INDIA: WHERE DO WE GO FROM HERE
September 17, 2013
Singapore
New Delhi | Mumbai | Bangalore
Mohit Saraf
Senior Partner
INDIA: GROWTH STORY
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India: A market with great potential
o Middle class to reach 41% of population by 2025.
o Consumption expenditure to be 3.6 trillion USD by 2020.
o Investment of 1.02 trillion USD required in infrastructure in the
Twelfth Five Year Plan (2012-17): 50% from private sector
(Source: Planning Commission of India).
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2013 A.T. Kearney FDI Confidence Index ranks India as 5th most attractive
FDI destination.
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Independent judiciary and single integrated system of Courts.
Large English speaking workforce.
Population in working age group likely to exceed 64% by 2021.
Cheap and abundant labour.
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT:
PRESENT ISSUES AND CHALLENGES
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Policy paralysis and procedural delays: Projects not implemented example,
Posco and ArcelorMittal’s Odisha steel project.
Rise in bad loans/NPA in the banking sector: Inability of companies to pay
back debts due to delays in implementation of projects and consequent returns.
Uncertainty in Tax laws
o Vodafone controversy: Retrospective amendment in tax law by the
Government.
o Transfer pricing issues: Shell India case – Issue of shares by Shell India
to its two parent companies subject to transfer pricing rules; Vodafone
India Services case – sale of call centre business to Hutchison Whampoa
Properties subject to transfer pricing rules.
Government policy struck down resulting in business disruption and
operation of companies – example allocation of 2G spectrum and cancellation
of licenses.
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT:
PRESENT ISSUES AND CHALLENGES
 Modest inflow of Foreign Direct Investment
o FDI in 2011-2012: 46.556 billion USD
o FDI in 2012-2013: 36.860 billion USD
o Percentage drop: 21%
 Low investor confidence: weak rupee, tight liquidity, high
cost of funds, policy impasse and procedural delays
hampered investor confidence.
 Outflow of Foreign Institutional Investors from the
Indian markets particularly in the backdrop of expected
tapering of monetary stimulus by US Federal Reserve.
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT:
PRESENT ISSUES AND CHALLENGES
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Large fiscal deficit: April-July – 52.30 billion USD i.e. 62.8% budget estimate
for 2013-14.
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Large current account deficit on account of huge imports of gold, crude oil
and coal: 98 billion USD, 4.9 percent of GDP.
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Sharp depreciation of Rupee against US dollar - record low of INR 68.85 to
the dollar on August 28, (20% depreciation from the end of 2012).
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Declining rate of growth - India's GDP growth slowed down to 4.4 percent in
the first quarter 2013-14 over the corresponding quarter of the previous year.
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Large trade deficit on account of low exports due to weak demand in major
markets: April – July 9% of GDP
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CORRECTIVE MEASURES AND INITIATIVES
Key Recent Changes in Foreign Direct Investment Policy
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The Government recently liberalized sectoral entry norms and limits in various sectors.
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Increase in FDI inflow in India
o
FDI for the period for the period January-June 2013 period 10.87 billion USD
o
FDI for the period January-June 2012 period 10.27 billion USD
o
Percentage rise: 6%
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Single Brand Retail Trading:
o
FDI up to 49% now allowed under the Automatic route
o
Beyond 49 % under the Approval route, up to 100%.
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Multi Brand Retail Trading:
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Earlier, FDI was prohibited.
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In 2012, FDI up to 51% allowed under the Approval Route.
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Certain onerous conditions had been imposed on foreign investors.
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These conditions have been diluted by the Government to attract more investors
to the sector.
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CORRECTIVE MEASURES AND INITIATIVES
Key Recent Changes in Foreign Direct Investment Policy
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Telecom Services:
o 74% limit now raised to 100%
o Up to 49% under the Automatic route and beyond 49% under the
Approval route
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Defence production: Up to 26% allowed under the Approval route, with
investment beyond 26% allowed with the approval of the Cabinet
Committee on Security in cases which will lead to the access of
modern and state-of-the-art technology in the country.
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Asset reconstruction companies: FDI entry route changed to
Automatic route for investment up to 49%, with investment beyond
49% up to 74% allowed under the Approval route.
