Building a stage for the comeback

 Issuance is predicted to fall to €272 bn in 2008 a 41 percent decline from 2007 according to the European Securitisation Forum’s (ESF) 2008 Forecast Report. Products that are expected to see the greatest differences in issuance in 2008 are residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS) and collaterised debt obligations (CDO). Despite dire predictions the market is not expected to be routed completely, but the originate and distribute model which was at the heart of the growth in recent years is under severe scrutiny.

  • The list of factors affecting the issuance outlook is well known:
  • Global credit market uncertainty;
  • Evolving risk repricing;
  • A de-leveraging trend as illustrated by hedge funds unable to meet margin calls;
  • Softer mortgage markets in certain jurisdictions;
  • Squeeze on structured investment vehicles (SIVs) and their funding model based on assets with long maturity funded by liabilities in the short-term;
  • Flight to quality for asset backed commercial paper (ABCP)
  • Diminished liquidity (a wait-and-see attitude on whether the latest action by the US Federal Reserve’s $200bn liquidity boost coordinated with other central banks will work);
  • Heightened investor risk sensitivity.

At the moment Europe is not generally experiencing credit quality issues at the same level as in the US. However, investor risk perception has had a marked effect on the securitisation markets – at its most basic – less investors means less liquidity.

While lack of disclosure is not the cause of market turmoil, the opacity of some complex instruments, it is fair to say have contributed to it. The ESF, an affiliate of the Securities Industry and Financial Markets Association, has been working on transparency an important piece of the puzzle to reassemble the securitisation market through a number of practical initiatives which aim to boost investor confidence and to restore normal market conditions. An integral step is to ensure that investor faith is rebuilt so that when the market returns investment opportunities are selectively determined.

Accessibility of pre- and post-issuance information
The transparency action plan will improve information about securitisation and enhancing data accessibility for public term ABS deals.  Since September 2007 the ESF is working on a number of industry initiatives for the current structured products market environment. These include industry measures to improve functioning of market such as recommending transparency of ABCP Funded Vehicle Holdings; clarification of various definitions including subprime and non-conforming and disclosure as well as the standardisation in valuation methodologies. In addition, the ESF is putting greater emphasis on investor education of structured finance. The emphasis is focused on transaction surveillance, risk monitoring and valuations.

At the beginning of this year a few of the initiatives on transparency and disclosure were taken a step further with seven other industry associations and the European Commission. The commitment letter outlined three main initiatives with relevant work streams and a delivery deadline of end of June 2008. Different associations will be jointly responsible for particular areas of work. The ESF will work on two particular streams: the first project is an industry market data report and the second one deals with investor information initiatives which does not have a specific deadline. This is because the ramifications of the changes under consideration are far wider and imply changes in the current business practices with specific costs and benefits.

Beginning in June 2008 a report, which will be produced on a regular basis will aggregate existing data that is presently available from different sources into one consolidated report. The report will provide information on aggregate basis for the main asset classes for Europe and the US.

The goal is to include information on a wide variety of instruments, including ABCP, term ABS and CDOs. Information will include aggregate data on primary activity by type and location of investors as well as by region and asset class. The purpose of the report is provide the European Commission as well as other authorities with statistical information and a brief description of the market trends to be able to monitor the evolution of the markets.

Also the report is not static and over time market participants, regulators and the European Commission will identify other potential areas of coverage.

The ESF is also working on the accessibility and investors understanding of product structures.  Investors require upfront disclosure information on each public transaction structure and initial portfolio as well as ongoing data on the performance of the pool assets as well as other information such as rating changes. Generally this information is available but not openly accessible.

The industry is working to increase transparency to investors and interested parties in the securitisation market. There are a few hurdles which necessarily need to be overcome such as ensuring there is a legal and technical feasibility review to make sure that the proposed changes comply with the existing EU Directives such as the Prospectus Directive, the Transparency Directive and the Market Abuse Directive. The amendments under consideration will not affect existing transactions.

Standardised definitions
The ESF together with other associations are planning three questionnaires covering the main asset classes for securitisation: RMBS, CMBS and CDO. The purpose of the questionnaire is to come up with globally accepted definitions that can be used going forward in the offering documents and also in the context of the Capital Requirements Directive. Standardised definitions will also be key to have a better understanding of the statistical representations and the data included in the research reports.

While the task of creating global definitions is impossible due to the existing differences in the mortgage markets a related objective is to be able to better compare standards. A typical example is the relevance of the credit quality of the borrowers that is determined by country court judgements (CCJ) in the UK while the FICO scores in the US are predominant.

The securitisation industry is working hard to building back the confidence in its market and laying the foundations for the return of this important fixed income instrument.

PLUS prepared for bear

Is it or isn’t it a bear market? Perhaps that’s not the question, but rather whether a young, new stock exchange in London like PLUS Markets Group can survive the volatility that’s been seen in the stock markets in the past few months.

Ask these questions to PLUS’s director of business development Nemone Wynn-Evans, however, and she does not flinch.

“Many people would look at current valuation levels in London today and say that we were in a bear market,” said Ms Wynn-Evans. “Indeed, many people would look at the smaller end of the London equity market and say that it has been in a bear market since the end of last year.

“From our perspective, our business model is very robust and it is arguably well-suited to a bear market. We believe that even if there are difficult financial conditions ahead, our business model is set up to capture market share both in terms of liquidity and also London listings.”

While PLUS is looking to maintain strong levels of liquidity, it is seeking to capture a larger market share of what is available in the small to medium-size capitalisation company sector.

Indeed, what’s important to PLUS Markets is not whether the cake is getting bigger in a bull market or smaller in a bear market, but how big the slice of cake that PLUS can get, said Ms Wynn-Evans. “We are capturing market share and we are now an established pool of small and mid-cap liquidity, competing credibly against other trading venues. In addition, there may be other business areas in which there is customer demand for us to compete.”

Taking on the LSE
PLUS Markets, which became a fully-authorised stock exchange last year, considers itself a direct competitor and ideal alternative to the giant London Stock Exchange – a historic monopoly – for small-to-medium-size enterprises. Although commentators have often likened PLUS to the LSE’s AIM market, PLUS doesn’t limit its competitive ambitions just to AIM, said Ms Wynn-Evans.

Ms Wynn-Evans realises that it’s no mean feat to take on a well-established competitor such as the LSE. However, she said, “Not so long ago if you wanted to fly from Britain, there was only one airline you could book and that was British Airways. If you wanted to make a phone call, you could only use British Telecom. Now there competitors for air travellers and phone users, and in the business of trading and listing equity in London, customers now have a choice of equity market providers.”

The exchange received “Recognised Investment Exchange” approval from the U.K.’s Financial Services Authority in July last year, prior to the implementation of the European Union’s Markets in Financial Instruments Directive (MIFID) in November, which dismantled competitive barriers of existing stock exchanges across Europe.

The growth of PLUS trading activity in recent months has been impressive. For the first two months of 2008, over 750,000 trades worth over £5.8 billion were executed on PLUS, and trading activity remained strong while other markets saw falls.

The average daily number of trades on PLUS exceeded that of other small and mid-cap markets such as AIM, while PLUS captured over 50% of all UK retail trades for the first time in January. Over 600 small and mid-cap companies now see the majority of their trading taking place on PLUS, of which over 400 companies are listed or quoted on other markets.

Due to the low cost of listing, observers say that the PLUS-quoted market attracts companies with an average capitalisation of up to £25m and an associated placing/fundraising of around £5m.

As of February 2008, there were 220 companies on the PLUS-quoted market, and in the first few months of the year, 10 companies have already joined PLUS-quoted. Significantly, double the funds were raised by companies on PLUS in 2007 over the previous year. In 2008 to date, fundraising activity remains strong, with an increase of 17 percent total funds raised in the first two months of the year to £9.9m.

Attraction of PLUS for investors
Perhaps the biggest attraction of PLUS to investors and companies alike is its reduced execution and listing costs compared to accessing other markets such as the LSE, which is why PLUS may be even more attractive in a bear market.

In particular, PLUS’s trading income is not based on execution fees like it is for the LSE and just about every major stock exchange in Europe. Instead, PLUS uses the US exchange model where execution fees have eroded away to nothing, and traders and exchanges make their money on selling the data from their markets.

So, for every trade on the LSE, there is a fee. “That isn’t necessarily the case on PLUS, so the importance of execution fees linked to absolute trading levels is much less critical on PLUS. Our business model is predicated on capturing trading activity, through offering best execution opportunities at low transaction cost, and then selling our proprietary market data cost-effectively,” said Ms Wynn-Evans.

From a listings perspective, there are two markets which companies can access via a listing or quotation on PLUS, she added:

The PLUS-listed market, which is a cost-effective alternative to the LSE Main Market; and

The PLUS-quoted market, which is an alternative to AIM for smaller growing companies, offering cost-effective access to capital on the basis of its straightforward regulatory framework, and profile on a dedicated growth market.

“Our PLUS-quoted market is designed to cater for smaller companies who are seeking an appropriate market on which to raise smaller sums of money,” said Ms Wynn-Evans. “In more challenging market conditions, you find that smaller IPOs of well-run companies can still raise small amounts of money from specialised small cap funds, where larger IPOs dry up completely. While other markets across Europe are reporting difficult times for IPOs, we have never been so busy. We are attracting companies through our door who still want to take a step onto a public market, even in turbulent financial conditions. They’re finding that other markets are too expensive; they don’t need to raise large amounts of money; and, indeed, current market conditions suggest that they probably couldn’t anyway. But a market like ours can still provide a home for those businesses and a platform for their future growth.”

Considering PLUS’s business model, Ms Wynn-Evans is not concerned about potential rocky times ahead on the stock markets worldwide. “We do not fear a bear market. We are confident in the attractiveness of our offering to investors and companies seeking access to small and mid-cap liquidity and capital in London, the heart of the world’s financial community.”

A Saxo Bank WLP approach

As banks and financial institutions wake up to the growing potential of the online trading market, they continue to look for the technological solutions for gaining reliable, fast access to the sector. However, developing a workable, tried and tested platform for online trading is neither a cheap, straightforward nor timely exercise – and it was from this position that the concept of white labeling originated.

Once viewed as a necessary step, White Label Partnerships have grown to become a sought-after solution that can offer much greater front, middle and back office support systems than many institutions could develop themselves. So what has changed? Why is the White Label Partnership business now proving both popular for those opting to use it, and successful for the companies who can offer the innovation and support already in place?

The answer lies in development. The sector itself has moved beyond its origins. Once businesses have opted to partner with a solution provider, a wholly unique and adaptable platform is on offer. Where once, it was viewed that a WLP watered down a business’ ability to differentiate itself from the rest of the market, it is now becoming accepted that they really are able to develop and make the platform and interface, their own.

Why not build your own?
To ‘build’ a front-to-end platform is inarguably time-consuming and requires an enormous investment in terms of skill retention, capital and effort from any organisation willing to do it. The reality is that few have succeeded. The IT development and testing phase, on its own, is the work of a highly skilled, multi-faceted and specialist team. While most financial institutions have core IT capabilities, a very small minority have the skill set necessary to develop, beta test and support a multi-product platform, with real-time account and risk management facilities.

Without deep pockets and excessive retainers needed to ‘buy in’ the level of skill needed or to train staff, operating a successful facility is only becoming harder. Pragmatists recognise that one cost efficient and viable solution is setting up a WLP with a proven provider, who has a record of accomplishment in online trading.

How does a WLP work?

The Brand: White Label Partners gain the benefit of the platform, branded in their own identity and the platform provider brings the technology and value-added services to the equation. The partner must then undertake to manage the sales, marketing and account management of the business while Saxo Bank works off a revenue sharing model.

The Plan: The business planning required for success in partnering is part of the value-added services and Saxo Bank provides this aspect free of any charge.

The Business: The platform is a company in itself, expanding the partner’s product suite, offering a scalable online distribution capability and reaching a dynamic global market of tradable products.

The objectives of the WLP are to provide a platform that allows either institutional clients, such as hedge funds, CTAs, managers and other intermediaries or retail clients to trade any number or combination of assets. It also has the ability to provide a platform for trading of in-house asset managers or external hedge fund managers seeking broader umbrella relationships and gives the WLP brokerage community a powerful tool to meet the market’s growing appetite for online FX and other asset-class trading.

The commercial proposition
Saxo Bank provides a turn-key service for select partners including liquidity, execution, information and risk management as well as value-added services for client acquisition, client on-boarding and client management.

Based on a model of outsourced liquidity and risk management, Saxo Bank will consider a revenue sharing agreement with the WLP that takes into account projected and actual volumes. The Partner receives training, advice and in some instances, outsourced support of components of the value chain including lead generation, contract administration and client service/support as needed and determined between the partners.

The Platform
The client station is branded in the Partner’s chosen identity, color, logo and personal design specifications. All technical work and design integration is completed by Saxo Bank’s WLP IT Group and is designed with specific partner defined workspaces, including: basic FX retail clients, advanced FX institutional clients, multiple-products for global clients emphasising a specific country’s securities and with unique, WLP web-feeds, research, communications and daily updates. The WLP needs to provide a point person for the IT set-up, but all development of the platform and the workspace is performed by the Saxo Bank WLP IT group for the WLP’s approval.

