India: How to Navigate the Equipment Finance Marketplace
Executive Summary
India, with the world's second-largest population (1.15 billion people) and fifth-biggest economy (at US$2.99 trillion purchase power parity), represents one of the largest opportunities in the world for manufacturers, financial institutions and services companies. However, the challenges are large for companies considering an entrance into the Indian equipment financing market.
Although equipment financing has been available in India for many years, financing volumes and penetration rates are low for a market of this size. This is due to a high purchase propensity among Indian businesses, the preponderance of banks competing for the financing business of larger companies, and the existence of a pervasive "underground" financing system that provides off-the-books financing to a large number of small and medium-sized businesses.
Challenges to new market entrants include high paid-up capital requirements (as much as $50 million, in some cases), limited availability of westernstyle credit information, low acceptance of operating leases (with a resultant small used equipment market), and a dividend distribution tax (DDT) that makes profit repatriation expensive. India boasts a large and well-educated work force, but there are limited numbers of people with equipment financing experience. Salaries have escalated dramatically in recent years, and experienced financing professionals in the larger cities in India are expensive to hire.
India's tax system is one of the most complex in the world. In addition to withholding tax and the DDT, equipment financing firms must contend with VAT, the Central Sales Tax, a services tax on certain types of assets, a cross border lease tax, local taxes, and a variety of other taxes that vary from state to state and year to year. There is not a central repository of tax information in India, so companies are on their own to ensure that they comply with payment of all taxes - and government enforcement of compliance is strict.
To be sure, there are many western equipment financing firms that have been successful in the Indian equipment financing market for several years, including some that have been in India since the 1990s. But, given the relatively low acceptance of equipment financing services in India, the high degree of competition, the high paid up capital requirements, the low availability of experienced equipment financing personnel and the extremely complex tax system, India is not a country for the "build it and they will come" approach. Equipment financing firms should follow their vendor partners into India. Those without pre-existing client relationships there, however, should consider a wait-and-see approach before thinking about entering this market.
Table of Contents:
- 6 Introduction
- 7 Establishing leasing and financing operations outside the US
- 8 Key differences
- 8 Regulatory guidance
- 9 Risk management
- 9 Core Market Research
- 9 Equipment leasing in Brazil
- 10 Market size
- 11 Lease taxation
- 13 Lease accounting
- 14 Leasing associations
- 14 Establishing a Leasing Company in India
- 14 Procedures and time required
- 16 Partnership considerations
- 17 Capital Requirements
- 17 Funding and currency considerations
- 17 Staffing
- 18 Systems and service providers
- 18 Geographical considerations
- 19 Risk Considerations
- 19 Market entry risk
- 20 Operational risk
- 23 Financial risk
- 25 Exit strategy risk
- 25 Conclusion
- 26 Case Studies
- 31 Appendix One - Accounting Standard 19
- 43 Appendix Two - Reserve Bank of India NBFC Application
