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Cos look at India as a positive source of investment: KPMG

Last year India was our fastest growing member firm and we certainly expect that to continue in the future,” is the word coming in from John Veihmeyer, global chairman, KPMG.

But it is not just about how fast India is growing, he says. For KPMG, it is about India’s contribution to the rest of the network in terms of resources, thought leadership and number of things that are helping it be a major source of innovation and accelerating growth across the entire KPMG world.

According to him, companies all over the world look at India as an absolute positive source of investment.

Below is the verbatim transcript of John Veihmeyer’s interview with Shereen Bhan on CNBC-TV18.

Q: You have decided to bring the global board of KPMG and your global council down to India. Is the India story as exciting as it is made out to be?

A: India is a really important market for us and I really appreciate you taking the time to have me on today. It is a very fast growing region of our KPMG world. In fact, last year India was our fastest growing member firm and we certainly expect that to continue in the future. But it is not just how fast India is growing. Part of the story for us at KPMG is what our firm in India is contributing to the rest of the network in terms of resources, thought leadership and number of things that are helping it be a major source of innovation and accelerating growth across the entire KPMG world.

Q: I will talk to you about KPMG’s plan for India in just a bit, but let me ask you about what this government is doing in terms of the reform initiative. We have just had the Union Budget being presented. The slogan is “Make In India”, “Invest in India”. In your conversations with global business leaders of this point in time, how strong is the commitment to India? There has been a lot of talk about foreign direct investment, the government has liberalised sectors like defence further for foreign direct investment (FDI). Do you believe that we are likely to see big ticket FDI come into sectors like defence?

A: The optimism about India is growing outside of India. I was in Washington when Mr Modi came for his official visit just before the end of the year. There was a fairly broad cross section of business leaders there at that meeting and since that time, I have had a number of conversations with a number of CEOs of leading multinationals all over the world.

The new leadership and the new government in India has created tremendous amount of optimism about whether or not the really difficult issues and the reforms that need to be undertaken in India are going to be approached in a very systematic way. So, we are at a point now where there is a lot that remains to be done and therefore it remains to be seen whether or not all these reforms come to fruition. But, I sense in my conversations with other executives that there is a very changed mood about India outside of India and a growing sense of confidence about whether it is the ease of doing business and some of those other reforms that you referred to in specific industries, are absolutely going to take hold. And companies all over the world are looking at India as an absolute positive source of investment.

Q: Is that the reason why you decided to bring the KPMG global board as well as you global executive council to India?

A: It is very important. Our council is made up of senior partners of our member firms across all of our 140 member firms around the world. And it is very important that our leadership in countries all over the world understand the India story and there is no better way to convey that than to get them all here, hear firsthand. We are going to hear from a number of government officials, we are going to meet with clients and hear from our leadership here in our local practice about what those opportunities for investment are.

So, what we will end with at the end of this week is close to a hundred ambassadors within KPMG going back all over the world and when they meet with clients in their home countries, talk to them about the opportunities that India presents for the entire world. So, it is a great opportunity for the companies that we work with all over the world. To be better informed about the opportunity here and it is also a great opportunity for our people to see firsthand what is happening.

Q: So what worries you about global growth at this point in time? What would be the big downside risk that you are focused on?

A: It was interesting. I was in a meeting with a relatively small group of CEOs from all over the world not that long ago. And, when we opened the meeting by saying, “What is your number one concern?” There was a very unanimous answer to that and it focused on geopolitical risks around the world at the moment. And, while that may seem obvious at this point, they went back and looked at the answer to that question, the previous three years that this meeting was held and geopolitical risk was not in the top-10 risks identified in those previous three years. So, you can see how that has shifted and how that has changed recently. Some of the things that you alluded to whether it is the situation in Ukraine, the radical threat that we are seeing expand in a number of places throughout Europe, a number of places that are causing not just political concern or political risk, but clearly spilling over into having an impact on the economy and the recovery as well. So, geopolitical risk is certainly number one on that list of concerns.

Second, when I talk to CEOs is concern about the regulatory environment and executives understand the need for robust and what we would characterise as smart regulation. There are more and more examples around the world where it does not quite feel like smart regulation and it feels like a regulatory environment that is making it very challenging for companies to grow and expand in a way that I think would have a really positive impact on these societies and these economies in total. So, those are probably the two first answers I would give you.