Developing the client base
As part of an end-to-end service, Partners will receive mechanisms specifically designed to help generate leads, via the Internet and help establish the capabilities for branded advertising, web hosting and external creative services and project management. Training is another aspect provided by Saxo Bank. The Sales Team are given specifically developed training and assistance where required, and Saxo Bank provides them with background to answer trading questions, to manage account issues and to service clients in an ongoing and supportive manner.

Support at both ends
For a WLP to indeed prove successful, both parties need to be equally as committed to providing back up, service and to meeting their side of the agreement. Saxo Bank does not just enter into any partnership. A workable solution requires marketing commitment and the sales drive from the Partner’s end. In turn, Saxo Bank provides a turn-key approach that caters to the full value chain of services, including sales, legal and finance, sales trading, dealing and market making, customer service and back office.

What product are they partnering?
The SaxoTrader is an award-winning, multi-product thick-client platform offering Forex, Stocks, CFDs, Futures, Funds, real-time streaming data, trade execution, confirmations and margin management. Clients have access to streaming news, research and data, with world-class liquidity and access to exchanges worldwide, while ongoing maintenance and technology enhancements complete the package.

The FX product range includes over 150 Forex crosses, Spot Gold and Silver, Options, forward outrights, trailing stops, stop loss orders and aggregated liquidity. The equity product range includes Contracts for Difference (CFDs) from 23 exchanges, 15 Index-tracking CFDs for major indices. It also offers Stock trading from 22 exchanges and Stocks can be used as a collateral for margin trading other products.

The Futures offering includes direct online trading on 480+ online contracts, Gold and Silver, financial Futures, crude oil and natural gas energies and Stock Indices. Clients can also use traditional offline trading of a wide range of commodity futures (50+), with 16 Exchanges available and new online commodities trading.

The information suite is full-scale and designed to offer clients the benefit of a number of integrated sources. It includes streaming news from: Dow Jones Newswires, Market News International and AFX, along with real-time risk management and cross product account information as well as dealer chat and market comments and recommendations, aided by technical analysis.

Ongoing technological enhancements
Saxo Bank places technological innovation among its top priorities, with a track-record to match. Partners can expect the expansion of tradable instruments, the ongoing development of new functionalities for professional trading execution and the implementation of business management and risk management protocols for front and back office capabilities.

Client reporting and risk management
All client account information including risk management metrics such as available margin, collateral use and net free equity are calculated, displayed and reported to clients in real-time on the trading platform. Client users will, at all times be able to see trades executed, trades booked, rollover history, account and financial statements, real-time audit log of all client account events, pre-deal margin check, real-time margin control, real-time, mark-to-market profit & loss and multiple accounts or/and base currency accounts.

Looking for a successful outcome

When a software company says it can make useful business information available “at the click of a mouse”, it always pays to be suspicious: truly valuable insights are rarely that easy to come by. But when the claim is being made by Christopher Cox, chairman of US financial regulator the Securities and Exchange Commission (SEC), a higher degree of scepticism is required.

The SEC is busy trying to persuade the companies it regulates to start submitting their financial returns in a new format: eXtensible Business Reporting Language (XBRL). The idea is that XBRL can take the mass of impenetrable accounting and compliance information that companies produce and turn it into analytical gold. Whereas paper-based return are static and of little value, investors can take XBRL data and cut and dice it any way they want; producing their own unique and dynamic reports to zone in on the parts of a company they are most interested in, and to make better comparisons between companies. That’s the theory.

Companies have been less enthused about the idea, partly due to concerns about the money they will need to invest before they can generate XBRL reports. Undaunted, the SEC is pushing ahead, trying to win companies over. Its latest plug for the technology is a tool on its website called “Financial Explorer”. This lets investors “quickly and easily analyze the financial results of public companies,” the SEC says. “Financial Explorer paints the picture of corporate financial performance with diagrams and charts, using financial information provided to the SEC as interactive data” (you can try it for yourself here:

The software takes the work out of manipulating the data by eliminating tasks such as copying and pasting rows of revenues and expenses into a spreadsheet. That frees investors to focus on their investments’ financial results through visual representations that make the numbers easier to understand.

Financial Explorer is not the only XBRL tool that the SEC has made available. Its Executive Compensation viewer lets investors compare what 500 of the largest US companies pay their top executives. An Interactive Financial Report viewer helps investors to gather, analyze, and compare financial disclosures filed voluntarily by public companies using XBRL. To date, there have been 307 such filings from 74 companies.

The SEC expects more companies to join its voluntary XBRL filing scheme. “XBRL is fast becoming the universal language for the exchange of business information and it is the future of financial reporting,” says Cox. “With Financial Explorer or another XBRL viewer, investors will be able to quickly make sense of financial statements. In the near future, potentially millions of people will be able to analyze and compare financial statements and make better-informed investment decisions. That’s a big benefit to ordinary investors.” David Blaszkowsky, director of the SEC’s Office of Interactive Disclosure, said investors who went to the SEC’s website and tried out the new tools would get “a first-hand glimpse of the future of financial analysis.”

For now, that is a future no company is compelled to join; XBRL is voluntary. But the SEC is expected to make XBRL filing compulsory, and a decision is likely before the summer. Other regulators are waiting to see what the SEC does. In the United Kingdom, the Financial Services Authority and the London Stock Exchange have been dragging their heels on XBRL; in Japan, the Tokyo Stock Exchange will make it mandatory in April.

Corporate resistance in the US is based on the not unreasonable concern that companies will have to go through another massive change in their financial reporting processes. Most have only recently digested the Sarbanes-Oxley Act, and many have had to start producing accounts under International Financial Reporting Standards. The SEC – and other regulators that see XBRL as the future – need to convince companies about the benefits.

If the SEC wants to learn some lessons about how to do that, it might benefit from a visit to the Netherlands. The country is taking a very different approach to adopting the technology – one that some say is much more likely to be a success. While the SEC has been pushing XBRL as a way of making information available to investors in an easy-to-use format, the Dutch have gone down a different road, says Harm Jan van Burg, who works at the country’s Ministry of Finance and is managing the country’s move to XBRL.

In the Netherlands, the focus from the start has been to reduce the administrative and compliance burden on companies, he says. For the Dutch, the move to XBRL is just one part of an ambitious government plan to cut business red tape by 25 percent, which the government reckons would save companies around €350m a year on compliance costs.

Creating a system that allows companies to file XBRL accounts will “revolutionise financial reporting,” says van Burg, but the project is much wider than that. Companies also file returns to a host of government departments, covering areas such as tax, economic statistics, and employee payroll information. Often, they end up providing the same information more than once, or have to recalculate data to fit with definitions provided by government departments, which can vary from one agency to the next. The government is backing XBRL as a solution to this mess.

The first stage of the project was to create a national XBRL taxonomy. Every government department now uses the same definition of core terms, such as what constitutes an asset. Creating the taxonomy has forced government agencies to reconsider what data they really need to collect from companies. They originally asked for the taxonomy to include 200,000 terms, but serious pruning has got that down to around 8,000.

The next stage of the project is to get companies to actually use the taxonomy and to start filing returns in XBRL. Progress here has been slower than expected. The original idea was that companies would start to file XBRL reports in 2007. Only a few took the option – about 100 or so. Speaking in February, van Burg said the gateway had received “practically zero” filings so far this year. “I’m not scared that my numbers in January and February are not very big because most companies don’t file in the early months of the year,” he said. His prediction is for 2.5 million returns by the end of the year, which is “less than we wanted” but on target to achieve a goal of at least 10 million a year by 2010.

Success depends on how the software evolves, says van Burg. “The signs are really positive,” and most of the accounting software used in the Netherlands is now XBRL-enabled, but that’s only happened very recently. Now it’s for companies to decide whether to use the technology, he says.

To exceed 10 million filings, around half of all the companies registered in the Netherlands will have to file under XBRL. The government’s job is to “create a regulatory situation where businesses can be as efficient as possible,” says van Burg, but whether to use it or not “is always the choice of individual businesses.” XBRL filing is entirely voluntary.

Van Burg is confident that the filings will flow in because the business case is so strong. That’s not true in the US, he says. The SEC approach to XBRL relies too much on what he calls “filing in a single situation” – i.e. companies filing records to the SEC but nowhere else. “The business case would be much stronger if not only the SEC accepted XBRL, but also the IRS and other institutions that want financial information,” he says.

The situation is similar in the UK, he says, where companies can file XBRL to Companies House, the repository of corporate data, and the tax authorities, but the two do not share a common taxonomy. “If there were a national taxonomy the benefits would be far greater,” says van Burg. The Dutch model – where government agencies work together – “is exportable to any country,” he says, and is close to the approach taken in Australia and New Zealand. “But it needs strong political support because you have to deal with a bunch of agencies that are used to imposing their data models on businesses.”

There are other weaknesses in the US approach, he believes. The XBRL taxonomy under development is too complicated, and that there is still a lack of XBRL-enabled accounting software. Indeed, the XBRL community has put too much emphasis on how the data will be used and not enough on getting it produced in the first place, he says. “The US needs to concentrate very hard now on the accounting software market so that it can create XBRL reports. Until that happens on a large scale, XBRL will never be big.”

However, there are doubts too about how big XBRL will become in the Netherlands, despite its supposedly superior model. The country’s corporate trade associations are still only lukewarm on the idea. The Confederation of Netherlands Industry and Employers “sees possibilities in the use of XBRL” as a means of reducing administration costs, says its senior adviser on fiscal affairs, Janny Kamp. But the organisation only signed up to support the project after receiving a promise from audit firms that they would pass-on the efficiency benefits to their clients, she says. The confederation also demanded that there would be no extra reporting obligations and no requirement to use XBRL.

Jan Pasmooij of Dutch accountancy body Royal NIVRA accepts that it has taken time to convince the business community of the benefits of XBRL. Trade bodies were critical of the estimated cost savings published at the start of the project, but are on board now, he says. Listed companies, however, “are not interested at the moment.” Pasmooij, who wrote the original proposal for the Dutch XBRL model back in 2003, says they will eventually use the technology because it will benefit their internal reporting. Small and medium-sized companies, meanwhile, are not likely to deal with XBRL themselves, because they outsource the preparation of their accounts and tax returns to accountancy firms. That makes such firms an important audience to win over.

Pasmooij points to the example of tax filing. In 2000, the government made it possible for companies to file their tax returns electronically, but few accountancy firms used this option. It was not until electronic filing – using a system other than XBRL – became mandatory that firms invested.

“I think we will see a slow take up,” he says. “We will see the first movers now, who think there will be an advantage in future. Smaller practitioners will move later. The big firms will look at what’s happening with the SEC; for them it is important what is happening world-wide.”

That raises a question: does the government have to make XBRL mandatory, if it wants it to be a success? “When you talk with the politicians they say no,” says Pasmooij, “but I think it will start voluntarily, we will learn and fine tune, and then for the future it will be mandatory.” Over the long term, it’s not economically efficient for the government to run two parallel systems, he says – one using XBRL and one still filing on paper. “For us 2008 is very important. The proof of the pudding is in the eating. We have the taxonomy available and an infrastructure to support the electronic exchange of information. Now it is up to the accounting and tax firms to start working with XBRL.”

The SEC hasn’t got to that point yet. If it does decide to make XBRL reporting mandatory, it will still need to persuade companies that the necessary investment is worthwhile. Simply imposing the project on them is unlikely to result in a successful outcome.

Managing petro-dollars

It is a universal truth that in the world of greed and fear it is the trust that is inculcated by creating value to customers wealth would be the only driving factor that makes an investor entrust money again with the portfolio manager. At United Securities it is a combination of sheer hard work with team effort that has paid off in bringing this dream a reality. With assets under management of over $250m, United Securities is one of the leading portfolio management companies in the Sultanate of Oman.

United Securities started its asset management division in 2003 by managing portfolios of select local high net worth individuals. What started as trickle has grown to become a full fledged stream within a short period of time. By end 2007, assets under management have grown to over $230m. The division that started with few select clients has now grown not only in terms of diversity but also offers a host of investment solutions to its geographically widespread customer base. Since inception, the asset managers at the company had always been able to outperform not only the bench mark index at local bourse, but the performance of regional bourses too.

The performance
United Securities started its asset management department with managing $15m in 2003. The assets under management increased to over $250m as at the end of February 2008. Portfolio managers have been consistently providing investors with superior returns which have never dropped below 30 percent during any given year. Outperforming the benchmark index has become a way of life at United Securities and during 2006, the portfolio returns were more than 125 percent over and above MSM30 returns.

 Year  MSM30 return  United Securities portfolio returns  AUM (Mn $)
 2004  22.2%  30.5% 15
 2005  46.3%  48.0%  15
 2006  14.5%  33.0%  42
 2007  61.9%  77.5%  230

Asset management process
Portfolio managers at United Securities point out to the well known fact that capital markets are not fully efficient and there are opportunities that arise from deviations primarily driven by heuristics. A systematic approach is adopted by them which not only ties valuations with sentiment but also uses the help of thorough research process that identifies possible opportunities that arise from the behavioral biases. An investment approach that links identifying undervalued businesses and market leaders is applied. An optimal way to exploit the market inefficiencies driven by strong research support has benefited the investors at United Securities.

