of companies choosing to form a company in India typi- intellectual property rights (www. cally operate as private companies or joint ventures. export.gov). The country is listed Private companies permit the parent to manage treasury on the Priority Watch List of the US Trade Representative’s Spe- operations while joint ventures with a local partner can cial 301 report for 2017 (https:// have treasuries managed by the partner under policies ustr.gov/about-us/policy-offices/ consistent with the multinational’s parent. press-office/press-releases/2017/ april/ustr-releases-2017-special- Forming a company in India starts with the Registrar of 301-report). The message is very Companies (ROC) in the state/union where the company clear for companies with valuable will maintain its registered office. This involves approval IP that operate or plan to operate of the company name, payment of fees and submission in India: be very careful and don’t assume you are covered by laws of documents. Once the ROC receives the required docu- in your country or international mentation and fees, it will issue a certificate of incorpo- agreements. To survive, compa- ration and the private company can begin conducting nies should develop an overall IP business.

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