All posts by Lilin Chia

News

Why Singapore remains an attractive option for Indian Family Offices

The number of family offices in Singapore has quadrupled from 2016 to 2018: MAS

Credit Suisse estimates there are close to 760 Indians with over $100 million in net worth. A significant proportion makes up the nation’s 16.6 million-strong diaspora. These high-net-worth individuals call International financial hubs like Dubai, Hong Kong, and Singapore home.

Taxation and legislation increasingly undesirable

India has a corporate tax rate of 30% and a reduced rate of 25% for an annual turnover of less than ₹ 250 Crore. This compares to Singapore and Hong Kong who both offer lower tax rates of 17% and 16.5% respectively.

In fact, with additional tax exemption provisions for the first SGD 300,000 of chargeable income, the corporate tax rate in Singapore for HNWIs falls below 17%.

In a recent budget move, India’s finance minister announced that Non-Resident Indians (NRIs) who have stayed in the country for 120 days will be treated as Indian citizens. HNWIs who do not have to pay taxes in any other country will thus have to pay tax on income generated in India.

HNWIs with Indian-born parents and grandparents would also be subject to worldwide tax and reporting obligations in India.

Offshore set-ups increasingly attractive

Well-regulated financial centers such as Singapore and Hong Kong are getting increasingly popular for Indian Family Offices.

In addition to an attractive corporate tax set-up, Singapore also maintains a healthy investment climate, boasts stability, and incentivizes innovation.

For instance, as family offices are generally interested in investing in start-ups, Singapore stimulates entrepreneurship through platforms such as Startup SG, incentives for SMEs, and events such as the MAS-organized annual FinTech Festival.

The nation-state introduced an investment fund innovation with the Variable Capital Company (VCC) to increase its attractiveness as a competitive asset management hub in the APAC region.

VCCs offer many advantages for investment funds, including the option of being set up as either a standalone VCC or as an umbrella VCC with sub-funds.

Tax exemptions under the Enhanced-Tier Fund Exemption (ETF) Scheme and Singapore Resident Fund (SRC) Scheme as per Section 13X of the Income Tax Act have recently been extended to all from of fund vehicles such as VCCs.

Reassessing strategy

The combination of growing restrictive financial climate in the sub-continent and increasing attractiveness of viable overseas options explains the  influx of Indian Family Offices presence in Singapore.

In considering this, family offices must review their values and guiding principles in handling their family structures and assess existing structures at home and abroad.

About GAO

Having a wealth of experience working with Family Offices and HNWs, GAO has effectively guided numerous families through the evaluation and selection of quality financial products and arrangements. GAO Advisors strongly believes in the power of due diligence as the first and best line of defense for families’ assets.

GAO Advisors has also acted as an expert witness in a range of dispute cases, producing investigative reports and testimonies for consideration by the Court. GAO Advisors has a demonstrated track record of providing incisive insights and shedding light on otherwise muddled case information.

Case Studies

Court case offers insights for valuation proceedings

In a court case involving two chemical manufacturers in their ownership of a shared venture, the judgment’s preference for certain valuation methods sets a precedent for future valuation experts to follow.

Background                                                      

In DyStar Global Holdings (Singapore) Pte Ltd v Kiri Industries and others and another suit [2018] 5 SLR 1 (the “Main Judgment”), the SICC ruled that Senda International Capital Ltd (“Senda”) purchase Kiri Industries LTD’s (“Kiri”) shares in their shared venture, DyStar Global Holdings (Singapore) Pte Ltd. The SICC held that Senda has engaged in instances of oppressive conduct against Kiri. Kiri’s shares were valued as of 3 July 2018 (“the valuation date”).

In Kiri Industries Ltd v Senda International Capital Ltd and another [2019] 4 SLR 1 (the “12 March 2019 Judgment”), the court ruled that no minority discount for lack of control (“DLOC”) should be applied to the valuation of Kiri’s shareholding of DyStar.

The most recent proceeding involved the valuation of DyStar and Kiri’s shares in DyStar (“the valuation proceedings”).  Senda and Kiri engaged separate valuation experts to assist in the valuation process.

The experts utilized different approaches to valuation and arrived at different valuations. This divergence was a result of not only the different methodology applied, but also the significance they appointed to particular events. These include a category of occurrences known in the judicial proceedings as “Five Risk Events, and one-off events and transactions affecting DyStar’s valuation.

Judgment and learning points

The methodology used and valuation proposed by the expert appointed by Kiri was preferred to Senda’s. Reviewing their merits proves useful for other valuation experts. 