The approach is incomplete without intervention of human elements and this is where the organisational culture comes into play. A team that started with four people in 1998 has grown to more than 35 people in 10 years time. Motivation, mentoring and a constant demand to build and improve skill sets and capabilities has contributed positively to the growth of United Securities.

Customer focused approach
At United Securities, investing in and nurturing of customer relationships is paramount. As investments are nurtured and taken care of, customer relationships are treated with the same diligence. A proactive and personal approach has resulted in building and sustaining higher levels of customer loyalty. Equity strategies that combine varying risk and return approaches are tailored to specific risk and return objectives are offered to the investors. This systematic customer focused approach has helped them walk away with superior gains on their investments.

Muscat Securities Market
The Muscat Securities Market (MSM) has been the only market in the Middle East to have generated consecutive positive returns for its investors since 2002. Despite the blip that investors in other GCC markets witnessed during 2006, the MSM has consistently netted positive returns and has been an out performer in 2007 where the index netted gains of 62 percent.

Though market capitalisation of the MSM has increased more than five times since 2002, the current market capitalisation at $24bn accounts for less than three percent of the total regional market capitalisation. MSM is the front runner among its GCC peers that has promoted their image of being more accessible to foreign investors. With the developed markets currently witnessing a slowdown in economic growth and decoupling of economies becoming the buzz word of the day, foreign investor interest in the region is bound to grow on account of increased inflow of petrodollars. The role of the Capital Market Authority in monitoring the MSM only adds weight to investing in Oman argument. The CMA has maintained its stringent stance regarding transparency of corporate disclosures. Oman has been foremost in adopting pro investor reforms such as introducing index based ETFs and unlike other GCC markets, pushing corporates to announce their quarterly results within a specified deadline. Thus while Omani capital market is all set to receive increased foreign inflow of investment, United Securities is far ahead, equipped with its sophisticated investment vision.

Looking forward
United Securities is utilising its long-proven experience to establish its presence as a regional player of significance. Unite Securities is a SEBI registered Foreign Institutional Investor (FII) in India. It is close to acquiring companies in Egypt and Saudi Arabia. It has advanced a long way in its journey to become a one-stop shop for all regional markets in the Middle East, the North Africa region and the Indian sub-continent.

Islamic banking reaches new heights

The Islamic banking industry is relatively new compared to the conventional banking. Introduced 30 years ago, it was operating in a limited number of Muslim countries. Three decades ago, Islamic banking was targeting and planning to serve only Muslim clients keen to deal only on Shariah compliant base.

Since the beginning of the 21st we witnessed a radical change and the number of Islamic banks significantly increased and their geographical spread grew exponentially to be present today in almost 76 countries covering all continents. The Islamic banking potential and promising future were probably the main reasons that pushed major international conventional banks to embrace the Islamic banking wave. Most of them opened an Islamic window under their main platform with an objective to capture within the Islamic industry the lion share using their muscles.

The paradox is that international conventional banks with their 400 years banking experience were fresh graduates next to their peers with 30 Years of Islamic banking experience. This is why today full fledge Islamic banks mainly from the GCC are leading the growing Islamic banking industry. Backed up by their countries booming economies and natural resources such as oil and Gaz, these banks are now going global offering Shariah compliant financing solution to clients in all continents where the demand on the product is expected to reach $4trn in a 5 years period. Their strength, a banking concept based on transparency, win-win relationship and Ethical banking values and services.

One of the most active GCC Islamic banks eager to play a major role in the international finance arena is Qatari based, Qatar Islamic bank (QIB). With more than 25 years in Islamic banking, an outstanding financial performance record and the leading position in its own country in Islamic banking, QIB is leading the way into Islamic banking global expansion. We have met with QIB Chairman, Sheikh Jassim bin Hamad bin Jabr Al Thani to talk to us about this success story and to tell us more about QIB future plans and strategy in the booming Islamic banking sector.

Qatar Islamic Bank closed 2007 with not just a profit record year but the 4th consecutive year of outstanding financial performance, outperforming those of the banking industry. Would you please share with us some of the key figures and brief highlights of main reasons behind this performance?

The last 4 years journey was a break through in QIB history. In four years we have almost tripled our total assets that reached 21.3 billion QR in 2007 representing a year on year increase of 43 percent vs. 2006, and 40 percent average increase for the last 4 years. During the same four years period we have more than doubled our deposits that reached 12.2 billion QR a 39 percent increase vs. 2006 FY, and a 26 percent average increase for the four years. This is mainly due to our aggressive local expansion plan whereby we have now 22 branches in Qatar and our unique products range enabled us to consolidate our existing customers base and attract new ones despite the fact that all conventional banks during this period opened Islamic windows and new full fledge Islamic banks were established in Qatar.

Our financing and investments simply tripled in 4 years reaching 15.9 billion QR in 2007 representing a 57 percent increase vs. FY 2006, and an average growth of 39 percent for the same four years.

During this four years period QIB net profit quadrupled to reach 1.255 billion QR in 2007 a 25 percent increase vs. 2006, with an average profit increase of 74 percent for the last four years. Both the capital and the shareholders equity tripled in four years with an average growth of 82 percent and our return on asset is one of the best in the world as we were ranked 14th worldwide in 2006 and 2nd in profits growth among the Arab banks. Overall, our performance is by far above the industry average whether in comparison to the total banking industry or to the Islamic banking one.

What strategy did QIB put in place to achieve this outstanding performance?
QIB has developed a five year strategic business plan that is on going up to 2012. The objectives of this plan are to consolidate and maintain our leading position in the Islamic banking in Qatar and to become a leading global provider of Islamic banking via an aggressive international expansion plan and the development of new financial instruments covering the increasing demand on the banking and financial services on the local and international market.   

To put this into execution we have been through a total reengineering process of the bank. We have used external advisers and auditors to evaluate our position in several fields such as IT or HR and organisation structure. The management team and the external advisers developed a strong and aggressive plan that we have successfully executed and is currently on going.

I would like to highlight as well the role undertaken by the Shari’a Control Board presided over by Dr. Youssef Al Kardawi, where the board has endeavored, since the bank started in 1982, to find and develop legitimate solutions for the banking, financing and investing services. Hence, the committee’s achievements and QIB experience in this field became an important reference for developing the Islamic banking services in Qatar and abroad. The committee plays as well a role in enhancing the ambitions of the board of directors to expand the bank’s activities internationally through developing the financing houses established abroad and opening new investment houses in promising markets such as in Asia, the Middle East, North Africa and Europe.

What about the organisation structure and employees’ contribution to this success?
We have put in place a new organisation structure that addresses the bank requirements and challenges. We have attracted high caliber talents with expertise in their respective fields and strong determination to success to raise Islamic banking to new heights. We have created stand alone specialised structures dedicated to retail and consumer banking, corporate banking and private banking. We have established an investment banking and business development structure to oversee the bank expansion and investment internationally and to develop Shariah compliant sophisticated financing structure to convert totally or partially mega project financing from conventional to Islamic banking. Our employees are one of our strongest assets. We do have today more than 600 employees in Qatar of which about 30 percent are Qatari talents and we also employ via our subsidiaries internationally around 150 employees.

On top of a strong performance, we have also witnessed a major change in the identity and overall communication activities. What were the reasons behind this change?
After 25 years in the market place we believed that this was the right time to revamp the entire image and identity of QIB. We are now competing at an international level and we need to build strong image and brand awareness not just in Qatar but globally. Our aim is international standards at all levels. To achieve this we have clear upgrade plans in place where required. For example we are upgrading our IT system to the latest technology available, we developed a new website and even our offices interior design was upgraded. All these among others are part of our plan to combine authenticity and modernity to reach global international standard while maintaining our sharia compliant roots.

The success of our global strategy is already acknowledged. Fitch and Capital intelligence respectively upgraded our rating from BBB+ to A- and for our 2007 performance we have already received four awards among which are “Best Real Estate Finance House” and “Most Improved House” from Euromoney  in addition to “Best Rebranding” and “Best Advertising Campaign” from the Business and Islamic Finance magazine.

What makes QIB keen on international expansion?
In our strategy we have included aggressive growth plan both locally and internationally. We believe in globalisation and in exponential growth of the Islamic banking industry. With our 25 years experience in this field we see it normal at this stage to build a global network. Part of our mission is to serve and promote the Islamic banking industry. This will be achieved by transferring the know-how and expertise to our network in different continents.

Thanks to our investments houses, subsidiaries and affiliates, we are proud to say that we have already established the first Islamic banking global network under one roof and this is via the Arab Finance House in Lebanon, the Asian finance bank in Malaysia, the European finance House in UK and QInvest in Qatar, our investment arm in Qatar licensed by QFC and in operation since May 2007.   QIB global network is able to offer cross continent Islamic financing solutions to any corporation worldwide in compliance with the Islamic Sharia.

How do you see competition within the Islamic banking industry?
We compete in the total banking industry and not just the Islamic one and of course globally not just in Qatar. It is with such a wide competitive map in our strategic plan that fast growth in market share and performance can be achieved. We continue to lead the Islamic banking sector in Qatar with around 57 percent and we hold about 10 percent of the total banking industry. Our expertise and experience allows us to offer alternative solutions to convert clients or mega projects financing from conventional to Islamic financing and this is going to be a major source of growth.    

What do you foresee for Islamic banking in general and what are QIB plans in particular?
QIB is strongly committed to Islamic banking and will continue playing a major role to raise the profile and the awareness of Islamic finance.  We believe that in Qatar the Islamic banking will continue to grow faster than the conventional sector. At a global level we expect that by 2010 the Islamic banking will reach 1 trillion USD. We have strong plans to maintain our leading position in Qatar with a 25 percent growth rate. We are going to put state of the art key performance indicators to measure our performance on 360 degree scale including for example earning /employee. We will increase our branches network to achieve 35 within the next few years. We will expand our ATM network and launch E banking. We will develop a unique incentive and concierge program for our private banking customers. Moreover, we do expect a strong growth in projects and corporate financing via an alternative finance solution conversion program targeting key companies in Qatar. We do have plans to reengineer our real estate development subsidiary Aqar and prepare it for further challenges.

We will continue with QInvest looking for major investment opportunities and turn them into reality as we have successfully done recently with the acquisition of 40 percent of the prestigious Shard of glass in London.

We will also establish two new financial institutions, a private equity fund firm and a Sukuk specialised institution. We plan to operate the two institutions from the QFC.  In 2008 we will also build the foundation for a Takaful company.

We will continue our support to the qatarisation program and of course continue our corporate and social responsibility program.    

What is next in the agenda for the international expansion?
The expansion plan will continue. We are now licensed by the FSA in the UK to open the European Finance House (EFH) in UK. We will expand our European presence and prepare to open Finance Houses in France and Germany.  We will also expand our Asian presence and on top of Malaysia the Asian finance bank we will open representing offices in Indonesia, Singapore and Brunei. In Lebanon we will continue our expansion and Arab Finance House will move from 4 to 7 branches. We are now in final stages of feasibility study to expand to Turkey and Egypt and we are seriously considering the other GCC countries. We do also have a strategy of acquisition as part of our growth plan and are evaluating few options. Moreover, we will continue looking for the right opportunities to consolidate our existing international funds portfolio.

For further information:

Showcasing Caribbean investment opportunities

The Ministry (MTI), Telecommunications Services of Trinidad and Tobago (TSTT) and RBTT Bank Limited have joined forces to sponsor the event, which is the flagship inward trade mission of the Trinidad and Tobago Manufacturers’ Association (TTMA


TIC 2008 takes place from April 30 to May 3, 2008. It is the Caribbean’s biggest business-to-business event, and includes a multi-sectoral 292-booth tradeshow, structured networking opportunities and a topical business education programme. A wide cross-section of companies from around the world will showcase goods and services to thousands of local, regional and international buyers – including specially organised trade missions and buyer delegations.

TIC is celebrating its ninth anniversary, and, says Minister Rowley, “has grown to become a critical nexus for business, trade and investment, providing opportunities for manufacturers and buyers, investors and financiers, suppliers, service providers, regulatory agencies, consultants and media operators to network, share ideas, and develop business partnerships. This productive, dynamic interaction is critical for our regional business sectors as we compete on the global stage.”

Spanning the sectors
TIC’s evolution in a very real way, reflects the growth, vibrancy and diversification of the economies of T&T and the Caribbean. What began as a small show, with about 30 exhibits devoted to manufacturing has grown into a massive display of regional business capabilities, spanning all sectors. For overseas exhibitors, buyers and investors, TIC offers a unique introduction to the warmth and culture of the peoples of the Caribbean and insights into the way business is done in the region. Central and South America are also major participants in the Convention, a direct result of the deepening of south-south ties.

TIC takes place in the Caribbean’s most dynamic (and fastest growing) market. Energy has powered Trinidad and Tobago to success as Caribbean’s largest and strongest economy (GDP Growth 2006: 12 percent). Today, it is one of the world’s leading energy producers, the world’s fifth largest producer of Liquified Natural Gas (LNG) and the largest provider to North America (T&T also supplies the US with 56 percent of its ammonia and 77 percent of its methanol imports). Now, propelled by this wealth of energy and leveraging its natural, geographic and human resources, T&T has embarked on an ambitious programme of diversification, partnering with businesses across the globe.

