Conducting due diligence in India

The Dutch translation of due diligence is 'with due care'. Unlike in the Netherlands, as a buyer you have no legal obligation to investigate in India. Nevertheless, it is crucial to extensively screen the background of the Indian party before engaging with your business partner. This is how you conduct thorough due diligence of an Indian company (Private Limited).

Due diligence in India

Due diligence is typically performed prior to the purchase of a business or investment in a business by the acquirer or investor. It is sometimes referred to as an audit, but a proper due diligence process goes beyond simply checking the financial statements.

Due diligence helps make the right decision and mitigate the risks associated with the business transaction. Both parties usually enter into a confidentiality agreement before a business due diligence is initiated, as sensitive financial, operational, legal and regulatory information is revealed during the due diligence process.

It is the responsibility of the seller of the company or the shareholder to provide the documents and information necessary to conduct due diligence. In India, it is no different. Typically, the documents listed below are required for conducting due diligence on a private limited. All these documents should be thoroughly reviewed by an expert in India to make an informed decision:

Review of MCA documents.

Much of a company's due diligence can be done with the help of the Ministry of Corporate Affairs (MCA). The MCA regulates business affairs in India through the Companies Act, 1956, 2013 and other related laws and regulations. All companies in India must file their financials and shareholder data with the MCA. These details (master data) of each company can therefore be accessed through the website the MCA.  

The documents, before being filed with the MCA, are approved by the Registrar of Companies (ROC). For a fee, all documents filed with the ROC are made available. The information provided by the MCA is available for one day and is provided under the Right to Information Act. The information collected in this step includes the following, among others:

1. Financial statements;
2. Annual reports;
3. Legal proceedings against the director or company;
4. Lien on assets;
5. Any problem with non-compliance law/regulations.

These are mainly documents filed after September 16, 2006. Prior to this date, documents were submitted to the ROC in the physical form. These documents were kept in the respective ROC and are not accessible online. To inspect these documents, one must visit the respective ROC.

Reputation

In addition to legal information, it is wise to examine the company's reputation in the marketplace. How is the company generally known to customers, suppliers, employees and other stakeholders? Does the company have a good and reliable name in the market? Does the company have a good payment reputation? Has the company entered into other strategic collaborations before and how did they work out? 

Apart from Indian companies' own websites (usually in English), the professional federation of the sector in which the company operates can be an interesting source of information for this purpose. There are also a number of important national business organizations in India, many of which have regional branches. The main ones are:

• Confederation of Indian Industry (CII): www.cii.in

• Federation of Indian Chambers of Commerce and Industry (FICCI): www.ficci.com

• The Associated Chambers of Commerce of India (ASSOCHAM): www.assocham.org

• Chamber of Commerce and Industry (PHD): www.phdcci.in

Finally, on the Credit Information Bureau (India) Limited (CIBIL) website, you can check the credit history of an individual, company or partnership. Any disputes/cases filed against the company can be checked and also whether they have ever been declared a wilful defaulter in the past.

Thinking about a merger, M&A or setting up a Joint Venture?

Partnering with an Indian company can be a great way to enter the Indian market. With a good Indian partner, you immediately have an extensive network, knowledge of the market and share the business risk. But there are legal rules and conditions attached to setting up such a partnership.

IndiaConnected helps companies realize mergers, M&A and joint ventures as a trusted advisor and sparring partner. We support parties throughout the entire process: from partner search to due diligence and negotiations.

Are you interested in finding a suitable partner in India? Or would you like to know more about what is required for an acquisition or joint venture?

India's major taxes: you need to know about the Goods and Services Tax (GST)

The Goods and Services Tax (GST) is the Indian version of VAT. Anyone doing business in India will eventually have to deal with it. The GST was introduced in 2017 to make the country's complex existing tax system more manageable.

Despite having made doing business in India considerably easier, the GST tax can still be a challenge for European companies starting their operations in India. In this article, we'll explain how the tax works and how it affects you as a foreign entrepreneur.

The old, Indian GST tax system consisted of an accumulation of indirect taxes, excise taxes and surcharges levied not only at the national level, but also at the state level and even at the city level. A major tax collected by Indian states was the Value Added Tax (VAT), but there was no fixed national rate for it.

States independently determined what VAT was charged for a product, resulting in much red tape for businesses. In addition, state-to-state sales also required a Central State Tax (CST) to be paid to the national government, further underscoring the fragmentation of the old tax system.

All these different taxes from different Indian governments brought about a waterfall effect and made tax evasion and corruption relatively easy. Indian tax authorities were losing a lot of revenue as a result, so change was much needed. 

One centralized sales tax

With the new Goods and Services Tax, there came one centralized sales tax for all of India in 2017. It unifies all taxes by product type and is levied at the national level in New Delhi.

There are five rates, ranging from 0% to 28%, under which 1211 categories of goods and services are divided. Under the GST system, tax is charged at any point when value is added to the product and a sale occurs. This runs up to the final sale to the customer. To clarify this a simplified example: 

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In addition, GST is a destination-based tax. This means that if a product is manufactured in the state of Andhra Pradesh, but sold in Karnataka, the entire tax goes to Karnataka. A big improvement from the previous system where tax had to be paid at each step to a different government body. 