The valuation date is very important

Only events that occurred before the valuation date and, more interestingly, events occurring after the valuation date that were foreseeable as of the valuation date were to be taken in the valuation proceedings. For instance, an insurance pay-out in May and June 2019 had to be incorporated into DyStar’s valuation as they were foreseeable as at the valuation date.

Interestingly, the closure of a DyStar plant in Ankleshwar, India due to a notice by the state pollution control board before the valuation date did not affect the valuation. This is because it was judged that there was a subsequent notice issued after the valuation date. Hence, as the entirety of notices was not foreseeable before the valuation date, the closure was not included.

Reliance on market data is preferable

Kiri’s valuation experts relied on market data in the form of independent market and broker reports comparable to similar companies in terms of operation, revenue and market share.  This approach was praised by the judges as Senda failed to disclose some of DyStar’s key financial documents for the relevant years. 

They also relied on data from credible, peer-reviewed, and reputable sources, some of which were also used by Senda.

In addition to the valuation produced from the market approach, the expert also presented an alternative figure using the Discounted Cash Flow (DCF) method. Then, these values were aggregated into a single final valuation. This approach was praised for its commitment to accuracy.

Discounts and risk premium should be considered

A discount for the lack of marketability (DLOM) was applied to Kiri’s minority share as a reflection of the lack of marketability. This was the case as the company was privately-owned and not publicly-listed.

Also, a country risk premium was imposed on DyStar as it did business in multiple jurisdictions. This reflects the country-specific risks that come with such a vast multi-state operation.

All in all, the judgment sided Kiri’s valuation expert’s method and the sum of US$1,636m, but ruled that this required some minor technical calculations

About GAO Advisors

The insights provided in this case have been a feature of GAO’s valuation process.

GAO Advisors is a corporate financial advisory firm that provides strategy advice, transaction structuring, and valuation services.

It has acted as an Expert Valuation Witness to several seminal cases including  UTJ v UTK [2019] SGHCF 6, where it produced credible, fair and comprehensive assessments of the matters dealt with in its valuation reports. GAO provided an aggregated value from an amalgamation of two different methods for the asset valuation process. These valuation reports allowed the Court to arrive at a more just and equitable means of dividing matrimonial assets between the Parties.

Other cases include:

  • Valuation of a family textiles business in which patriarchs were seeking to claw-back over $10 million in fraudulent withdrawals by next-generation family members.
  • Valuation of damages in a High Court case where over 125 club members, in one of the largest representative action suits in Singapore, acted against the club owner for breach of contract and the torts of deceit and negligence.
News

Grab-Gojek union topples, concerns remain

The proposed merger between South-east Asia’s two largest ride-hailing companies is now off the table, reports The Business Times. This marks an end to the year-long saga abuzz with talks of shareholder pressure, final deal terms, anti-competitive concerns, and public backlash.

This saga has reminded investors and consumers alike of antitrust concerns that come with the merger of two unicorns. The pitfalls and dangers in the valuation process of a high technology company have also been highlighted.

GAO tracks the concerns brought up in this process and offers insights into these pertinent points.

Anti-competition debate in the post-Grab-Uber era

Questions of market concentration and compliance with competition regulations remained central in the bid. Across Southeast Asia, Grab, valued at more than US$14 billion, has a presence in eight countries while Gojek, valued at approximately US$10 billion, has a presence in five countries.

The sheer size and reach of the companies have made investors and consumers nervous about a proposed merger. 

It is important to note that these companies are in the digital market where network effects are accentuated as opposed to conventional markets. So, it would be nearly impossible to overthrow market leaders in the field due to high switching costs and informational asymmetries that give the incumbent a competitive edge. Thus, a merger of this magnitude would more likely than not shift the market into a monopolistic direction.

The Government, therefore, has been expected to step in with its anti-monopoly laws to ensure consumers are protected from any anti-competitive effects.

In Singapore, the Competition and Consumer Commission of Singapore (CCCS) has said that “it is looking at the at the new development” and “has written to the parties for new information” as despite having a voluntary merger notification regime, section 54 of the Competition Act (CA) prohibits a merger that results “in a substantial lessening of competition”.  This proactive stance surely comes from its dealings with the contentious Grab-Uber merger that happened in 2018. 

Grab announced in March 2018 that it had acquired Uber’s Southeast Asian business (with Uber acquiring a 27.5% stake in Grab). The CCCS responded by commencing an investigation under section 62(1)(d) of the CA as there were reasonable grounds for suspecting that the transaction has resulted in a significant lessening of competition in the ride-hailing market in Singapore.

Through a seven-month investigation, the CCCS found that there was a substantial decrease in the degree of competition.