Trinidad and Tobago’s open and increasingly diversified economy offers an investment and business friendly environment, characterised by a stable political system, strong legislative and regulatory framework and progressive investment policies encouraging fair competition. The prospects for investors are boundless and they’ll all be on show at TIC’s new Investment Portal.

The bottom line: $350m-plus in trade in just nine years makes TIC a force to be reckoned with. From small transactions, to orders for containers of goods, to massive construction deals – just about every type of deal is done on the TIC Tradeshow floor.

Significant contact
Mrs Katherine Kumar, Managing Director of RBTT Bank Limited, says TIC “has brought tremendous benefits to our clients and our bank in the domestic market — with unprecedented value added in regional and extra-regional markets,” noting that that “it was through the Trade and Investment Convention that RBTT was able to make that significant contact which led to a vibrant merchant banking and corporate banking business in Costa Rica… Joining the Convention will pay dividends. A chance visit to your booth or a chance conversation can lead to new horizons for your business, as RBTT discovered with our Costa Rican connections.”

TSTT’s Chief Executive Officer, Mr Roberto Peon adds: “Trinidad and Tobago may be a relatively small landmass at the tip of south America but TSTT has worked hard to ensure that the country is plugged into to every major hub around the world and vice versa. The TTMA has also worked extremely hard to plug Trinidad and Tobago into the rest of the world and the Trade and Investment Convention is an excellent example of how communications enables the creation of a global village. The TTMA has continued to successfully network to bring together a diverse group of buyers and sellers from the Caribbean, North America, Central America, South America, Europe, and Asia.”

A leading light

What phase has the privatisation in Montenegro reached?
Over 85 percent of capital in Montenegrin companies has been privatised so far. The accelerated privatisation proces is the result of a continuing upward trend in foreign investors’ interest in investing and conducting business activities in Montenegro especially through the privatisation process. The main indicator of the mentioned trend is a relatively greater number of successfully completed privatisations with a higher quality of bids and a stronger competition especially among reputable foreign investors. New owners come from a number of countries, some of which are: Germany, Hungary, Norway, Belgium, Austria, Greece, Italy, Russia, Japan, France, Slovena, Switzerland, Great Britain, US, Canada etc.

What were the stages that the privatisation process was going through?
The privatisation proces was initiated by the transformation of companies’ capital, which involved the phase of the capital evaluation (mainly applying the method of net assets), and the development of the transformation programmes for each company individually. The process involved the assignment of shares to employees by combining free-of-charge distribution and purchase of shares at discounted price.

During the mass voucher privatisation process 436.880 of Montenegrins became the owners of shares in companies through the free award of vouchers, thus participating with 27.1 percent in the total capital of the Montenegrin companies. Mass voucher privatisation as a privatisation model has resulted in both the acceleration of the privatisation process the accelerated development of capital market and financial institutions in Montenegro.

The continuation of the privatisation process, regulated by the Economy Privatisation Law, has been intensified since 1998 when the Privatisation Council was established by the Decision of the Government of Montenegro. The Privatisation Council has the competences in managing, controlling and ensuring the implementation of privatisation. The Privatisatin Council is accountable to the Government for its work.

What methods have been applied in the privatisation in Montenegro?
According to the Economy Privatisation Law, the privatisation in Montenegro is conducted by the combination of the
following methods:

1) sale of shares

2) sale of business assets of a company,

3) issuance of shares to the employees of a company,

4) exchange of shares for privatisation vouchers,

5) registration of new shares by means of the increase in capital,

6) debt-for-shares exchange,

7) joint venture in which a company being privatised invests fixed assets and

8) combination of the listed methods.

The privatisation in Montenegro has been mainly realised by applying the model of the sale of shares and assets by public auction, public tender or by putting up shares for sale on stock exchange, pursuant to the annual Privatisation Plan adopted by the Government of Montenegro upon the proposal of the Privatisation Council. The annual Privatisation Plan defines the main privatisation objectives and other aspects of the proces, methods and principles of privatisation of specific companies in the respective period.

The privatisation process in Montenegro has been substantially accelerated by the adoption of annual privatisation plans, particularly in respect to the stock-exchange sale of minority ownership stakes of the State and the State Funds. Thus the privatisation has been completed in a large number of small enterprises due to the efficient realisation and simplified procedure pursuant to the annual privatisation plan and owners’ decisions. Activities in the field of privatisation have especially been intensified since 2004, with a successfully completed privatisations in a large number of small and medium-sized enterprises.

Is the privatisation process in Montenegro public and transparent?
The privatisation process in Montenegro is characterised by a considerable publicity and transparency. Each privatisation, independently of the model applied (tender, auction, stock exchange), is accompanied by the public announcement in the local newspapers, internet and other forms of promotion. In order to increase the quality and intensity of the competition between potential investors, public invitations for the participation in the privatisation are addressed to economic departments of foreign consulates in Montenegro and Montenegrin legations in foreign countries. Information on the privatisation of large companies are made available in distinguished international magazines and on related Internet pages (Internet page of the World Bank), disclosing details about companies, criteria for the participation and the privatisation process itself.

Within the tender process it is usual to engage international financial and legal advisors, thus raising the quality of the process as well as transparency, professionalism, competence and objectivity of decision-making to a substantially higher level.

What are the key advantages of Montenegro in attracting foreign investors?
The applicable regulation and established procedures in the privatisation process in Montenegro are dominantly focused on providing equal conditions for all potential local and foreign investors.

Montenegro is the regional leader in terms of the implementation of legal and institutional mechanisms for creating favourable investment environment for distinguished foreign investors within the privatisation process.

In addition to the attractive location and economic and political stability of Montenegro, the numerous incentives for foreign investors include:

  • Protection of ownership-property rights,
  • European integrations as a strategic goal;
  • Progress in the implementation of economic reforms;
  • Favourable business and investment environment with a continuing lift of business barriers and simplification of procedures;
  • National treatment – a foreign investor has the same rights and obligations as a local one, with the possibility to, without restrictions, be a shareholder in a company as well as a purchaser of real estate (with the reciprocity condition);
  • Equal taxation system as for domestic legal entities allowing tax allowances and benefits;
  • Non-taxation of capital gain that has been reinvested – invested into the purchase of securities;
  • Protection of patents, trademarks, models, samples, copyrights etc.
  • Maximally liberalised foreign trade regime, payment of profit tax by legal entities at a rate of 9 percent of the tax base;
  • Single proportional income tax rate paid by physical entities of 15 percent in 2007 and 2008 with further decrease to  12 percent in 2009 and 9 percent from 2010;
  • Exemption from profit tax payment (within a three year period) for establishing a legal entity in underdeveloped municipalities (production business activity companies);
  • Avoidance of double taxation;
  • In free zones, users and operators are fully and with no time limitations exempt from profit tax for legal entities;
  • The agreements can envisage the jurisdiction of an interational
    arbitration in case of possible disputes in order to ensure a full
    legal security of investors.

Who are the most important investors in the privatisation process?
By means of privatisation Montenegrin companies have acquired renowned strategic partners such as Inter-Brew, Belgium (Brewery, Nikšić), Daido metal Japan (the industry of bearings, Kotor), Hellenic Petroleum, Greece (Jugopetrol, Kotor), Hit-Nova Gorica (hotel Maestral), Nova Ljubljanska banka from Slovenia (Montenegrobanka, Podgorica), Deutsch Telelecom-Magyar Telecom (Telekom Crne Gore), Societe Generale, Pariz (Podgorička banka, a.d. Podgorica (joint stock company)), Rusal, Russia (Aluminium Plant, Podgorica; Bauxite Mines, Nikšić), Strabag Austrija (Crnagoraput AD Podgorica (joint stock company)) etc. Important investors involved in the projects in Montenegro also include Aman Resorts  from Singapore, Kempinski hotels form Germany, and PM Securities owned by a Canadian businessman Piter Munk.

What are the effects of the privatisation on FDI?
Due to considerable efforts made to establish stable political and economic conditions and positive investment environment, there is a continuous upward trend in the growth of interest of foreign investors in investing and conducting business activities in Montenegro especially through the privatisation process.

The effects of foreign direct investments are particularly noticeable in the Montenegrin tourism industry, which is one of the priority sectors in the development of the Montenegrin economy. Owing to the announced privatisation of a large number of Montenegrin hotels in the past period, serious capital investments in tourism industry are in progress or are expected to be made, resulting in the further expansion and renovation of tourism infrastructure and especially hotel offer. As a result of the privatisation in tourism industry, total investments in hotel industry bound by the contracts in the following two to four years have been estimated at 140 million EUR with a continuing upward trend. Montenegro is the leader in the region in terms of upward trend in inflow of foreign direct investments, with the dominant share of investments through the privatisation process.

What are the ongoing privatisation projects?
The adopted Privatisation Plan for 2008 envisages the continuation of the initiated activities aimed at the realisation of international tenders for the sale of shares in Adriatic Shipyard AD Bijela (joint stock company) and the company “Montepranzo-Bokaprodukt” AD Tivat (joint stock company) with the planned construction of «Golf resort» compex on the Montenegrin coast, and the continuation of activities aimed at the preparation of international tenders for the sale of shares in the companies “Duvanski kombinat” AD Podgorica,  Electric industry “Obod” AD Cetinje, Institute for physiotherapy, rehabilitation and rheumatology »Dr Simo Milošević« AD Igalo, as well as for the sale of five small mini hydro power plants owned by »Elektroprivreda Crne Gore« AD Nikšić (national electric power supply company). Based on the previously adopted restructuring programme, the privatisation in the following companies is envisaged to start: „Luka Bar“, Bar; „Željeznica Crne Gore“ AD Podgorica; „Montenegro airlines“ DOO Podgorica (limited liability company). In order to raise necessary investment funds for „Elektroprivreda Crne Gore“ AD Nikšić, a combined engagement of preferential and commercial borrowings with the increase in capital shall be entered into or the sale of minority package of shares to a strategic partner shall be conducted conditioned by the retention of a majority state ownership in the company.

Has the process been awarded for its quality?
The quality of the realisation of the mass voucher privatisation process has been confirmed by winning a prestigious international award for public relations- IPRA (International Public Relations Award)  for the quality of the media campaign organised during this process in Montenegro.

What future projects could be singled out?
A large number of very attractive projects is in the preparation phase. The projects of tourism valuation of several exceptional locations on the Montenegrin coast that can be singled out are: Buljarica, Jaz and Ada Bojana, Great Beach, Valdanos and the Island of Flowers, Kumbor, Trašte and Bigova. The privatisation process for the mentioned projects will be realised by applying the model of public private partnership (PPP). The amount of investments for these projects is worth several billion EUR. The preparation of the mentioned projects has been initiated and internation public invitations for the expression of interest have been announced for the locations Ada Bojana, Bigovo, Kubor and  Mediteran, wheres the announcement of the same is to ensue for the locations Great Beach,  Valdanos, the Island of Flowers and others.

In the forthcoming period the main activities will be focused on the realisation of infrastructure projects, including the construction of road infrastructure, thermal energy and hydro energy capacities, regional water supply systems and the systems for solid and liquid waste disposal. The realisation of these projects has been identified as a priority in creating the basis for the further accelerated development of the Montenegrin economy.

What are your expectations related to the position of Montenegro in the forthcoming period?
Based on the past results and planned activities, I expect that Montenegro will in future retain its leading position in the region in terms of attracting foreign direct investments, primarily due to its exceptional potentials as well as due to its comittment to create regulatory and economic conditions for further unimpeded development, with notably positive effects of the accelerated process of Euro-Atlantic integrations.

Hungary: a magnet for FDI

As a result of EU accession on May 1, 2004, investors in Hungary find themselves in a single market of 493 million consumers with enormous potential for developing new markets and new horizons. At the geographical centre of the region Hungary is destined to become a bridge between present EU members and those countries on the verge of joining. Hungary’s increasing importance in offering logistics services to regions such as the Ukraine, Russia and the Balkan Peninsula is also a key factor for consideration. For any company entering the European market Hungary’s central location is impossible to overlook.

If he could send a telegram to potential investors as to why they should invest in Hungary, Gyorgy Retfalvi CEO of Hungary’s investment agency ITD Hungary would cable them the following message: “Hungary is the bridge for you to establish manufacturing and distribution in Europe.”

The importance of foreign direct investment in Hungary has grown at a spectacular rate during the past 15 years. Multi-nationals now account for around 50 percent of Hungarian GDP and some 80 percent of exports. In the nineties, the country enjoyed a competitive edge thanks to its inexpensive labour costs, relatively deregulated markets and aggressive incentives, but today, many of these quantitative advantages are being slowly eroded away. This makes it all the more important to focus on areas where Hungary’s strengths lie, and to build a coherent economy that brings the best out of the country’s human resources.