Q: Speaking of the regulatory environment, we have just had this government say that they are going to defer the general anti-avoidance rule (GAAR) for at least another two years and they would now like to coincide the introduction of GAAR or the role out of GAAR with what the organisation for economic co-operation and development (OECD) decides to do as far as the board for industrial and financial reconstruction (BIFR) rules are concerned. In your experience and in the conversations that you are having with the global leaders at this point of time, how much of an issue is this? And the transition to a GAAR world in that sense or a BIFR world in that sense, what is that going to mean?

A: It is a very significant issue. I think it is very much on the minds of companies all over the world. We are in this very unique moment in time where companies are very much trying to globalise in an environment where regulation is very much country based and that creates a dichotomy which creates significant uncertainties as companies are trying to expand globally. And, part of what KPMG really brings to companies that we work with is trying to bridge that gap. How do you take companies who very globally minded, trying to operate and expand globally and help them succeed in a word where regulation is very much country based? The positive dynamic around some of the BIFR evolutions and the conversations taking place right now is to try and create a more level-playing field and more consistency across countries in some of these areas that have a very significant impact on your ability to trade globally, transfer pricing issues from a tax standpoint, all of those things, they create significant uncertainties for companies trying to take advantage of growth markets all over the world in a very uncertain regulatory environment. So, I am very much supportive of any effort to get as much consistency as we can by getting governments working together to try and develop a common platform and a level playing ground if you will for companies trying to do business cross-border.

Q: Speaking of regulatory risk or tax related risk and that was the number one concern in India over the last 24 months or so or perhaps even a little longer. Since this government has come into office, they have said that, while they have not changed the retrospective law, they have said that will not move towards an era of retrospective taxation. Does that give investors and clients a sense of comfort? Or is that not good enough?

A: No, that is a very important issue. If a company is thinking about investing in India and frankly if a company is located in India in terms of expanding investment, there is nothing that hurts economic expansion more than uncertainty. And, one of the most significant uncertainties that you can create is an environment where companies do not have the confidence that regulations that they operated in and the tax cost that they thought they were going to incur could potentially be changed retro-actively. So, Mr Modi and his leadership team here understand that, they recognize that that kind of uncertainty is a significant inhibitor to companies expanding and locating and operating in India. And it is an uncertainty that it seems to me is very easy to control and eliminate and there is great optimism and confidence for companies looking into India at this point with the signals that Mr Modi has sent; that he understands that and he is not interested in creating further expansion of a retrospective regime around tax policy.

Q: You sit at the US-India Business Council (USIBC) as well and I know that the USIBC has been calling for liberal foreign direct investment (FDI) regime especially in sectors like multi-brand retail, which the government said is off the table, insurance, pending approval from parliament, but they have decided to move now 49 percent. What more is on the unfinished reform agenda that you would like this government to address from a foreign investor point of view?

A: I certainly believe and think most of the members of the USIBC that I sit on that board with would tell you that more we can do to open trade flows and to allow an environment of open trade across border will play a significant role in expanding economic activity within the country and cross-border. When we talked about that, that certainly and anything that contributes to that will be very important. The other specific thing I would say in response to your question is that whole universe of reforms that Mr Modi is talking about in terms of ease of doing business in India.

Q: Manufacturing in India.

A: Broader than manufacturing. Manufacturing is a big piece of it, but in an over-simplification, taking the 40 permits and approvals that maybe required to get a transaction or a new venture started and taking that to the one-stop window where companies understand what the protocols and policies and regulations are going to be, and they believe that they can get businesses up and running, get businesses expanded, get the permits that they need without it taking an exorbitant number of months and multiple approvals and sign-offs that need to take place. So, the reforms that many companies outside of India are looking for are just a continuation of commitment to the ease of doing business reforms that the government is very much understanding and sending very strong signals that they are willing to go after it in an aggressive way at this point.

Q: Given the opportunity for growth in India and given the fact that you have some Indian conglomerates that are looking to expand their presence globally. What is your India team telling you about mergers and acquisition (M&A) and the kind of M&A activity or action that we are likely to see involving India?