The benefits of Goods and Services Tax

The list of benefits of a centralized sales tax is long. First, the GST greatly simplifies India's unwieldy tax system. In addition, the GST makes it possible to effectively make India a single market in which free movement of goods between states becomes a reality.

This allows companies to organize their distribution from a central nationwide warehouse - and not have to set it up separately in each state. Furthermore, tax evasion becomes more difficult, increasing revenues for the Indian treasury. The above benefits in turn lead to positive macroeconomic effects: doing business in India becomes easier, (foreign) investment increases, the Indian government itself can invest more, and the Indian economy will grow faster.

But the GST also has disadvantages

The GST is far from perfect because it still does not bring taxes together under one roof. In fact, there are 38 different ones: a separate GST for all 29 states (SGST) and the seven "union territories" (UTGST), a federal GST (CGST) and an integrated GST (IGST) for interstate supplies of products and services.

Despite the fact that the GST system is supposed to eliminate the water vale effect and thus lower the price of products, certain products have actually become significantly more expensive. For example, since the introduction of the new tax, products such as shampoo and deodorant suddenly fall into a higher tax rate. 

What does the GST mean for you as a European entrepreneur in India?

All European companies wishing to start their own branch, joint venture or any other type of sales organization in India will face this tax. To pay this tax, you will need a PAN number and must register with the GST portal where you will get your unique GSTIN code. Through this portal, a tax form has to be submitted and paid every month.

European companies that only export to India hardly have to deal with the taxes. However, it is important to understand how the GST taxes the Indian distributor or importer you are working with.

GST is one of India's most important taxes, besides of course Corporate Tax and all sorts of other taxes such as Minimum Alternate Tax (MAT), Dividend Distribution Tax (DDT), Custom Duty and Excise Duty.

How to win a government contract in India

Under Prime Minister Modi, India has embarked on a major upgrade of the country. Through various government programs, such as Made in India, 100 Smart Cities and Digital India, billions are being invested in improving India's infrastructure. From clean forms of energy to the rolling out fiber optics. India is eager for foreign knowledge and technology for these ambitious projects. But how do you win such a coveted government contract as a European company?

You win a tender with 3 crucial ingredients'.

Joeri Aulman has been successful in winning government contracts in India in recent years. He is a project manager and airport developer for Naco, a division of Royal HaskoningDHV in the field of airport consultancy. "First of all, we were very lucky with our market entry. We entered the market in 2005, at the exact time that the first privatisation of airports in India was starting. That turned out to be perfect timing." 

But it was the good references from local business relations that really got the ball rolling for Naco. "On the recommendation of an existing client, we were allowed to present ourselves to the Indian party. The presentation was focused and, very importantly, not didactic. Despite our knowledge and experience, we were modest and that was the key to success." According to Aulman, the combination of smart timing, excellent references and modesty in presenting your plan are therefore the three crucial ingredients for winning tenders in India. "Over the past 15 years, we have learned that if one of these three ingredients is missing, we miss out on the contract immediately."

Not only India benefits, there are also interesting opportunities for European companies

According to the Indian Ambassador to the Netherlands, Venu Rajamony, there is a lot for European companies to gain in India. "We are the fastest growing, large economy in the world with a young population and a growing middle class. Competitive European companies entering India with long-term planning are going to benefit from the country's rapid developments and expanding consumer market."

For companies looking to win Indian government contracts, Rajamony has some advice. "To stand a chance, it helps when European parties cooperate with an Indian partner. In addition, companies increase their chances if they produce part of their technology in India (make in India), use Indian raw materials for it (source in India) and hire Indian personnel (hire in India). This not only aligns with various government objectives, but also reduces the cost of often expensive European technology. European companies must realize that India is a highly competitive market. Companies from all over the world subscribe to Indian tenders." 

There are hundreds of tenders open as part of the Smart City mission

Six tips to win tenders in India

In order to easily sideline those foreign competitors in the battle for an Indian government contract, you need to keep the following points in mind during the preparation: 

1. Timing: plan ahead

Timing is key, but you can't start building a network early enough. In other words, if you don't start building a network until demand for your products starts to increase, you are late.

2. Use references actively

India is a network economy par excellence: relationships are crucial. So don't hesitate to approach the Indian embassy in your country for help if you get stuck with permits and the like. Their network is large and they can often provide clarity. In addition, seeing is believing. Anyone who has previously done a good job on another project in India has an edge.

3. Be concrete but modest

India may be desperate for state-of-the-art technology in all sorts of areas, but that does not mean that foreign companies can be pedantic, condescending or arrogant. With such an attitude, a foreign company is doomed to fail in India.

4. Work with an Indian partner.

As mentioned, India is a network economy, so local cooperation greatly enhances your chances. If you do not have the right entrances, you will usually fail with government tenders. An Indian partner knows his way around the Indian bureaucracy - no need for the Dutch party to waste valuable time on this.

5. Make, hire & source in India

The Indian government is faced with the immense task of providing jobs for hundreds of millions of young Indians. Logically, companies that create jobs in India, directly or indirectly, have an edge in tenders. So put yourself in the shoes of Indian officials.

6. Understand your market value

Leave your European mindset at home and tailor your offer to the price/quality level the Indian government is looking for. Do you not yet have a good understanding of your sector and how you can best position yourself in the Indian market? Contact our experts and we will conduct a customised market research and give you concrete suggestions for the right next steps.