“Until 1999, Hungary led the way in the region, labour was inexpensive and the government was able to offer extremely attractive investment incentives,” Retfalvi says. Today’s market for foreign investment is much more complex. “A country’s competitiveness is based on dozens of factors, such as labour costs, taxation, education, infrastructure economic outlook and location. Decision-makers face an extremely difficult task choosing which region is best for them,” he explains. “At ITD Hungary-Hungarian Investment and Trade Development Agency, it is our job to provide them with all the information they need to make the right decision. We promote Hungary by identifying and communicating its strengths, liaising with potential investors and advising the government on legal and taxation policies.” This demands a profound understanding of the wider economic picture, as well as a willingness to get involved in all the groundwork associated with major deals. ITD Hungary works across cultures and it must understand what motivates companies on a business as well as a personal level.” says Retfalvi.

Striving forwards
In an increasingly interdependent world economy, it is not only the Hungarian and Central European market that is changing fast. In response to competition from inexpensive manufacturing in Asia, North America and much of Europe have already made the transition to a largely service-based economy, and Hungary must strive to do the same. This means challenging employees, implementing technology and adopting business practices that will stand the test of time.  Hungary still has the lowest unit labour costs in Central and Eastern Europe in the manufacturing sector, with a labour productivity growth of 13.1 percent in 2006. Hungary has the highest annual growth in the region, which he said was partially due to its “appealing” tax regime.

According to Locomonitor, Hungary is ranked 13th in the world in terms of FDI, receiving almost two percent of international investment projects. Much of that, of course, is a consequence of Hungary’s reputation for having a well trained, creative work force, with a high ranking in R&D activity, particularly in the fields of computer science, engineering, and software.

“ITD Hungary markets well, and makes a keen effort in highlighting the assets of Hungary and its workforce,” commented Retfalvi. More than 80 companies have decided to launch a large investment project in Hungary, thereby creating 32,000 jobs. We have many decisions-in-waiting from French, American, British, Chinese, Japanese, and Israeli companies, hopefully with a good success rate,” adds Retfalvi.

On a regional level, as living standards and labour costs rise in comparison to Hungary’s immediate neighbours to the east, the type of investor it can attract has changed. With this in mind, IDT Hungary must continue to be responsive to new developments and fine-tune its strategy at every turn. For instance, while high-profile carmakers, such as Audi and Suzuki, initially entered Hungary to reduce the cost of assembling their vehicles, they have been persuaded to stay by the arrival of a second wave of suppliers, who manufacture precision parts and need to be involved in the development process. Naturally, companies like Japan’s Denso, who make fuel injection pumps for diesel engines in Székesfehérvár, have more sophisticated human resource needs. These jobs encourage individuals to develop their skills and generate more added value, earning them a higher cut of the revenues.

Location, location
The quality of life that Hungary offers to foreign investors and employees in Budapest and throughout the country is an important factor when businesses consider locating here. Expats working in Hungary for extended periods have not been disappointed: they have found living in Hungary pleasant and Budapest exciting and less expensive than other major European capitals. Moreover, the country boasts a rich and internationally recognised culture, distinctive cuisine, superb wines, a spa tradition stretching back centuries, excellent international schools (British, American, Chinese and Japanese for example) and countless leisure activities and facilities.

“If we can build a reputation as a nation of innovative, skilled and productive people, we can also encourage companies to conduct research and development here,” Retfalvi says, pinpointing Hungary’s highly educated workforce, particularly in the fields of mathematics, electronics, engineering and IT, as its key asset for the future.” Initially, companies were unsure whether we had the skilled people to take on key development projects. We now have a host of reference companies, such as Bosch, Flextronics and Samsung, to testify that we have all the necessary expertise,” he says. “Morgan Stanley recently set up a strong team in Hungary to work on their financial models, citing the extremely high standard of mathematics, for example.”

ITD Hungary regularly takes prospective investors on tours to these companies, introducing them first hand to top companies employing top people in high-profile projects. Once they are established, these companies will also invest in educating the next generation of employees through collaboration with schools and universities. “Having good references is crucial, it is all about knock on effects,” says Rétfalvi.

Setting roots
In addition to acting as a business ambassador for Hungary, Retfalvi is also responsible for ensuring everything runs smoothly once a company does decide to set down roots. “When companies first come here, they don’t have any contacts whatsoever. We put them in touch with the right people, sit in on negotiations and advise them on planning permission, taxation, finding suppliers and hiring employees,” he explains. This demands a diverse set of skills, as well as profound knowledge of the local business environment – the organisation must be greater than the sum of its parts. The agency managed more than €8.7bn of Foreign Direct Investment (FDI) in Hungary between 1998 and 2007. Total FDI stock in Hungary currently equals €66.8bn. ITDH employs works together with commissioners with profound knowledge of the world’s business markets and boasts a comprehensive network of offices world-wide.

Positive evidence of our efforts and success that ITD Hungary has received „World Class” evaluation in the IPA benchmarking 2004 of GDP Global by achieving a score of 70-75 percent in the general evaluation(project handling and investor servicing). On top of that, in handling enquiries concerning call centres, ITD Hungary was named best agency not only in Europe but globally as well.

We are very proud of the result we have achieved. This provides confidential feedback to us on our competitive strengths and competitive position amongst other agencies. This way we can work on the identified action points to improve our promotional strategies. Above all it strengthens our belief in the success ad usefulness of our work and gives impetus to our further efforts and development

For further information:
Tel: +36-1-472-8100

The pole position – a blessing or a curse for FDI?

Slovenia’s business makeover has not been a bumpy ride experienced by other economies in transition at the beginning of the 1990s. Slovenian companies were a target for foreign interest as early as in the late 1970s thanks to Slovenia’s manufacturers of household appliances, cars and commercial vehicles, furniture and garments. Conveniently nestled between Austria and Italy, Slovenia has traditionally served as a gateway for exports to the discerning markets of West Europe even in former Yugoslavia.

Much has been done to boost the country’s attractiveness as a place to do business between Slovenia’s independence and today. The call for political action was backed within the framework of effort to become a full EU Member State and awareness that the Slovenian internal market was not fully integrated, which in turn meant a lack of competition in some sectors and increased operating costs for foreign investors.

Following the political consensus, liberalisation of the internal market has been built continuously since 2000 as the Slovenian economy become fully integrated with the EU economies, joined the EU in 2004, qualified for Eurozone and adopted the euro on January 1, 2007, and entered the EU Schengen in December 2007.

Adding value
Despite the country’s good economic performance, the government is committed to continuing efforts to improve micro-economic conditions to enhance GDP growth. This includes measures to increase competition by liberalising previously sheltered industries such as electricity, energy, telecommunications, and to dismantle administrative hurdles. In response to the critics quoting Slovenia’s excessive red tape and the shortage of land for industrial use, the Slovenian authorities got down to the business of changing the country’s business landscape attractive to foreign investors. Since 2000, registering a company in Slovenia has been greatly facilitated in many ways including electronic access to practically all public administration services, and the number of locations for property development and redevelopment to technological parks and economic zones has jumped.

When foreign investors consider locations to relocate or expand operations, the attractive tax regime of the eastern Alpine country bordering the Adriatic Sea is a reason to shortlist it. The present government deserves much of the credit for Slovenia’s tax reforms: a gradual corporate tax rate reduction aimed at promoting a pro-growth economy, phasing out of pay-roll tax, a relief on personal income tax. Tax allowances are in place for investment in research, technology and development, while greenfield foreign investment projects in manufacturing and sectors with high value added are eligible for financial incentives when they create new jobs. With tax revenue accounting for some 40 percent of GDP in 2005, Slovenia’s tax rates are lower than in many other European countries and converge with the EU27 average.

While traditionally taxes have been one of the key reasons for locating and investing away from home, transparent and stable political, legislative and administrative environment, the ease of getting about: good transport to airports, good rail links, availability of schools and good quality accommodation, as well as quality of life in general, should tip the scale in favour of Slovenia. The government’s ambition is to make Slovenia the leading European choice of international companies for locating international/European headquarters, an R&D centre, or a centre for administration and/or accounting functions. The government reforms have helped Slovenia’s economy increase its competitive edge and appeal to foreign investors without overheating the economy. Thanks to a wide-spread use of the first common financial reporting standard – IFRS – investors can compare statements produced in one country with those produced in another and exploit the advantages of mobile technology and broadband penetration where Slovenians themselves are early adopters both for business and private purposes. Today investors can benefit also from lower transaction costs arising from the single currency and the implementation of the Single Euro Payments Area (SEPA) where the current differentiation between national and cross-border payments no longer exists. This means that customers within the SEPA are able to make payments throughout the whole euro area as efficiently and safely, and above all at the same price, as in the national context today.

More ingredients for a recipe to attract FDI
Many Slovenians speak English, German and Italian and the Slovenian economy has all the attributes of an open and dynamic system without high leverage. Its budget revenues and expenditures are balanced, services generated 64.4 percent of GDP (2007 estimate) leaving industry behind (33.5 percent), gross fixed investment accounted for over 27 percent of GDP (2007 estimate), value added grew most in construction (well over 18 percent) followed by manufacturing (slightly more than 8 percent). Financial intermediation, trade and transport enjoyed high growth rates, and the only figure to spoil the picture of prosperity was the fact that in 2007 consumer prices increased by 5.6 percent.

In other words, the level of external debt is sustainable leaving room for more private equity and M&A activity. The Resolution on National Development Projects for the Period 2007-2023 lists several national projects worth some €24bn of which some €15m in private equity through public-private partnership.

In conclusion, although foreign direct investment (FDI) is generally perceived a source of economic development and modernisation, income growth and employment, it should truly be a ‘win-win’ situation for both the investor and the recipient country. Over the past seven years, Slovenia has established a transparent and effective enabling policy environment for investment and has built the human and institutional capacities to attract foreign investors. If its FDI stock appears modest in comparison with other CEE countries, it has something to do with the proverbial prudency of its people and their system of values where diligence and loyalty go hand-in-hand with creativity and innovation that are often key to the success of a business. A good pole position seems to make people more prudent and more environment-concerned. In the long run, it should be good for the investor and the host country.

Why invest in Slovenia?

A strategic location as a bridge between Western Europe and the Balkan States boasting strong levels of efficiency and productivity.

A well developed transport infrastructure both on dry land and through the sea port at Koper to serve some of Europe’s major transit routes.

A proficient and skilled labour force boasting a high degree of IT and technological prowess, from electronics to financial services.

All attributes to become a location of choice of international companies for international or European headquarters, an R&D centre, or a centre for administration/accounting functions

Slovenian Ministry of the Economy identifies development priorities
The priorities of the Slovenian EU Presidency in the field of energy, telecommunications and industrial policy – sustainability, competitiveness and security of energy supply with focus on the internal gas and electricity markets, renewable energy sources, energy technology and external energy policy. Energy and waste management offer a host of opportunities for foreign investors (PPP).

The Resolution on National Development Projects for the Period 2007-2023 lists several national projects worth some €24bn of which some €15m in private equity through public-private partnership.

The areas of wholesale and retail trading such as in electronics and garments, as well as consultancy services remain investors’ favourites, but further opportunities exist in sectors such as IT, pharmaceuticals, banking, insurance and telecommunications. Niche sectors and boutique companies may not be high-profile but thanks to specialisation stand to fare better than large household names that often lack flexibility in meeting customers’ needs. From electronic components to sailing boats, from racing skis to roulettes, from ultra-light aircraft to motor exhaust systems – these are some of the products ‘Made in Slovenia’ that do not fear competitors.

Efforts to improve macro-economic conditions to boost GDP growth and attract FDI have delivered the following preliminary figures for 2007:

GDP growth                    6.1 percent
GDP (at current prices)      €33,542m
GDP per capita                     €16,616
Exports growth                 13 percent
Imports growth              14.1 percent
Employment growth         2.7 percent

The ‘golden island’

The only cloud on the horizon is the question of whether or not the new government can find a solution to the island’s unification problem. Yet even here there is optimism, with islanders hopeful that new president Demetris Christofias will make a fresh effort to unify the Greek- and Turkish-Cypriot parts of the island, split since 1974.

Against this background of long-running political uncertainty, Cyprus has excelled economically. There is no reason to suggest this is about to change. Mr Christofias may be a socialist, but he is a modern socialist with an appreciation of the free market. He has already declared that his policies will be liberal towards international investments and that he will continue the “mixed economy” system without making any changes to the island’s tax or social system. Such liberal policies have been supported by all major parties in the last 30 years.

According to Deloitte Cyprus, which has one of the largest teams of taxation experts on the island providing a full range of business and personal taxation services, tax incentives are the most obvious attraction. But there is more to Cyprus as a destination for FDI than its high-profile fiscal perks.

After all, Cyprus isn’t the only country in the European Union that has an attractive tax regime. Why should investors choose it over, say, Jersey or the Isle of Man?

Different philosophies
Pieris Markou, the head of tax services at Deloitte Cyprus, points out that the Channel Islands and Isle of Man have a completely different philosophy to their tax systems. They offer complete tax exemption but no double tax treaties or any other international investment agreements. Cyprus, on the other hand, offers not only the lowest corporate tax rate in Europe –along with Bulgaria – of 10 percent, but a low tax system that can be combined with double taxation agreements, other international investment agreements and, since accession to the EU, with various EU directives.

