Global Sourcing: Destination The World Webinar Series

Global Sourcing:Destination India

April 26, 2006Sabyasachi Satyaprasad, neoITBijesh Thakker, Thakker & ThakkerMichael Mesnik, Baker & McKenzie LLP

Baker & McKenzie International is a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

Global Sourcing : Destination India

©2006 Baker & McKenzie 2

Global Sourcing: Destination The World Webinar Series

• Global Sourcing: Destination Vietnam, May 31st

• Global Sourcing: Destination Australia, June 21stRegistration:Julie.E.LaEace@bakernet.com

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Agenda

I Business Environment II Legal and Tax

Environment

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About neoITS

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A consulting firm singularly focused on helpingGlobal 2000 improve operations and

grow their business by capitalizing on services globalization

• Deep globalization experience and expertise• Recognized industry thought-leaders• Track record of advising on successful client transformation• Trusted advisors to C-level executives and management

© 2006 neoITAll rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 4

Knowledge& Research

Operations Improvement

Expansion& Growth

RiskManagement

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Why India• Human Resources

– High quality labor pool– Expertise in wide range of areas– Availability of labor; scalability– Cost savings– English language proficiency

• Location – Low cost– Easy accessibility– Centers of Excellence emerging– Multiple cosmopolitan cities

• Government– Business-friendly policies – Stable political climate– IP laws in accordance with WTO standards

• Service/Process Maturity– Heritage– High process/quality certifications– Global reach, scale & scope of homegrown

service providers

• Infrastructure

• Regulation and IP© 2006 neoIT

All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 5

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The Road to Success

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Indian ITO & BPO Services Exports (1990-2005)

Figures in brackets indicate share of India in Total Offshore Market Spending

• MNCs like GE who had been operating in the country for years saw the potential for IT Services

• Emergence of pure Indian service providers – with focus on exports (Infosys), with focus on domestic market (TCS)

•The Beginning

• Captive centers & JV’s established by other MNCs such as Nortel, D&B

• Wipro, Infosys, TCS & HCL began to grow and emerge as dominant offshore services suppliers

• Significant revenues from staff augmentation

• Leverages strong support by Govt.

•Evolution

• Y2K crisis combined with internet boom created IT resource shortage in the US

• Began to develop processes and best practices designed for offshore transition and operations

• Converting legacy systems into simple client-server based systems

• Emergence of offshore product development services

•Y2K

(85%) (80%)

(75%)

(70%)

0

5

10

15

20

25

1990 1995 2000 2005© 2006 neoIT

All rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 6

• Leaders rode the offshoring wave to create billion dollar companies

• Era of competing with global majors• Started focus on brand building• Buzz over moving up the value chain -

consulting subsidiaries, product R&D• Over 100 Indian Suppliers achieved SEI-

CMM Level 5 certification

•Billion $ Players

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Emergence of Centers of Excellence & Tier 2 cities in India

Pune

Kochi

Kolkata

Thiruvananthapuram

Mysore

Chandigarh

Bhubaneswar

Coimbatore

Jaipur

IndoreAhmedabad

Vishakhapatnam

BangaloreChennai

GurgaonNoida

Mumbai

Hyderabad

Mature centersFollowersOther emerging centers

© 2006 neoITAll rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 7

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Global 2000 Leveraging India

Financial Services

Insurance

Manufacturing

IT/Telecom

Retail

Pharmaceuticals

© 2006 neoITAll rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 8

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Rich Supply Base of Homegrown and MNC Vendors

Source: neoIT Note: Not a comprehensive listing

60%+% growth of PE investments in the industry

70-75%

CMM5 certifications as a % of global

30%+% revenue growth rate of Top 5 service providers

10+No. of service providers with global acquisitions

80+~ Share of revenues from repeat clients for Tier 1 service providers

25-35Quarterly new client additions in 2005 for any of Tier 1 service providers

100+No. of service providers with CMM5 certification

8No. of service providers with more than 5000 employees

5No. of $1bn+ service providers

2000+No. of offshore outsourcing focused IT service providers

Leaders

Challengers

Laggards

• ~15% of global resources of MNC service providers will be based out of India by 2007 • India presence helping MNCs to manage cost structures better, enhance competitiveness in deals, address new

markets and customer segments, reduce price points to deliver maximum value to clients and seamlessly leverage true global delivery model

© 2006 neoITAll rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 9

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Client Concerns

IP protection Security Increasing salary levels Specialized labor pool Regulatory issues Transition issues Change management