For the first time in history, the CCCS imposed a financial penalty of S$6,419,647 on Grab and S$6,582,055 on Uber. It argued that both companies “had given specific consideration to the likelihood that the transaction would breach antitrust rules and lead to financial penalties”.

Several companies like India’s Jugnoo have expressed interest in entering Singapore’s ride-sharing space since the merger. However, reinforced network effects cause such entrants to “likely have to incur significant amount of upfront capital in order to attract drivers and riders”, CCCS found.

The “upfront capital” includes providing driver incentive schemes and rider promotions, in addition to acquiring a sufficient fleet of vehicles and pool of drivers, as well as partnerships with taxi operators.

In the backdrop of decreased competition in the ride-hailing industry, consumers too felt the pinch in terms of increased prices and lack of options. For instance, Grab prices had increased between 10% to 13% in the post-merger period.

These concerns reappeared in the Grab-Gojek saga, pushing the Government and the CCCS to be more pro-active in their bid to ensure citizen welfare.

Valuing tech companies

Another question inside investor circles surrounding the potential merger was the issue of inflated valuations of tech companies.

Tech start-ups, especially the ones that are already well known before hitting the public market, are often valued more than what they are worth. This is commonly the case as those who buy the company buy its brand and name, rather than its growth or investment returns potential.

Valuations have to include not only its assets and liabilities but also its innovation, flexibility, cultural relevance, and social reach.  The most prominent illustration of this happened in 2019 when the IPO of a company touted as the next “Alibaba” imploded.

WeWork valued its worth at a whopping $47 billion and claimed to stand out from its real estate competitors due to its status as a high technology company. This value stood in stark contrast to its actual value of around $8 billion, plummeting as low as $2 billion as in May 2019.

“Technology is at the foundation of our global platform,” WeWork’s S-1 filing reads. “Our purpose-built technology and operational expertise has allowed us to scale our core WeWork space-as-a-service offering quickly, while improving the quality of our solutions and decreasing the cost to find, build, fill and run our spaces.”

This and a myriad of other factors such as difficulty in measuring how long a company’s rapid growth rate will last and gauging how effective its barriers to entry will dampen the accuracy of their valuation.

This could explain the tensions that arose during the valuation proceedings between Gojek and Grab. Observers from the Business Times noted that tensions between the two companies arose due to a disagreement between their perceived value. Neither wanted to concede to be the smaller party in the merger.

Case Studies

GAO Expert Valuation Report Refines Accounts and Capital Flow of Company

In a dispute between two Singaporean parties in a manufacturing venture in China, GAO Advisors prepared expert valuations and produced a comprehensive capital flow methodology to refine the venture’s accounts and to assess the efficacy of claims made.

Background                                                     

The two parties were ex-classmates from secondary school, and in 2005 the Plaintiff hired the Defendant as the managing director in his company which he expanded to China in 1999. The Defendant took over operations of the China-incorporated company, which existed as eight separate corporate entities (“the Companies”) to disperse revenue and qualify as a small-scale taxpayer in China’s Value Added Tax (VAT) system.

The Defendant oversaw operations until his resignation in 2013. In that time, his primary responsibility was the management of the Companies’ monies. Thus, he was in charge of the company seals, which were necessary for the withdrawal of monies from their bank accounts. Upon his resignation, the Defendant gave the Plaintiff notice that business operations have ceased two months earlier, and informed of a self-procured division methodology of the remaining assets. He also withdrew a certain percentage of the assets as severance.

The Plaintiff disagreed with the amount withdrawn and appointed GAO to produce an investigative report for the Companies’ accounts and assess the Defendant’s methodology.

The Challenge

The Companies’ mode of operation posed a significant hurdle in the valuation process. The sole provider of capital for business operations was the Plaintiff’s parent company. Hence, the capital flow, as per standard protocol, followed the Companies’ bank accounts to the Defendant’s to the Plaintiff’s.

The existence of multiple bank accounts at each level of capital flow, the inconsistency in in-voice submission for bookkeeping purposes (many handwritten), and preference for cash dealings for ease of trade meant tracking and assessing capital flow was a challenge.

GAO’s Method

In tracking the Companies’ capital movement, GAO set out the following scope of work:

  • To engage in meetings and discussions with relevant stakeholders namely the two parties, the Companies’ bookkeepers, suppliers, and clients;
  • To review all the available records of the Companies’ capital movement in the relevant period including bank documents and financial records;
  • To review correspondence between the Plaintiff and the Defendant, as well as their suppliers and clients, to understand their personal and business relationship;
  • To ascertain the amount of monies withdrawn by the Defendant from the Companies’ bank accounts.