These unique combinations offer tax advisors the opportunity to use Cyprus in many international tax structures to effectively reduce a multinational’s tax burden. They also mean Cyprus has become an efficient jurisdiction for routing investments in the EU by third country multinationals, or for investing outside the EU by member state multinationals.

Hardly surprising then that since its accession to the EU Cyprus has been characterised by many as “the gateway to Europe”.

Foremost amongst the island’s tax breaks is that low tax rate, which applies to all companies irrespective of their ownership or business activity. Other tax advantages include:

Holding companies
As long as a number of straightforward conditions are met, dividends received by a Cyprus holding company from overseas participations are exempt from tax.

Financing operations
A Cyprus company acting as an intermediary between a holding and an operating foreign company can finance the foreign company through interest bearing loans using the Cyprus treaty network or EU directives. This results in a “double dip” effect with interest being deductible in the operating while also escaping taxation in the ultimate recipient’s jurisdiction. A small margin is taxable in Cyprus at the rate of 10 percent.

Royalty income
A Cyprus company acting as an intermediary between an overseas licensor and a foreign company in a treaty location or in the EU can reduce taxable profits in the operating location.  A small margin will be taxable in Cyprus at the rate of 10 percent.

Exemption from capital gains tax
No tax is imposed on any profit from the disposal of securities, irrespective of the length of ownership or percentage participation.

Treaty network
What distinguishes Cyprus from most other international business centres is its extensive network of double taxation treaties. The island has these treaties with 43 countries. Most treaties provide for reduced rates of withholding tax on dividends, interest and royalties paid out of the treaty country, or the avoidance of double taxation if a resident in one of the treaty countries derives income from another treaty country.

Withholding taxes
There are no withholding taxes on payments of dividends, interest and royalties to non-residents, irrespective of whether the recipient is a corporation or an individual.

Another new measure that has been introduced is a residency based taxation system which states that a company is considered a tax resident in Cyprus if it is managed and controlled in the island. In practical terms, management and control is usually interpreted to mean management of the company at its highest level, which is the board of directors. International investors who want to ensure compliance with this requirement can either appoint local directors or set up a fully fledged office in Cyprus, also relocating key personnel to the island.

This attractive tax regime is backed up by liberal policies on FDI that are designed to promote the island’s growing services sector. After tourism, the financial and professional services sector is the next most important source of revenue for the Cypriot economy.  According to Deloitte, having a liberal FDI policy promotes the services sector, which increases demand for services and in turn increases local employment and wealth.

The ‘spin-off’ benefits are significant, Mr Markou says. “This increased demand for services has encouraged the service providers in general to improve their product in terms of quality and efficiency. This can only be for the good of the Island as a whole.”

Because it has been able to demonstrate a stable financial and business-friendly environment since the 1970s, Cyprus has attracted significant foreign investment and capital flows for decades. But the island’s policy-makers have not sat back and happily watched FDI inflows grow. Reforms have been carried out, most notably as part of the island’s preparation for EU accession in 2004. Cyprus harmonised its financial and regulatory environment with that of the EU. A general tax reform came into effect on January 1, 2003 to align the Cypriot tax system with European principles of equality and to demonstrate a commitment to the Organisation for Economic Cooperation and Development (OECD) against harmful tax practices.

Equity participation
FDI policy has been liberalised for both EU and non-EU nationals in another significant way, says Mr Markou. Foreign investors can participate in most sectors of the economy with equity participation of up to 100 percent, without a minimum level of capital investment. This means foreign companies can invest and establish a business in Cyprus on equal terms with local investor.

The government also says administrative procedures have been simplified and measures have been taken to streamline the infrastructure regarding foreign investment, reducing the level of bureaucracy.

EU membership has given impetus to the island’s many reforms. As an EU member, Cyprus has entered what Mr Markou calls “a new era” as an economy offering a great number of advantages within a common European market. The euro was adopted by Cyprus as its unit of currency on 1 January 2008, further confirming the country’s macro-economic stability and its commitment to low inflation, low interest rates and high growth.

“I am confident that the impact of the euro can only be viewed positively by the foreign investor,” says Mr Markou. “It means an investor can put more trust in the socio-economic environment with minimum surprises as regards the kind of economic policies that can influence market conditions existing at the time the decision is taken to invest.”

“With globalisation, every piece of certainty that can be achieved is a plus for the international investor. Being part of the European economic family takes away a certain element of uncertainty in the macro-economic policies of the country and this can only be to the benefit of the international investor.”

If evidence of the success of Cyprus’s fiscal policies were needed, it comes in the form of new company registrations. More than 20,200 new companies set up shop on the island in 2006, rising to 29,016 in 2007. This is a trebling in the number of new company registrations in the last three years and the trend is continuing.

Mr Markou says there is a notable increased confidence in the use of Cyprus in international tax planning, especially from the European and US investors who are finding that using a company registered in the EU carries advantages that cannot be found in jurisdictions with similar tax benefits, but lack the EU identity.

And it’s not just corporations that benefit from moving their operations to the island. The benefits of an individual becoming a resident in Cyprus, either for employment or retirement purposes, are numerous. New residents are attracted by the Mediterranean lifestyle combined with a high standard of European infrastructure. There are also social benefits for residents, including low housing and education costs, and low crime rates.

Insurance contributors
From an economic viewpoint, the top marginal tax rate for employees is 30 percent and social insurance contributions are 6.3 percent. Both rates are highly competitive compared to other European countries.

For retirement purposes, Cyprus residents enjoy a low rate pension tax of 5 percent, whereas any interest or dividend income received would be subject to 10 percent and 15 percent tax respectively. Cyprus has no inheritance taxes, capital gains taxes (on property situated abroad), or transfer and exit taxes.

Yet it’s tourism that remains the primary source of revenue for the Cypriot economy, and the tourism sector has proved vulnerable during recent years. However, FDI acts as a cushion against swings in tourist arrivals, and revenue generated through the financial and professional services sector acts as “a stabiliser” on the economy.

“The government, together with the private sector, is making every effort to improve the service industry in Cyprus,” says Mr Markou. “The government recognises that this is the future of the Cyprus economy.”

Indicative of this is the recent setting up of the Cyprus Investment Promotion Agency, which combines the efforts of the private and public sector in promoting Cyprus as an international service centre. It is important to note, says Mr Markou, that all professional service providers in Cyprus employ qualified personnel educated mainly in the UK, the US and Greece. Accountants and lawyers employ qualified personnel from the UK and US professional bodies, while the professional services industry is self regulated and offers close quality control monitoring to ensure the standard of quality of services offered.

The only unanswered question about Cyprus is whether or not a solution can be found to the unification question. For the international investor community, is a solution even necessary?

“Political stability within a chosen jurisdiction is important to the international investor,” says Mr Markou. “Cyprus joined the EU without being subject to any restrictions about resolving the Cyprus problem. That said, a solution would remove any remaining uncertainties international investors may have and would act as a springboard to new challenges.”

Pieris Markou is the head of tax services at Deloitte in Cyprus. He is a fellow member of the Institute of Chartered Accountants in England and Wales, a member of the Chartered Institute of Taxation, IFA and STEP.  He is also an active member of the Institute of Certified Public Accountants of Cyprus, currently serving as Chairman of the Tax Committee, participating in a number of meetings with the Minister of Finance, the House of Representatives and the Tax Commissioners for the formulation of the Government’s policies on taxation. Pieris specialises in local and international taxation.

For further information:
Tel: +357 22 36 03 00

The challenge of real reform

By mutual agreement, one of the most pressing issues for Mexico is the need to improve its infrastructure, particularly transportation. To aid this on February 7 2008 the Mexican Official Federal Gazette launched the National Infrastructure Trust Fund (otherwise known as The Fund). This Fund constitutes a financing strategy to help modernise and expand Mexico’s infrastructure, operating as a public trust of which the National Public Works and Services Bank acts as a trustee.

What is the Fund for?

To encourage competitiveness;
Help sustain growth; and
Assist job creation and help provide equal labour opportunities.

One of the purposes of The Fund is to turn Mexico into a leader in infrastructure development in Latin America and, by 2030, for it to be among the top 20 percent of the world’s most highly rated countries for overall infrastructure competitiveness. The Fund functions as a venture capital fund in infrastructure and channels resources through different financial instruments such as guarantees, subordinated debt and venture capital. Projects are financed by federal budget, private sector investment and resources drawn down from The Fund’s assets.

The Fund operates as a project assessment center that will help establish investment priorities in the following areas:

Drainage and sanitation;
Railroads, ports and airports; and
Projects for generation of renewable energy

Real change promised for many areas
Energy reform is intended to change the legal framework to allow a more aggressive participation of the private sector in the generation of electric energy, as well as to permit the private sector to distribute electricity, extract and process oil and gas.

The falling production in the Cantarell oil field in the Gulf of Mexico is reducing revenue for the federal budget and the availability of oil in Mexico. That means Mexico will have to make alliances with oil companies who specialise in deep water exploration and production in order to drill and extract oil from other fields in the Gulf. This could also lead to liberalization and further investments in refining and in the oil pipeline system.

As to electricity, a bill was submitted the Mexican Congress in 2002 calling for amendments to the Constitution in order to promote new investment and legal certainty to investors in this sector. This took into account that neither of the public electricity utility companies, the Federal Electricity Commission or the Central Power and Light Company would be privatised. This proposal, however, is still before the federal Congress.

Meanwhile Mexico has established the National Climate Change Strategy as a mechanism to comply with its commitments under international treaties, such as the Kyoto Protocol, promoting clean and alternative energies, methane recuperation and carbon capture. Mexico has obtained clear benefits from the carbon emissions market. Up to now, 97 projects have been approved representing emission reductions of nearly 6.4 million tons of CO2 equivalents per year, placing our country, in terms of clean development projects, in 4th place – a hugely impressive achievement.

Recently, the Mexican Bioenergetics Promotion and Development Law was published, effective from February 2008. This Law provides incentives for the production, marketing and efficient use of bioenergetics, promotes the reduction of pollution and greenhouse effects, and aids in technological and scientific investigation in this area. The new law will promote the production of ethanol and biodiesel through the cultivation of sugar cane and corn.

Education reform
Extensive educational reform is promised. The main purposes of this educational reform will be to:

Achieve equality of opportunity in order to combat poverty;
Avoid the educational backlog caused by a lack of space; and
Promote investment in technology.

The Secretary of Public Education has already signed a cooperation agreement with eleven states for the purpose of ensuring that the National Council for the Promotion of Education improves basic teaching in the poorest municipalities in Mexico. Additional resources are promised to help provide this.

The Government will establish mechanisms to improve the professional quality of teachers and students. School principals are to be designated following a competitive process. Resources from the Student Aid Fund are to be assigned to 2,500 high schools in order to be used in education projects.

Judicial changes
The Mexican justice system has received different proposals from non-governmental organizations, judges, lawyers, public servants, and academics, such as those related to criminal procedure, public security and the amparo or constitutional action.

To protect human rights, it is important to change the criminal procedure system from a written to an oral system. To do so, some amendments may be necessary, namely:

To switch from the current semi-inquisitorial system to an adversarial system;
Restrict powers of the public prosecutor and transferring more powers to judges;
Guarantee all statements of a defendant to be made before a judge and in the presence of defense counsel;
Establish an abbreviated process where defense counsel and prosecutors agree on the sentence to be imposed; and
Create the position of a judge to control the pre-trial process.

Recently, the federal Chamber of Deputies approved a judicial reform in connection with some of the items described above, which now will be reviewed by the Senate.

Tax reform
At the beginning of October 2007, the Official Federal Gazette published several executive orders amending or repealing a series of Tax Statutes. On November 5, 2007 an order was published creating several income tax benefits and a single rate business tax.

The purpose of the reform was to enable the federal government to increase tax revenues for 2008. The tax reform seeks to decrease reliance on petroleum revenues from PEMEX and proposing a non-petroleum tax collection system. In order to establish this, the single rate business tax was created in order to obtain business tax revenue (this tax is a substitute for the previous asset tax). The single rate business tax is complementary to income tax. The Federal Tax Code was also amended, especially with respect to the tax authority’s auditing and enforcement powers.
Support from Mexico’s new Economic Support Program

The Mexican government recently announced the Economic Support Program including 10 measures aimed to strength the economy and mitigates the negative effects resulting from a deceleration of the US economy. This program includes reductions in income tax, single rate business tax, social security quotas and simplifies customs proceedings. It is estimated this will have an economic impact for the Mexican government of around 60 thousand millions pesos.

Labour relations
The reform of Mexico’s labour laws, currently deliberately biased in favor of employees, will be necessary in order to create more employment, better quality jobs, a more competitive economy and encourage more regional balance. Unfortunately, no proposed changes to labour laws have yet become law.

To help support reform in these areas, it will be necessary for a tripartite grouping of labour authorities, employers and employee organizations to develop policies capable of obtaining broad support for such initiatives to become law.

The Confederation of Industrial Chambers of Commerce, an employer organization, has presented to the federal Congress certain suggestions for reforming Mexico’s labour laws. Currently it is very expensive to fire employees. While this protects existing employees, it is a huge disincentive for employers to hire new staff or start new businesses.

