Currency Risk

1. Currency Risk • Indian economy is currently in a rapid growth phase. • GDP for past 3 years > 8% • Wages have increased 15%-plus for skilled workers. • Corporate and personal borrowing up 28% over past 12 months. • Overall demand for goods has increased and surpassed supply. • GDP is US$1,103 billion, 12th largest economy in the world. • In terms of purchasing power parity (PPP), India has the world's 4th largest GDP at US$4.156 trillion. • Increased wealth = consumption & competition increase. • February 2007: Referred to as “Overheating Economy”.

2. Currency Risk • Current inflation comfort zone between 5 and 5.5%. • June 2007, inflation is at 4.8%. Down from 6.9% in January. • Rupee at a current 9 year high vs. U.S. dollar. • Spot rate as of 7/17/2007 = 40.230 rupees per dollar • Cuts in fuel taxes and import duties. • Ban on wheat exports has help soften food prices. • RBI inflation goal is between 4 and 4.5%. • Raised bank reserve ratio to 5.5%. • Raised interest rate ¼% to to 7.75% on April 24, 2007.

3. Currency Risk • Past/Future Outlook • India has had two major financial crises : 1966 and 1991. • Caused by large out of control trade deficits and shrinking foreign exchange reserves. • Solved by a forced devaluation of the rupee. • Rupee appreciation will lead to less exporting, so to avoid another financial crisis, RBI needs to curb spending and borrowing. • Currency Risk Mitigation • Closely watch Indian economy. • Increase the cost of capital. • Hedge risks in the options market with excess capital.

4. Regulatory Risks • In early 1990s alcoholic beverage industry open to foreign investment. • Foreign shareholdings in industry were restricted to a maximum of 74%. • Entry into India was exclusively through the joint venture route. • January 2006 India approved a major rationalization of FDI policy. • Helps avoid multiple layers of approvals required in some activities. • 100 % FDI in manufacture of alcohol under the automatic route is allowed. • Subject to licensing from state governments where the unit will be set up. • Entry into brewery sector through automatic approval route • Under automatic route, approval of the RBI is required. • Government set up the Foreign Investment Implementation Authority (FIIA). • Facilitates quick translation of (FDI) approvals into implementation. • Helps FDI investors obtain necessary approvals. • Sorts out operational issues with various Government agencies to solve problems.

5. Regulatory Risks Continued… • Foreign capital is freely allowed to be repatriated. • Includes capital appreciation, profits, and dividends. • Taxes must be paid before repatriation. • Any company incorporated in India is considered domestic, even if foreign owned. • Domestic corporate tax rate = 33%. • Potential Risks • Lightened regulations may cause potential market saturation in the brewery sector. • Immediate competition with large brewers already present. • United Breweries- 50% market share • SAB Miller- 37% market share • Budweiser and Crown Beers of India- 5% market share goal

6. Regulatory Risks Continued… • Regulatory Risk Mitigation • Focus on brand naming company image. • Register a trade mark to avoid brand duplication. • Current registration is good for 7 years. • Focus on developing in new areas and markets.

7. Labor Risks • National Sample Survey Organization survey • Equal to approximately 42% (of 1.1 billion) of India’s population. • 56% of rural males and 33% of rural females • 57% of urban males and 18% of urban females in the labor force. • 10% in formal economy, 60% self-employed, 30% casual workers. • Current Indian unemployment is at 7.8%. • If unemployment increases, demand for beer decreases. • Labor force is growing at 2.5% annually, employment is growing at only 2.3%. • Approximately 2.5 million employable college graduates emerging every year. • Pressure to transfer agricultural land to higher productivity industry. • Manufacturing has generated jobs for many of the less educated who are squeezed out of agriculture.

8. Labor Risks Continued… • Rigid Labor Laws • Labor market changes have not kept pace with the country's economic liberalization program begun in 1991. • Current Laws: • Any company employing more than 100 workers cannot fire people without government permission. • Labor commissioner in the government has to be notified of every single person working on the night shift. • No worker to work beyond 75 hours of overtime a quarter. • < or = 46.25 hours per week. • Risk Mitigation • Treat workers fairly through fair compensations and treatment. • Clearly understand labor laws to avoid government intervention. • Keep good rapport with involved labor unions.

9. Corruption Risks

10. Corruption Risks Continued… • Corruption is perceived as widespread. • India ranks 88th out of 158 countries in Transparency International's Corruption Perceptions Index for 2005. • Ranked 72 in 2001, 73 in 2002, and 83 in 2003. • India study estimates the monetary value of petty corruption in 11 basic services like education, healthcare, judiciary, police, etc., to be around Rs.21,068 crores in 2005. • Equivalent to $4.7 billion U.S. dollars. • Reasons for widespread corruption: • Lack of transparency and accountability in the system • Lack of an effective corruption reporting mechanisms • Lack of honesty in officials in the Government • Acceptance of bribe as a way of life, custom and culture • Ineffective judiciary • Poor economic policies

11. Corruption Risks Continued… • Mitigation of Corruption Risks • Establish a system of checks and balances for all executives and directors. • Require multiple approvals and signatures for major decisions. • Adhere as closely as possible to the Foreign Corrupt Policies Act of 1977, a U.S. federal law. • Most recently amended in 1998. • Requires any company associated in the U.S. to have an adequate system of internal accounting controls. • Conduct third party audits to ensure sound business practices.

12. Recommendations for Client • Common Types of Business Entities in India • Private Limited Company • Best initial scenario is a 50/50 split of the company with JV partner. • Shareholders’ rights to transfer shares is prohibited. • Can immediately start business after incorporation. • Public Limited Company • Must have at least 7 shareholders. • Must obtain “trading certificate” before business can begin. • In addition to certificate of incorporation. • Must obtain government approval before the hiring of management. • Subsidiary • Composition of the board of directors is controlled by the holding company. • The holding company controls more than one­half of the total voting power in the subsidiary.

13. Recommendations to Client • Formation of a joint venture- Private Limited Company • Companies incorporated in India are treated the same as domestic companies, even if 100% foreign owned. • Many tax exemptions available to the company set up domestically. • Only $2250 is required to form a private company. • Once partner is determined, a Letter of Intent is signed by the parties highlighting the basis of the future joint venture agreement. • Very specific joint venture agreement is signed. • Includes (and numerous other details) • Dispute resolution agreements • Board of directors • Non-compete agreements • Business termination procedures

14. Recommendations to Client • Exit Strategy • Dividends, capital gains, royalties and fees can be repatriated easily with the permission of the Reserve Bank of India. • Can repatriate share after discharging tax and other obligations. • Can also disinvest share either to Indian partner, to another company, or to the public. • Problems do arise when people and businesses try to go around the rules or from inexperience.