The passage back to India

It was seen as a land of opportunity, yet Channel Islands businesses have struggled to make inroads into India – will the abolition of certain tax treaties open the door once more?

Back in 2009, BL magazine turned its attention towards India. We weren’t alone – Hollywood was busy bestowing Oscars upon Mumbai morality tale Slumdog Millionaire, while those who’d rather be staring at the ticker tape than the cinema screen while munching their popcorn were equally transfixed.

The Asia Development Bank was saying that, thanks to consumer spending and changes to monetary policy, India’s economy was set to grow 8.5 per cent that year; entrepreneurship was thriving among India’s highly educated middle class; while, according to Forbes, India’s 40 richest people were worth a spicy $351bn. 

But if India’s economy had all the hallmarks of a Hollywood blockbuster, the UK was fast becoming Betamax. Alongside other struggling western economies, it was suddenly learning what it meant to slum it in a new-found stagnation. 

So, you can hardly blame many in the Channel Islands’ financial sphere for hoping India’s success would rub off on them – would wealthy Indians turn to Channel Island holding companies to access the world’s stock markets, or perhaps use the islands to safeguard their private assets? Or would flows of foreign investment into India come via island shores?

Eight years after our first examination of India, it seems the economic opportunity has been difficult to capitalise on for players from the Channel Islands. 

“A number of Channel Islands businesses were looking at it and going in for one or two years,” says Neel Sahai, Director at Minerva Trust & Corporate Services. “Expectations got raised too high and lots of people were disappointed by the level or speed of returns. It required firms to be in the region regularly to build their profile and make local advisers more confident to recommend them. But for firms that don’t have an anchor relationship in India, the decision to invest is a hard one. It’s put a lot of people off.”

Sahai has seen all this before. Minerva is one Channel Island-based company that’s been working with Indian clients for 35 years, and it knows the importance of patience and long-term relationships when dealing with the region.

Sahai also understands the scale of competition in India from Mauritius and Singapore, two international finance centres that have earned that trust there already. For the rest, he reckons sentiment towards India “fluctuates massively between being overhyped one year and underwhelming –almost pessimistic – the next”. 

Playing the long game

It is certainly telling that the Channel Islands have since seemed far quieter about the Indian opportunity than those in, say, the Far East or Middle East. Back in 2009, Jersey Finance was busy setting up permanent representation in Mumbai and New Delhi – doing a “good job of raising the profile of Jersey”, according to Sahai – and partnering with the UK government to promote links.

But now? Its online Links with India brochure hasn’t been updated since 2013. Meanwhile, Guernsey Finance replied to a BL enquiry by stating that India wasn’t one of its target markets and that, as it simply couldn’t be everywhere, it just wasn’t a focus. 

Richard Nunn, Head of Business Development at Jersey Finance, says it’s always taken a long-term position. “We’ve seen a return on the investment we’ve made in India, but as it’s very much a market built on long-term relationships, returns have been slower than in other markets where we’re active,” he says. “A lot of the focus in India is behind the scenes, building relationships with key gatekeepers.” 

As regards more concrete results, Nunn concedes there has been a greater flow of high-value business coming from the Gulf and Far East, where “there are perhaps fewer barriers to entry”.

Back in 2009, we spoke to Mehul Kotedia, CEO of Mekad, one company that saw potential in India. Since then, Mekad has opted not to attempt to scale the Indian peak.

“Our company was very small in terms of the advisory side, and with the legislation changing over the years on both sides, it wasn’t cost-effective to be nurturing those clients when we had opportunities to seek easier wins elsewhere,” says Kotedia. “We still think there are opportunities, but as a small business we need to be realistic about where we stretch ourselves. And it makes no sense to add anything when other areas are proving lucrative.”

Sahai says only two or three Channel Island companies have a presence on the ground in India, aside from the major banks. Minerva may well be the exception that proves the rule – having worked with India for 35 years, the investment of time and money makes good business sense. It’s profitable. “For us, it’s turned out as we’d have hoped,” says Sahai. 

The country’s performance is still staggering. India is the fastest growing large economy in the world. High-net-worth wealth is increasingly vast and its population is still expanding, with 65 per cent under 35 years old. Its middle class is on course to be the world’s largest by 2030, and spending is set to rise from around US$950bn in 2010 to $1.7 trillion in 2020. 

“We believe strongly in India,” says Simon Finch, Investment Manager at Ashburton Investments. His Jersey team manages Ashburton’s India Equity Opportunities Fund, which has more than $100 million of assets under management. “First, it’s differentiating itself from the typical commodity-sensitive emerging markets such as China, Brazil and Russia, through strong corporate governance, a reformist government and investment in its domestic consumption. 

“And there are significant opportunities for investors to tap into world-class companies and internationally recognised brands, such as Tata Motors and ICICI, or technology firms, as India overtakes the US as the second largest smartphone market globally.” 

Growth market

Crucially, the Indian government has proven willing to massively liberalise investment. Campaigns such as Make In India and Invest India have been successful in building bridges, and India has become one of the top destinations for foreign direct investment globally. 

“With its government opening up to foreign direct investment and investing significantly in infrastructure projects across the nation, India will continue to grow much faster than China in the years to come,” says Finch. “Its progressive liberalisation of its foreign investment policy in recent years has stimulated inflows and created unprecedented opportunities for India to achieve accelerated economic growth.”

In the private client realm, things haven’t been quite as simple – exchange controls remain in place and the trust industry remains young, largely alien and not yet commercially viable. 

“Families are using trusts but still tend to use a local accountant or family and friends they genuinely trust, over professional firms at this stage,” says Sahai. “The market needs to develop and that may take time. We’re keeping a close eye on it. But it’s an opportunity for Channel Island firms. Jersey and Guernsey are seen as world leaders in estate management.”

Sahai is convinced the islands offer plenty of appeal. The flexibility of Jersey Private Funds is proving attractive to clients, many of whom are impressed that Jersey has attracted the world’s largest fund, Japan’s $100bn SoftBank Vision Fund. 

“That had them listening,” says Sahai. “They’re now saying: ‘Hang on, if Jersey is attracting SoftBank, and it has a private fund regime, I’m willing to find out more about it’.” 

There’s been one other critical change. Last year, India announced it was reviewing its double-tax treaties with Mauritius and Singapore. The capital gains tax exemptions that had previously been so attractive have, since April, begun to be phased out and will be gone altogether by 2019. At which point, the Channel Islands will be on an equal footing when it comes to persuading advisers which structures to use. 

In many ways, the islands would be at an advantage. Even if their provision is likely to be more expensive, if they’re attracting investment in from the West, for example, certain backers would be more comfortable using a better regulated, arguably more professional Channel Island structure as the pooling vehicle. 

Sahai highlights one “really nice structure” that Minerva set up last year, from an Indian technology company attracting private equity investment, work that would previously have gone via Minerva’s Mauritius office. “The client said: ‘No, the treaties are changing, so it’s now about what jurisdiction we and our private equity investors feel comfortable with. We want Jersey’.” 

Just like India’s booming Bollywood market, it seems that the Channel Islands’ star is rising, and it may well land more roles in the showstopping opportunities that the country offers. 

Perhaps now, thanks to India’s new-found appetite for international business, the islands would be right to make a song and dance about it.