The US and Mexico have both agreed upon a pilot project to determine whether the border between the two countries can be opened to cross-border land transportation of cargo.

The pilot project will have a term of one year and in its first stage, the US government will allow Mexican carriers a permit to operate cargo transportation services in the United States – as long as they fulfill certain conditions. In the second stage, the Mexican government will open Mexico’s border to cargo transportation by United States carriers, granting access to Mexican carriers in the first stage. After a year, if the evaluation of the pilot project results is favorable, this cross border opening may become permanent.

It is estimated the opening of the border for cargo transportation services between Mexico and United States will result in a saving of approximately 250 million dollars per year. The gradual access by Mexican transportation carriers to the United Stated is, obviously, highly strategically beneficial.

Antitrust changes
The modern era of antitrust law in Mexico began in 1993 when the Federal Economic Competition Law became effective and inaugurated a new age in the regulation of economic competition in Mexico. Thirteen years after the enactment of the Law, companies are becoming more familiar with the Law and the work of the Antitrust Commission related to anticompetitive behavior has substantially increased because of the rise in the number of complaints being filed. However, in our view, there is still much more work to do in order to have a developed antitrust culture.

About Basham, Ringe y Correa, S.C.
Basham, Ringe y Correa is one of the leading international full-service law firms in Latin America. Established in Mexico in 1912, Basham draws upon nearly a century of experience in assisting clients who conduct business throughout Mexico. The firm’s clients include prominent international corporations, many of them in the Fortune 500 list, financial institutions and individuals.

The firm’s group of lawyers and support staff are committed to maintaining the highest professional and ethical standards. Constantly exposed to the international legal system, many of Basham, Ringe y Correa’s lawyers have completed graduate studies at foreign universities and worked at companies and law firms abroad. The firm received the ‘Client Choice Award 2006’ from International Law Office, Chicago, Illinois. Recently, the firm also received ‘Who’s Who’ recognition as Mexican Firm of the Year 2007.

Specialist areas covered by Basham Ringe y Correa

Administrative/biddings/privatisations, antitrust;
Arbitration, banking and finance;
Litigation, corporate and contracts;
Criminal litigation, energy, environment;
Franchising, health, immigration, intellectual property;
International trade and customs;
Labour, land aviation and maritime transportation;
M&A, Real estate and social security;

For further information:
Tel: +52 55 5261 0400

Taking control of the transactions in Greece

With a number of years of experience in providing legal services for many takeover transactions involving a wide range of multinational and domestic financial entities and businesses, M&P Bernitsas are in a unique position to comment on and analyse the takeover market in Greece and to look at the impact of the recently implemented European Takeover Directive and the repercussions of the American sub-prime crisis on Takeovers in the country.  

The firm also has experienced particular success in the growing project finance market, having been involved in almost all the recent high profile transactions to have taken place, and can offer an insight into the process and legalities of the market.

“We have been recently involved in the Maliakos-Kleidi motorway project finance transaction, where we acted as Greek law counsel to the lenders with Lovells LLP acting as English law counsel to the lenders and the Elefsina-Korinthos-Patra motorway project finance transaction, where we acted as Greek law counsels to the sponsors with Linklaters LLP acting as English law counsels to the sponsors,” said Managing Partner Panayotis Bernitsas.

As a result of their work in these projects and countless others, in which they liaised and interacted with both domestic and international partners, they can provide a comprehensive critical analysis of the growing project finance market and Greek legislation involving takeover financing in Greece.

Different projects
The demand for project financing in Greece has increased in recent years as it can provide the necessary funds to allow the financing of a variety of different projects necessary to the development of the infrastructure of the country in a manner that would also enable the Government to better monitor the State’s relevant expenditure. “Τhere is a significant call for project financing in Greece. Concession schemes as well as PPP schemes are used for projects which would otherwise need direct upfront financing by the State. Concession deals (BOT type) concern mostly motorways and operate on the basis of concession agreements ratified by law. PPP deals concern initially schools, prisons and hospitals and operate on the basis of partnership agreements. The financing structure must be firmly based on the concession or the partnership agreement respectively, must ensure a solid security package over all project assets and must also minimise mandatory costs,” said Senior Associate Yannis Kourniotis.

The growth of project financing is not the only change to be experienced in Greece, since last summer the European Takeover Directive has been in place to legislate takeover transactions and as a result there have been a number of changes to the legislation in the country and the financing arrangements that a bidder has to organise have been overhauled. “A bidder should have all necessary means to finance the offer price at completion, which means that all financing arrangements must be in place prior to launching a takeover bid and remain in place until completion. In many cases, this requirement has an impact on pricing,” said Partner Nikos Papachristopoulos.

This has made the selection of the method of raising the finance for a takeover vitally important, an issue that has not been helped by the problems with the American sub-prime market and the ensuing economic repercussions. “It appears that these problems have impacted upon all forms of financing and we do not see why they would not impact upon financing of takeover bids,” said Partner Athansia Tsene.

As a result, an alternative to direct financing that allows the creation of debt without the lender being expected to be a bank could, in the current climate, be a preferred form of financing for a takeover. As a method of financing that “is common for certain types of takeover bids, where delisting of the target company is sought upon completion of the acquisition or where mezzanine debt is considered necessary and mezzanine lenders are not expected to be banks,” according to Ms Tsene, securitisation is one such alternative.

Finance structures
But as with any form of takeover financing there are a number of considerations that must be taken into account before and during any transaction. “Any financing structure intending to finance a takeover bid needs to link advances under the facility to the actual payments for the acquisition of shares. In this regard, the rules of the Capital Market Commission and the Athens Exchange must be observed when determining the availability period and the conditions precedent to each drawdown. At the same time, the implementation of a securitisation structure may be a more complex exercise, as it requires coordination of the parties involved, including one or more banks operating in Greece and, therefore, qualifying to securitise claims under loans under Greek law on securitisation of receivables, with a view to ensuring finalisation of the documentation in a manner acceptable to all parties and meeting the requirements of Greek law on securitisation,” Ms Tsene continued.

There is still a heavy involvement of private equity firms in Greece however M&P Bernitsas believe that the current financial climate has made the financing of a takeover via private equity a more costly exercise. “Due to the volatility of and uncertainty in money markets, it is expected that it would be more expensive for private equities to finance a takeover. Usually, they commit a relatively low percentage of their own available cash and seek to obtain bank financing against security over the assets of the target,” said Mr Papachristopoulos.

While the current financial climate may make private equity more expensive it doesn’t mean that the takeover of Greek companies by foreign investors is about to stop. One of the largest areas of change following the European Takeover Directive has been in the regulation of cross border transactions which have, in theory, been made easier.

However, as with the enactment of any sweeping European-wide legislation there have been some problems integrating it into each country’s existing legal structure and Greece has been no exception. “It is easier, although we have faced certain problems with the way that the Greek legislator has implemented this Directive in Greece,” Mr Papachristopoulos continued.

Primary concerns
The problems with the implementation of the Directive in Greece could be because of the legislator’s interpretation of how to regulate the most important part of a cross-border takeover. The primary concern is “to ensure that the underlying financing arrangements are such that the requisite funds will be available at completion, notwithstanding the occurrence of events or circumstances which would otherwise entitle the financiers to cancel their commitments. In other words, certainty of funds between signing the transaction documents, launching and completing a takeover bid is of a paramount importance,” Mr Papachristopoulos said. If the legislator is unsure how stringent to be in order to ensure that this issue is addressed, a number of problems could arise.

The complications following the implementation of the European Takeover Directive will need to be resolved because the involvement of foreign investors and financial intuitions in takeover transactions involving Greek companies is only going to increase. The country has a number of attributes, “fairly healthy balance sheets, high margins and well positioned to expand in the neighboring emerging markets of the Balkans,” continued Mr Papachristopoulos, which make it an attractive proposition for international banks and investors. As a result there has been a shift in the attitudes of Greek companies to foreign investment and ownership, a shift that is backed by the government. “The trend is that numerous Greek companies would like to have strong international investors to also take advantage of the synergies and the local investment community and the Government favour this type of co-operations,” said Mr Papachristopoulos.

However, the involvement of international entities in takeovers in Greece brings with it a number of additional considerations and issues for firms like M&P Bernitsas to consider for their clients. The problems or issues that must be dealt with are determined by what role an international bank will be taking in the transaction. “If they act as lenders, a structure must be implemented to ensure that the borrower will have sufficient funds to repay its acquisition debt and to shorten the time period that will be required to complete the takeover to minimise their exposure to adverse market conditions. If they act as financial advisers of the bidder, the offer document and any other document relating to the takeover must be true and accurate. If they act as financial advisers of the target, the target must be assisted in forming a view as to whether the offer is fair and reasonable both for the shareholders and the target itself,” concluded Mr Papachristopoulos.

The origin of the financing or entities involved in takeover transactions is not the only factor that must be considered, the form of financing is, and always has been, the most important consideration.

For further information
Tel: +30 210 361 5395 or +30 210 339 2950

Over the rainbow

Though it was established some 105 years ago, the 300-lawyer strong South African legal firm of Bowman Gilfillan does not rest on its formidable laurels.

“We are judged not by our history but by the level of service we can give our clients in the here and now,” avers senior partner and chairman Jonathan Schlosberg.

With a total staff of more than 500, the firm is based in Johannesburg, with a large Cape Town base and a small but vibrant London presence. Besides South Africa – the so-called ‘Rainbow Nation’ – those clients have come historically from the UK, Europe and the USA but, increasingly, the firm is advising large financial institutions, multi-national companies and individual investors from China, the Middle East, India, other parts of Asia and Eastern Europe. “There are very few, perhaps only three, law firms in South Africa of our size, reach and capabilities.

Bright graduates
In addition, there are a number of medium sized and smaller firms and some very small ones but there is room in the industry for all sorts of players,” says Jonathan, adding, “There is, however an ever present shortage of qualified and capable lawyers, despite the high quality of bright young graduates being turned out by our law schools, so we are engaged in an ongoing ‘war for talent.’

“Traditionally, lots of this country’s most promising young law graduates have simply upped sticks and moved to the US or UK once they’ve qualified. “Fortunately, our firm’s reputation and our ability to provide lots of experience working with international clients on interesting and often very  large-scale projects,  enables us to persuade many of the best people to stay in South Africa and join us.

“We have very good retention rates. We rarely lose people to other South African firms – it’s usually banks and overseas law firms who attract them.

We must be doing things right because we score highly in the ratings. For instance, Ernst & Young named us as “M&A Law Firm of the Year’ for 2006. We also took the Chambers ‘African Law Firm of the Year’ title for 2007 and have recently been awarded PLCWhich Lawyer: “Best Law firm of the Year: Africa 2008.” In 2007, again, we were highly ranked in M&A and Corporate Finance by Ernst & Young and Dealmakers.

“We have very strong international relationships with banks and foreign law firms. One of our prime strengths is that our team of lawyers is spread across all age groups and there’s a wide spread of knowledge and experience within each of those age groups, enabling us to cover all the angles for our clients.”

One of Bowman Gilfillan’s biggest recent projects was its role acting for Standard Bank in that institution’s sale of a 20 percent stake to Industrial & Commercial Bank of China – a $5.5bn deal stamped with superlatives. It’s the biggest ever single investment into South Africa and, at the time, China’s largest ever outward investment.

“It was a surprisingly quick process,” recalls Jonathan, “Negotiations began in mid-September and six weeks later the heads of agreement were signed – and not one word of the deal leaked out, which was amazing.” Another major project for Bowman Gilfillan was the de-merger of PPC (Pretoria Portland Cement) from the massive Barloworld industrial conglomerate: “The business is now a free-standing independent, as is Freeworld Coatings, another former division of Barloworld.

Market capitalisation
In further major deals, the Tongaat – Hulett Group, with interests in steel and property, listed its massive Hulamin steel-making division with a market capitalisation of $2.28bn while Bowman Gilfillan was one of the legal advisors in the $279m sale of Anglo American’s shareholding in Anglo Gold-Ashanti – which was the biggest individual capital market spin-off ever seen in South Africa.

“Additionally, we have been advising Airports Company South Africa on raising $1.5bn to finance new developments and upgrades of its existing facilities and power company Eskom on their $38bn five-year capital investment programme, which is designed to deal with the ongoing power crisis that currently afflicts the country.

“These and other deals reflect the upbeat nature of the economy, even if some individuals may feel rather less upbeat about their own circumstance in a country whose infrastructure needs a lot of updating and where crime rates are still worrying. And, of course, when America sneezes, Europe sneezes too and we catch a cold.

“We’ve been enjoying GDP growth of five per cent plus but the global slowdown means this is predicted to drop to around four percent this year.

“There’s still no shortage of things for us to do, especially as a major overhaul of South Africa’s corporate law, to bring it more into line with American practice, is now in its fourth draft and will be enacted in 2010.

“To help not just our clients but other members of the public to understand the new process we commenced holding a programme of in-house and public seminars in South Africa and abroad which will run for an 18 month period.”

Ezra Davids, head of  the firm’s Corporate Department, takes up the theme: “Reflecting what’s happening globally, there’s been a bit of a tapering off, not in the number of M&A deals but in their size, and the bulk of them can now be described as mid-market.