© 2006 neoITAll rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 10

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Reward

Risk

Function

Culture/Fit

Portfolio Allocation (in %)

3rd Party

Biz Objectives

A Portfolio Approach

Complexity

India Brazil Singapore RussiaPhilippines Canada Costa Rica

60

3

2

10

55

15

Investment ROI Strategic ROI

Captive3rd Party

© 2006 neoITAll rights reserved. Reproduction of this document or any portion thereof without prior written consent is prohibited 11

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www.neoIT.com

Sabyasachi SatyaprasadResearch Director

sabya@neoIT.com

91 80 2361 0371

Contact Information

neoIT Global Headquarters2603 Camino Ramon, 2nd FloorSan Ramon, CA  94583 USA

Bangalore, India210, Bellary Road Upper Palace OrchardsBangalore - 560 080 India

Manila, Philippines

8/F Pacific Star BuildingSenator Gil Puyat Ave. cor Makati Ave.Makati City, Metro Manila, 1200Philippines

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Agenda

I Business Environment II Legal and Tax

Environment

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India – Prepare Yourself

Understand local legal landscape:• Foreign Investment• Foreign Exchange• Intellectual Property • Tax Laws• Labor Laws• Data Protection• Dispute Resolution

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Indian Legal System• Well-developed legal system• Based on English common law• Recently enacted laws based on

commitments under international treaties

• Almost all laws written in English• Higher courts conduct

proceedings in English• Judicial remedy fair, but delayed• Equal legal protection to foreign

and Indian investors

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Recent A.T.Kearney Report

• India-best offshore location

• China ranks second• Gap between India and

China lesser due to improvement in China’s infrastructure

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Way Forward

• Captive operation– 100% subsidiary– Branch

• Independent provider• Build/operate/transfer (“BOT”)

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Greater Control?

• “Captive” enterprise• Select managers and

employees• Confidentiality and

assignment of rights’ agreements

• Impose security requirements

• Ongoing monitoring

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Foreign Investment• No prior Government permissions

required except for:– Investment in certain industrial

sectors– Investment in excess of certain

sectoral caps– Purchase of existing shares– Investor has existing venture or

collaboration in India (Press Note 1)• IT and IT enabled services (“ITeS”)

are high priority industry and 100% ownership is automatic

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Foreign Exchange – Regulated

• Monitored by Reserve Bank of India (“RBI”)

• Capital account inflows/outflows - generally remain regulated:– Valuation requirement for

purchase/sale of shares– Foreign currency loans– But dividends freely remittable

• Current account inflows/outflows - generally liberalized

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Intellectual Property• Based on common law• Protection provided under specific

statutes for each Intellectual Property Rights (“IPR”) including trademarks, servicemarks, copyrights, patents and designs

• Statutory remedy for violation of registered trademarks and copyrights

• Passing off action under Law of Torts for unregistered trademarks and copyrights

• Patent law recently amended to comply with WTO requirements

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Expectations … and Realities

Effective enforcement?

Modern IP laws?

ChinaIndiaUSACountry Question

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• Recognized in 1984 by the Copyright (Amendment) Act, 1983• Enforcement options:

– Needed improvement• WIPO Internet

Treaties• Optical Media

Law• Cable TV piracy• Criminal

enforcement

– USTR 2005 Report• Priority Watch

List• Rampant piracy

– USD500M in 2004

– Criminal• Fines• Imprisonment

– Administrative• Seizures• Fines

– Civil• Injunctions• Damages

Example: Copyright in Software

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And Taxes...• Wide powers to revenue department• New Transfer Pricing norms• Increased focus on MNCs• Tax rate for foreign companies -

41.8%• Withholding Tax:

– Royalties – 10.45% under domestic law

– No withholding tax on dividends• VAT under implementation• Service tax @ 12.24% introduced for

services provided by call centers and medical transcription centers

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...But Attractive Incentives• Software Technology Parks (“STPs”) Scheme

and Special Economic Zones (“SEZ”) Act offer various incentives

• STP Scheme - benefits– 100% FDI– Single window clearance– Duty free goods – Certain export benefits– Tax exemption on export profits– Refund of central sales tax

• Sunset clause for tax incentive – valid till 2009• “Reconstruction or reconstitution of business in

existence”– potential loss of benefits, e.g. some BOT

structures

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More Incentives • SEZ Act

– New SEZ Act, 2005 notified– Incentives:

• Single window clearance• 15 years’ tax incentive in blocks of five

years each, subject to certain conditions• No limit on DTA sales• Offshore Banking Unit - cheaper finance• No service tax • Fewer restrictions for availing External

Commercial Borrowings– Over 117 SEZs approved

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Labor and Employment• Pro-labor – Socialistic past• Labor legislations enacted by Central and State Governments• Significant Central legislation - Industrial Disputes Act, 1947

Significant State legislation - Shops and Establishments Act• ‘employment at will’ principle recognized

– but difficult to remove blue-collar employees• Strong trade unions in traditional industries• Non-compete restrictions may not be enforceable • Dual employment or contract labor - important risk faced in India

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Industrial Disputes Act, 1947 (“ID Act”)

• Protects “workman,” not– Administrators or

managers– Supervisors earning

more than ~ USD 36 per month

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Shops & Establishments Acts (“SEA”)

• Shops & Establishments Acts protect all employees– Workman & non-workman

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Issues Regulated

• Working hours• Overtime

• Leave• Notice for dismissal, etc.

• Settlement of disputes• Regulation of service

conditions• Retrenchment

(termination)• Change in conditions of

service• Transfer• Closure and lay-offs• Strikes and lock-outs, etc.

Regulates

All employees (Workmen & non-workmen)

Workmen State Legislation (SEA)Central Legislation (ID Act)Particulars

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Termination

• Workman– Proof of redundancy– Severance pay (15 days’

pay per year of service)– One months’ notice

• Non-workman– Employment contract– Applicable SEA

• If contested, long drawn and pro-labor judiciary

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And if that’s too much …• Third party service

provider– Solid contract?– Co-employment?– Non-competes?– Ownership rights?– Data protection?– Enforcement mechanism?– Strong relationship

management?

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Solid Contract• Well-defined scope of services• Service level commitments

and measurements• Continuous improvement

obligations• Change control procedures• Organizational and technical

security obligations• Reporting, monitoring and

audit rights• Exit rights and obligations

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Co-Employment

• Risk: employee deemed co-employed by Indian employer and its foreign client

• Judicial tests: rights to (i) control discharge of work, (ii) hire and fire and/or (iii) fix place of performance

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Post-Termination Non-Compete

• Customer/provider– Enforceable in theory– Preliminary injunction?

• Employer/employee– Generally unenforceable– Freedom to work– Indemnity agreement?

• Emerging labor churn

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Data Protection• No separate legislation• Right to privacy under Indian

Constitution • Amendments proposed to

Information Technology Act, 2002– Obligation on body corporate

handling sensitive personal data to implement safeguards to protect sensitive information

– Prohibition on intermediary to disclose subscriber information without prior consent

• Contractual Protections– Employees– Subcontractors

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Ownership Rights

• Customer/provider– “Derivative works” owned

by authoring party– Assignment of rights– Commissioned works

• Employer/employee– “Work-made-for-hire”

recognized– Economic v. moral rights

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Dispute Resolution• Privity of contract principal• Right of third party to sue - in

exceptional cases• Choice of Law – enforceability

of proper law of contract• Choice of Jurisdiction –

subject to court having inherent jurisdiction

• Arbitration law – based on UNCITRAL Model Law

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Enforcement Mechanisms

• Judiciary fair, but generally not prompt

• Arbitration v. litigation?– Preliminary injunctions – No treaty with US on judicial

awards– NY Convention

• Hybrid approach– US master agreement– NDA with local enterprise

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… but Watch Out For …• Determine effect of north – south divide on

your business location• Due diligence and reference checks of

outsourcing partner particularly on non compete issues

• Employment is for life – build in simple exit mechanisms

• Hiring by Indian company not parent• Dual employment risk• Taxation of expatriates• Absence of specific data protection laws

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… but Watch Out For …

• Transfer pricing– Captive enterprise should earn “arm’s length” compensation

• Tax and other exemptions must be identified and applied for immediately upon incorporation

• 80 : 20 Rule – caution in case second hand equipment and machinery are proposed to be used

• Shift of STP unit from one place to another “reconstruction or reconstitution of business in existence” – loss of tax holiday

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Questions?

Michael MensikTel: 1 312 861 8941

mensik@bakernet.com

Sabyasachi Satyaprasad Tel: 91 80 2361 0371 sabya@neoIT.com

B.J. Thakker Tel: 91 22 6630 8000

bjt@ttindia.com