Indian IT firms win more M&A freedom

India's new budget is good news for its growing software sector

By Staff and wire reports

BOMBAY, India -- Under new budget rules, India's booming high-tech sector has won more freedom for offshore mergers and acquisitions.

Finance Minister Yashwant Sinha said Indian companies could use the money raised through American or Global Depositary Receipt (ADR/GDR) offerings for overseas investments, compared to just half the amount permitted earlier.

The relaxation in foreign investment now allows Indian firms unable to grow fast enough on their own to merge or acquire their way to a more competitive size.

Indian firms that have ADRs/GDRs may also acquire shares in foreign firms up to a limit of $100 million or 10 times their annual export revenue, whichever is higher, Sinha said.

The finance minister also said stakes exceeding 51 percent in widely held firms operating in free trade and export zones could now change hands without depriving the company of tax benefits.

Encouraging healthy M&A activity

Companies in such zones are not taxed but have so far been subject to ownership restrictions to avoid the misuse of tax breaks by tax dodgers. The restrictions, though, have discouraged even healthy merger and acquisition activity, according to industry leaders.

QUOTE "This budget will increase the competitiveness of the Indian industry." - T.V. Mohandas Pai , Infosys

"Maintaining the tax exemption even if 51 percent ownership changes hands encourages healthy M&A activity in the knowledge-based sector," says B. Ramalinga Raju, chairman of Satyam Computer Services, India's fourth-largest software exporter.

India's software services exports are expected to exceed $6 billion this year, up more than 50 percent from last year. About 60 percent of total exports are slated for the U.S. market.

The chief financial officer at Infosys, T.V. Mohandas Pai told India's Economic Times "Most requests of the software industry have been met. This budget will increase the competitiveness of the Indian industry."

$50 billion in exports by 2008

Suresh Senapaty, corporate executive vice-president finance of Wipro Ltd, said the latest government moves could help "kick start" the acquisition plans of Indian companies.

Wipro and Infosys Technologies, India's second and third-largest software exporters, are two globally respected companies that have overseas listings and are on the lookout for buys.

Infosys' managing director Nandan Nilekani told an IT seminar earlier this month that acquisitions were essential if India is to achieve its target of $50 billion in software exports by 2008.

Morgan Stanley Dean Witter's executive director Crawford Jameison told the same seminar that Indian IT companies were unlikely to grow too much more organically and cross border transactions were likely to pick up soon.

Investment bankers say the budget relaxations will provide Indian firms more latitude to pursue acquisitions.

Infosys has been scouting around since March 1999 and had applied to the government for an approval to pursue larger acquisitions. It has permission to make acquisitions up to $2 billion now, but says it has not found the right target yet.

Under the earlier rules, companies that wanted a higher limit had to approach the government and deal with much red tape.

"Today, even if I target an acquisition, I can actually go and do an ADR and use the full amount for it… and have no (central bank) restrictions. It's wonderful," says Phiroz Vandrevala, executive vice-president of privately-held Tata Consultancy Services (TCS).

TCS is India's largest software company in terms of revenue.

Reuters contributed to this report.

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Wipro Technologies
Infosys Technologies Limited
Tata Consultancy Services

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