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CORRECTIVE MEASURES AND INITIATIVES
Key Recent Changes in Foreign Direct Investment Policy
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FDI under the Automatic route for investment up to 49% in the following
sectors:
o Petroleum refining by public sector undertakings
o Commodity exchanges
o Power exchanges
o Stock exchanges, depositories, clearing corporations
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Credit information companies:
o FDI under the Automatic route for investment up to 74%.
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Courier services: FDI under the Automatic route for investment up to
100%.
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CORRECTIVE MEASURES AND INITIATIVES
Establishment of Cabinet Committee on Investment
 Headed by the Prime Minister
 With an objective to identify projects required to be
implemented on a time bound basis involving investment of
155 million USD (approximately) or more or any other
critical projects.
 To prescribe time limits for issue of requisite approvals
by Ministries/Departments.
 To review the implementation of projects that have
delayed beyond the stipulated time frame.
 70 projects worth 50 billion USD cleared including 35
power projects worth 27 billion USD.
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CORRECTIVE MEASURES AND INITIATIVES
Establishment of Project Monitoring Group to Track Stalled
Investment Projects
 Special cell created in the Cabinet Secretariat in June 2013.
 Objective is to pro-actively pursue large investment
projects so they are commissioned on time.
 Finance Ministry indicated 217 such projects where the
banks have already funded more than 108 billion USD
which needed immediate attention.
 Step in the right direction to improve investment climate.
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CORRECTIVE MEASURES AND INITIATIVES
Mylan- Strides Story
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Investment of USD 1 billion by US drug maker Mylan Inc, to acquire Agila
Specialities was long pending approval by FIPB.
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DIPP was desirous of reconsidering the FDI Policy in the pharmaceutical
sector.
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Prime Minister intervened and directed the ministries not to hold back pending
brownfield pharma FDI proposals citing an attempted re-formulation of the
policy.
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Clarified the application of any new policy on prospective and not
retrospective basis.
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Underlying objective of the Government to boost foreign direct investment
and narrow the current account deficit.
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CORRECTIVE MEASURES AND INITIATIVES
Jet-Etihad Deal
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Foreign airlines were not permitted to pick up stake in Indian carriers.
Policy was liberalized in 2012 for foreign airlines to invest upto 49% stake.
Abu Dhabi's Etihad Airways acquisition of 24% stake in Jet Airways recently
cleared by FIPB.
The deal was debated and discussed by SEBI and FIPB on issues of ‘effective
control’ of Jet.
Deal approved after a revised shareholder agreement decreased Etihad's
presence on the board of Jet.
Example of fruitful dialogue between the investor and regulatory
authorities .
Deal bodes well for more conducive foreign investment climate in the Indian
aviation sector where carriers are burdened with debts and make losses.
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CORRECTIVE MEASURES AND INITIATIVES
Air Asia Deal
 FIPB had also cleared Air Asia’s proposal to launch
domestic airlines in a JV with Tata Sons.
 Certain regulators had raised objections to the proposed
JV based on whether the liberalization of policy for FDI
by foreign carriers was applicable to new JV’s also.
 DIPP clarified the same on the ground that 49% FDI is
allowed in greenfield investments as well as existing
ventures.
 Willingness of various ministries to clear obstacles.
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CORRECTIVE MEASURES AND INITIATIVES
Supreme Court decision
 Supreme Court judgment Bharat Aluminum Company
Limited (“BALCO”) v. Kaiser Aluminum Technical
Service, Inc. (“Kaiser”)
o If the seat of arbitration is outside India then Part I of
the (Indian) Arbitration & Conciliation Act, 1996 is
automatically excluded.
o Substantially decreases interference by domestic courts
in international arbitrations as parties may not be able
to seek interim relief from the domestic courts.
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CORRECTIVE MEASURES AND INITIATIVES
Other Measures to Revive Economy
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Various measures introduced by Commerce Minister for revival of SEZ scheme in April
2013 and SEZ (Amendment) Rules, 2013 notified on 12 August 2013:
o
Reduction in minimum contiguous land area requirement for an SEZ
o
Flexibility in utilization of land parcels for multiple sectors
o
No minimum land area requirement for IT/ ITES SEZ
o
Exit policy for SEZ units introduced .