“There are lots of FDI deals, corporate restructurings and de-mergers to keep us busy and cross-border M&A work is growing in importance for us. The Chinese are showing a lot of interest in South African investments, and so too are the Indians.

“There’s talk of some $2bn worth of investment from that country into the Coega industrial development zone, for instance. “As well as all this inward investment, BEE, or ‘Black Economic Empowerment’ has been a very important development in our economy. There’s still a worrying wealth gap problem here but the black middle-class is growing all the time and most of the economy is now driven by their wants and needs, plus they are now interested in acquiring ownership as well as being consumers.”

Sustainable manner
According to the South African Department of Trade and Industry’s BEE strategy document: “Our country requires an economy that can meet the needs of all our economic citizens – our people and their enterprises – in a sustainable manner.

“This will only be possible if our economy builds on the full potential of all persons and communities across the length and breadth of this country.”

“No economy can grow by excluding any part of its people and an economy that is not growing cannot integrate all of its citizens in a meaningful way.”

Says Ezra Davids: “Unfortunately, there is still a rich/poor divide, mainly based on colour, but things are improving. BEE is not aimed at taking wealth away from whites and giving it to blacks but is a growth strategy, targeting the economy’s weakest point, which is inequality.

“Legislation and regulation is the driving force behind BEE. A key feature of the BEE Act of 2004 is the balanced scorecard, which measures companies’ empowerment progress in four key areas: direct empowerment through the ownership and control of enterprises and assets; management at senior level; human resource development and employment equality, and indirect empowerment through preferential procurement, enterprise development and corporate social investment.

“If they want to do business with any government enterprise or organ of state, then private companies must apply all of the codes. Additionally, they are actively encouraged to apply them in their dealings with other private companies.

“Today, foreign investors are increasingly adopting these principles. Fortune 500 company Old Mutual’s BEE deal, launched in 2005, gave more than half-a-million South Africans an interest in the company and led to a rise in its share price, while Merrill Lynch announced in 2006 that it would sell a stake of up to 15 percent in its South African business to black staff, women investors and a local educational trust.”

There are other interesting developments in the shareholding world: “Private equity is a growing phenomenon and last year saw South Africa’s largest ever deal of this type; with the $4.56m buy-out of the Edcon retailing and department store group by private equity firm Bain Capital.

“The commodities markets have seen lots of activity too. Having won pre-eminence in the global manufacturing sector, the Chinese are now seeking to secure the supply of the raw materials that keep their factories going by buying into mining companies and the like. There’s been substantial FDI here from the Indians and Australians too.

The future of Africa
As a British ex-pat who has made his home in South Africa after 20 years at City giant Allen & Overy, Jonathan Lang, head of Bowman Gilfillan’s Africa Group, is able to take an informed international overview of South Africa’s prospects: “The future of Africa as a whole very much depends on what happens in this country.

“As a firm, we have been advising on projects in places like Nigeria, Kenya, Mozambique, Zambia, Botswana, Tanzania, Angola, Ghana, the Ivory Coast, Togo and Senegal – in fact, all over sub-Saharan Africa. “While Asia is investing in Africa, South African capital is flowing northwards. Standard Bank, for instance, has recently bought a controlling stake in Nigeria’s IBTC Chartered Bank.

“We were advising the government of Botswana on the proposed privatisation of Air Botswana but those plans were scuppered by political machinations. But activity throughout the rest of Africa is growing all the time. Thanks to an overall reduction in the number of conflicts afflicting the continent, there are more economic opportunities now.

“Despite blips like what happened recently in Kenya, there’s more political stability on the continent these days – foreign aid is becoming less relevant while the resources’ boom of the past few years has helped spur FDI and M & A.

“Projects like the rebuilding of the strategic Benguela Railway, connecting the copper belt to Atlantic sea ports will help growth and are attracting large-scale Chinese involvement. The Chinese understand that there’s no point digging a big hole in the ground to extract ore if you’ve no means of easily transporting it to market.

“That’s why they are putting so much money into infrastructure projects. It’s interesting, they bring in their own machinery and labour for all this construction work, and they get the job done fast. There are over expanding enterprises too: “The continent’s true tourism potential is only now being recognised and we can expect a lot of FDI in that area. “Africa still has a long way to go, of course, and a lot of problems to solve. But these are very exciting times and the potential is enormous.”

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India’s tax situation

There is a growing concern in the international business community about the lack of certainty and transparency in the application of income taxes to their business operations in India.

The general impression is that the administration of tax laws in India is often arbitrary and deviates from well-accepted international norms and interpretations. Executives also are concerned about the time- consuming nature of litigation and dispute resolution in the country.

In order to improve the situation, Ernst and Young regularly participates in discussions with the policy-makers in the Indian Ministry of Finance to communicate the concerns of the international business community, says Gaurav Taneja, national tax director and partner of Ernst & Young in India.

The objective of the discussions is to make the authorities aware of several factors, he said, namely that:

* A gap exists between Indian and international income tax practices

* There is an economic cost from the current practices in the form of lost investment and employment opportunities;

* Simpler and clearer tax policies and interpretations and simplification of the dispute resolution process would facilitate an investor-friendly environment, yield more revenues, and reduce administration and compliance costs.

“The ultimate objective is to assist in the development of credible positions which are seen to be in the overall interest of the Indian government and the non-domestic corporate tax- payers,” said Mr. Taneja, whose firm states that it has the largest integrated tax advisory team in India of more than 1,000 dedicated professionals.

Changes to the tax policies were announced on February 29 in the nation’s Budget and incorporated into the Finance Bill, 2008.

However, says Mr Taneja, “the future of India’s tax policies cannot be foreseen based on the provisions of the Finance Bill alone. Over the years, the corporate tax rate has stabilised with the basic corporate tax rate being 30 percent. Perhaps for the first time, the direct tax collections have surpassed those from indirect tax such as excise, the hallmark of any tax-developed regime. Thus, Indian tax policies do need to take into account the changing environment.”

Indian Finance Bill 2008
The Economic Times in India believed that the Indian Finance Minister’s Budget was “crafted with an eye on the upcoming general elections, rather than giving impetus to the growth story.” The news journal noted that there were some “positives” for certain sectors such as auto and education, but was “rather disappointing” for information technology and banking.

Ernst & Young’s Mr. Taneja, meanwhile, pointed out some of the new taxation issues that are proposed in the Finance Bill 2008 as announced during the Budget.

For example, there has been no change on the corporate tax rate, but one of the most significant proposed changes has been in the manner of computing the book profits for the “minimum alternative tax” levy (MAT).

Presently under the MAT provisions, if the tax payable on total income computed under the normal provisions of the Income Tax Act 1961 (Act) is less than 10 percent of the book profits of the company, then MAT is levied at 11.33 percent on such book profits. (Book profits are the net profits shown in a profit and loss account prepared as per the Companies Act, 1956 as increased or reduced by certain adjustments provided for in the Act.)

However, says Mr. Taneja, the Finance Bill proposes to add back any deferred taxes and provisions to arrive at the adjust book profits. “Moreover, this amendment is proposed to be retrospective from April 1, 2001,” Mr. Taneja added. “By doing so, the Bill has sought to overturn a few judicial decisions and may lead to reopening of tax cases in several instances.”

However, the Finance Bill gives some respite from dividend distribution tax (DDT), says Mr. Taneja. Shareholders have been exempt from paying tax on dividends paid by Indian resident companies, but the companies have had to pay a “dividend distribution tax” of 16.99 percent. “This has lead to a cascading impact in the case of multi-tier group entities,” says Mr. Taneja. “The effective tax burden is high since DDT is a sunk cost and is not allowed as a deduction while computing taxable business profits.”

The Finance Bill provides some respite by proposing that the amounts of dividend paid by an Indian resident company (provided it is not a subsidiary of any other company) will be reduced by the amount of dividend received by it from its Indian subsidiary in the same financial year. This provision, however, does not benefit a subsidiary in India of a foreign company or more than a two-tiered company structure.

Also in the Finance Bill are certain proposed amendments regarding administrative and procedural provisions which may give the tax authorities further leeway on the issue of notices at the summary (initial) assessment level and the initiation of penal proceedings without giving any reasons. “One proposal which has come in for much criticism is that where a taxpayer has appeared in any proceeding or cooperated in any inquiry relating to an assessment, it shall be “deemed” that the notice from the tax department was duly serviced on him and was not invalid,” said Mr. Taneja. “In other words, he cannot cooperate without prejudice to the right to object subsequently as regards the invalid status of the tax notice.

I.T. industry taxation
Meanwhile, the Budget proposals were not favourable to the I.T. industry, according to Mr. Taneja. Under the present taxation scheme, the I.T. sector operating through undertakings set up under various government schemes such as the Software Technology Park, Electronic Hardware Technology Park Schemes –enjoy a complete direct tax exemption or tax holiday on earned export profits. Such undertakings are also eligible for certain indirect tax benefits such as exemption from payment of customs duty on imports. However, while the indirect tax benefits are slated to continue for companies operating out of such undertakings -. the tax holiday has a sunset clause of March 31, 2009 when it would be due to expire. Perhaps owing to India’s World Trade Organization commitment, this tax holiday period has not been extended in the 2008 Budget, even though the depreciating dollar against the rupee has hit hard the IT exporters.

“The Budget proposals have also been largely unfavourable to the IT Industry on the indirect tax front as well,” said Mr. Taneja. The excise duty on packaged computer software has increased from 8 percent to 12 percent. There is also a proposal to withdraw the service tax protection available to the IT industry by bringing ‘information technology software services’ within the service tax net (taxable at 12.36 percent). “This proposal may actually be beneficial to exporters who will now be able to claim a refund of service tax/excise duty paid on input services/inputs,” he added.

There could have been a more focused set of incentives provided to the IT industry targeted at the continued growth of the IT sector, Mr Taneja adds. “In our view, the Budget could have provided an extension of the tax holiday benefits for at least one year for the smaller players if not for everyone in the industry,” he said.

News reports claim that India may face stiff competition from other countries such as Vietnam for the “Business Process Outsourcing (BPO)” sector which sets up outsourcing companies in nations which offer tax holidays, free space, and reimbursement for salaries and training costs.

However, it is too early to say how the impending sunset clause on India’s tax holiday will affect the growth in India’s BPO sector, says Mr. Taneja.

“Over the years, India has transformed from being a pure outsourcing destination to an innovation or knowledge hub,” he said. “Unlike BPO which is regarded as procedure driven, Knowledge Process Outsourcing (KPO) is more knowledge-driven. Nasscom, an IT industry association, estimates that this sector is poised for a 45 percent per annum growth till 2010 and may touch $17bn by that date. According to Nasscom, engineering, design, biotech and pharmaceuticals are some key areas in the KPO sector. Thus, while it may be possible that other countries may attract investments into BPO operations, by reinventing the wheel India appears to be still capable of attracting investments.” It is also interesting that some large Indian resident companies are migrating their low-value operations to cheaper jurisdictions, Mr Taneja added.

Offshore jurisdictions
Meanwhile, prior to the Budget, there was talk of India’s finance minister introducing anti abuse provisions in the Finance Bill, primarily to take care of treaty abuse, especially as regards the tax treaty with Mauritius,

In the recent past, the practice of routing investments into India through jurisdictions like Mauritius and Cyprus, which contain favourable capital gains tax clause in the treaties, has been a much debated topic,” said Mr Taneja. “In these cases, the sale of shares of Indian companies do not attract capital gains tax in India. Further Mauritius and Cyprus also do not levy any tax on such capital gains.”

However, the Finance Bill, 2008, has not introduced any unilateral amendment which could impact foreign investments. “Fortunately, there has been no knee jerk reaction,” said Mr Taneja. “While interpretation of tax treaties may continue to result in litigation at the lower judicial levels, by and large, India is committed to honouring its treaty commitments.”

Media reports have highlighted efforts at renegotiation of these tax treaties – those with Mauritius and Cyprus, but the outcome of such negotiation is still unclear, as renegotiation is a bilateral act based on consensus, Mr. Taneja said. “The Indian Government may completely want to do away with the favourable capital gains tax clause in these tax treaties similar to the recently amended UAE tax treaty. Alternatively, they may want to introduce specific Limitation of Benefits clause to avoid misuse of tax treaties similar to the one introduced in the Singapore tax treaty,” he said.

Permanent establishments
On another matter, Mr. Taneja has concerns about the treatment of “permanent establishments (PE)” under Indian law. “Despite various judicial precedents, there is a lack of clarity and consistency at the tax assessment stage, especially by lower level tax officers, as regards creation of a PE in India upon deputation of expatriate employees, limited presence in India such as through a representative office, or performance of activities in India by agents,” said Mr. Taneja. “The attribution of appropriate profits to PE of the foreign enterprise in India has also suffered arbitrariness.”

Although, domestic tax laws (Rule 10) provide some guidance for the revenue authorities, these may not be objectively applicable in all situations where the PE would have performed limited role in the over-all business transaction, he said. Owing to the aggressive stand of the tax authorities, especially at the lower levels, it has now become very imperative for MNEs operating in India to review their existing business models to determine the extent of PE risk that they face and the risk associated with the subsequent income attribution to such PE by the tax office, he said.

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