Impact

GAO produced two estimations for the monies in question, by taking two approaches to ensure fairness. These approaches include:

  1. Deducting the estimated amount the Defendant has withdrawn from the Companies’ accounts the (i) amount he had returned to the Plaintiff and (ii) the percentage of the Companies’ profit he was entitled to, as per his severance rights discussed earlier with the Plaintiff;
  2. Taking the splits of assets stated by the Defendant in his resignation letter.

With both approaches, GAO concluded that there were discrepancies between what the Defendant claimed was allegedly entitled to the Plaintiff and what the Plaintiff received. In short, the amount withdrawn by the Defendant was found to be overvalued than his entitled sum.

The refinement of accounts through GAO’s manual and machine tracing and forensic accounting methodology led to the submission of an amended SOC, leading to a consent judgment.

About GAO Advisors

GAO Advisors is a corporate financial advisory firm that provides strategy advice, transaction structuring and valuation services. It has acted as an Expert Valuation Witness to a number of matrimonial cases including  UTJ v UTK [2019] SGHCF 6, where it produced credible, fair and comprehensive assessments of the matters dealt with in its valuation reports. These valuation reports allowed the Court to arrive at a more just and equitable means of dividing matrimonial assets between the Parties. Other cases include:

  • Valuation of a family textiles business in which patriarchs were seeking to claw-back over $10 million in fraudulent withdrawals by next-generation family members.
  • Valuation of damages in a High Court case where over 125 club members, in one of the largest representative action suits in Singapore, acted against the club owner for breach of contract and the torts of deceit and negligence.

GAO Advisors’ data-driven approach to its operations and experienced team of valuation professionals sets it apart from its competitors.

Dispute Resolution Insights

Judge rules BTO flat to be priced at market value in divorce settlement

Recent matrimonial case proves seminal with landmark valuation judgment

In UUV v UUU [2020] SGHCF 7, High Court Judge Tan Puay Boon ruled that a Yishun BTO property be sold at market value despite it not completing its five-year Minimum Occupation Period (MOP).

A family court district judge back in 2018 ruled that the wife be given the first option to buy out the husband’s share of their flat as part of the matrimonial distribution of assets.

The case was brought to the High Court as the wife attempted to get the husband to sell his shares based on the surrender value – a much lower amount than the market value.

The flat                                               

The BTO flat at Fern Grove @ Yishun was bought jointly in the couple’s name in August 2014 for $371,500, with a surrender value of $352,925 if the flat was to be handed over to HDB before its MOP of five years. 

The husband’s legal counsel noted that the flat had a certified market value of $545,500 in early 2020.

The ruling

Despite the initial court verdict not compelling the couple to sell the flat, the wife attempted to buy the husband’s shares at the HDB mandated surrender value.

Judge Tan disagreed as the wife would have an unfair gain in buying out at a lower amount than the market value.

“I accept the husband’s argument that a valuation based on the surrender value would result in a windfall to the wife,” he said.

He ruled that the valuation of the property should be pegged to the market value of similar HDB properties in the vicinity to get a more accurate indication of the real worth of the flat.

“The surrender value would only be an accurate estimate of the flat’s value if it was actually surrendered to the HDB, which is unlikely the case,” Judge Tan explained.

Also, he ordered that the flat’s value should be backdated to its market value in September 2018, when the couple’s ancillary matters were brought before the family court district judge.

A seminal case in family law

The husband’s legal counsel noted that the High Court’s decision is significant because it is “the first such ruling”.

The case clarified the appropriate method of valuing BTO flats with MOP obligations, she noted.

“Both parties had been stuck as to the use of the market price or the purchase price, the surrender value being pegged at a percentage below the purchase price. The court’s answer is the market price,” she said.

This proves to be a landmark ruling in matrimonial cases in 2021 given the rise in divorce cases and an increase in demand for BTO flats.

About GAO Advisors

GAO Advisors is a corporate financial advisory firm that provides strategy advice, transaction structuring and valuation services. It has acted as Expert Valuation Witness to a number of matrimonial cases including  UTJ v UTK [2019] SGHCF 6, where it produced credible, fair and comprehensive assessments of the matters dealt with in its valuation reports. These valuation reports allowed the Court to arrive at a more just and equitable means of dividing matrimonial assets between the Parties. Other cases include:

  • Valuation of a family textiles business in which patriarchs were seeking to claw-back over $10 million in fraudulent withdrawals by next-generation family members.
  • Valuation of damages in a High Court case where over 125 club members, in one of the largest representative action suits in Singapore, acted against the club owner for breach of contract and the torts of deceit and negligence.

GAO Advisors’ data-driven approach to its operations and experienced team of valuation professionals sets it apart from its competitors.