A: At KPMG, we have a big practice that supports M&A activity on the part of the companies that we work with, whether that is deal advisory on the front-end or integration assistance after those acquisitions have taken place. And we are seeing tremendous growth in that practice, both in India and frankly around the world right now. It is an expanding M&A environment as we look globally today. And as I meet with my leadership here in India, we believe that is one of our highest growth service areas potentially and we are investing heavily in it. We are expanding our team; we are building even greater resources because we believe that companies here in India need to continue to call on us in a more active way to assist them as they do look more aggressively to take advantage of the inorganic and the acquisition opportunities that exist.

Q: So more outbound M&A is what you anticipate at this point in time or?

A: I think it is both actually. We are seeing a fair amount of outbound, but I think we are going to see inbound as well so we are gearing up and again, this is not on hope and a prayer, we are actually seeing increased activity in the market place today that gives us great confidence as we expand our capabilities and expand our resources in a deal advisory space.

Q: One of the other ambitious reforms that India is going to embark on hopefully on April 1, 2016 is the goods and services tax (GST) and this government has committed itself to a timeline. We do not know what the eventual GST rate is going to be. We understand that the government at this point in time is reworking the revenue neutral rate. But, in your experience, what is the kind of disruption that we should expect at least in the first year as we move towards the GST and what would be the ideal GST rate in your experience?

A: I am not sure I can comment on what the ideal rate would be, but anytime a government tries to move to a different basis of tax, it absolutely creates some disruption and some uncertainty. In this environment, the directional moves around lower tax rates, the introduction of the GST are being viewed positively in terms of creating additional certainty and creating a more sustainable platform for the economy to grow here. So, the way I would look at that is it is impossible to avoid some short-term disruption in an economy when you introduce a new tax regime like that. You have to look at what is the long term vision of the economic environment that you are trying to create and is that short-term pain worth it to put the country on a more sustainable basis going forward? That is the way I would view that today.

Q: Let me talk to you about KPMG’s plans for India. You said that last year, India was your fastest growing market. Is it on course to be the fastest growing market this year as well? And what does that mean in terms of the kind of headcount that you are looking at, I believe between your BPO operations and your main operations you are about 13,000 people in India. What more can we expect in terms of hiring this year?

A: It is a god story all the way around. When the India practice achieves its goal in its plan for this year, it will again be our fastest growing practice. So, I do not expect that to have just been a dynamic we saw last year and not just a dynamic we will see this year, I actually expect that to continue for several years. Since that is our outlook for India, it creates an environment where we are highly motivated to continue to invest aggressively as a firm into our practice here in India. And that manifests itself both in terms of headcount, so our BPO practice that you referred to, we expect to at least double that over the next three years in terms of number of employees working in that BPO centre and in terms of our primary practice hear in India, again we expect to see significant growth probably a 50 percent increase headcount over that same three year period and again it is not just growth, it is a service for the local market place here in India. We have got a number of projects that we are working on with companies now where our professionals in India are working in the Middle-East in liaison with our practices there. We have great expertise and great talent here in India that we are trying to leverage not just for the benefit of our firm here in India but to make sure that our entire firm globally takes advantage of the kind of skills and talent that we have here sitting in India to really leverage those benefits across the network.

Q: But what about M&A possibilities for KPMG in India? I know that you looking at data analytics as an area to beef up your skills and your expertise. We have got a lot of startups in this space who are doing quite well. Would that be area of opportunity that you would look at, at all in India?

A: Absolutely, we have got a very small set of service areas that we believe are going to crate incremental growth opportunities for KPMG in the next three-five years. We are investing heavily in those areas both organically to grow those areas. But, acquisition activity is becoming a bigger and bigger part of our story as well. We have made nine acquisitions this calendar year, globally some very significant ones and we expect that to continue.

Q: What is the war chest for acquisitions, for M&A this year for you?

A: It is significant. Just in the US alone for example, we have been very clear that we are in the middle of a 3-year trajectory where we expect to spend a billion USD in acquisitions over that three year period and we are well down the path of achieving that goal. And India again is a great source of talent and potential companies that would fit very well whether we are talking about in the digital space or cyber capabilities or the data analytic skills that you referenced.

Q: Anything identified?

A: As you would expect, I can tell by the way you grinned when you asked that question, you know I cannot answer that.

Q: Are we likely to hear an announcement this year or in the next couple of months to be precise?

A: We will see announcements this year and continuing into the future of acquisitions that we are making in this region and specifically in India.


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