Relaxations in External Commercial Borrowings (ECB) norms for low-cost affordable
housing projects and for general corporate purposes.
Permission to non-residents, including NRIs, to acquire shares of a listed Indian
company on a recognized stock exchange through a registered broker, under the FDI
scheme subject to the condition that the non-resident investor is in control of the relevant
Indian listed company in terms of the Takeover Code.
Pension Fund Regulatory and Development Authority Bill passed by the both the
houses of the Parliament: Foreign investors can hold up to 26% stake in the sector.
Union Cabinet gave in-principle approval to subsidize setting up of chip-fabrication
units- paves way for 7.5 Billion USD worth projects to set up chip fabrication units: boost
investments in semi-conductor sector.
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CORRECTIVE MEASURES AND INITIATIVES
Companies Act, 2013- Highlights
 Companies Act, 2013 which seeks to replace the sixdecade old Companies Act, 1956 received Presidential
assent on August 29, 2013.
 Maximum number of members in a private company
increased from 50 to 200.
 Introduction of concept of One Person Company.
 For infrastructural projects, preference shares can now
be issued for a period exceeding 20 years.
 Consolidation of financial statements now made
mandatory.
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CORRECTIVE MEASURES AND INITIATIVES
Companies Act, 2013- Highlights
 Erstwhile mandatory requirement for transfer of profits to
reserves for dividend declaration to be done away with.
 Rotation of Auditors made mandatory.
 Requirement of obtaining Central Government approval for
related party transactions done away with.
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CORRECTIVE MEASURES AND INITIATIVES
Companies Act, 2013- Highlights
Independent Directors not liable to retire by
rotation.
Inability to pay debts to be considered as criteria
for determining a sick company.
Provisions of revival and rehabilitation of sick
companies to apply to all companies and not only to
an “industrial company”.
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CORRECTIVE MEASURES AND INITIATIVES
Companies Act, 2013- Highlights
Indian company can be merged with a foreign company
Fast track merger for small companies and holding wholly-owned
subsidiaries introduced.
Person/ group of persons holding 90% or more equity shares by virtue of
amalgamation etc. can purchase the remaining equity shares of the
company from minority shareholders.
To facilitate transition to new regime, central government empowered to
remove difficulties up to 5 years from commencement of Companies Act,
2013.
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT :
SUGGESTIONS AND WAY FORWARD
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The number of FDI limits in various sectors should be reduced, to bring clarity to the investors. The
limits of 26% and 74% do not seem to serve any purpose. 49% and 100% could be the only two
limits.
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Definition of control needs to be clarified: clarity required on whether and what type of veto rights
given to foreign investors will give rise to control.
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100% FDI allowed in construction development sector under Automatic Route. It should be permissible
for FDI to be received for development, at any stage prior to completion.
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E-commerce is a huge industry in India now and with a potential for tremendous growth. Thus, FDI
should be permitted in E-commerce.
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While the law minister has said that for certain strategic M&A deals, call/ put options would be
allowed from the perspective of Companies Act and SCRA, however, the same not been implemented
yet. Further, position on such options should be clarified from FDI perspective as well.
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT : WAY
FORWARD
 Fast tracking the implementation of stalled projects:
o Procedural issues be adequately addressed
o Inter-ministerial coordination and coordination with the
states ensured.
 Guidelines issued by the RBI in February 2013 for issue of
fresh banking licences to private sector entities and
NBFCs- implementation of the same needs to be effected in
a timely manner.
 Implementation of Real Estate Investment Trust (REITs)
to give impetus to the capital flow in the real estate sector.
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT : WAY
FORWARD
 Taxation disputes like Vodafone tax should be settled
quickly by providing for negotiated settlement mechanism.
 Rapid action should be taken on introducing the Goods
and Services Tax (GST) regime.
 Impasse in coal and iron mining and supply to
stakeholders must be resolved.
 Rationalization of definition for FDI and FII as envisaged
in the Budget Speech of the Finance Minister:
o Stake of less than 10% - FII
o Stake of more than 10% - FDI
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THANK YOU
Mohit Saraf
Senior Partner
Luthra & Luthra Law Offices
msaraf@luthra.com
+91 11 41215100
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