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New Delhi | Mumbai | Bangalore I NDIA : W HERE D O W E G O F ROM H ERE September 17, 2013 Singapore Mohit Saraf Senior Partner.

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Presentation on theme: "New Delhi | Mumbai | Bangalore I NDIA : W HERE D O W E G O F ROM H ERE September 17, 2013 Singapore Mohit Saraf Senior Partner."— Presentation transcript:

1 New Delhi | Mumbai | Bangalore I NDIA : W HERE D O W E G O F ROM H ERE September 17, 2013 Singapore Mohit Saraf Senior Partner

2 India: A market with great potential o Middle class to reach 41% of population by o Consumption expenditure to be 3.6 trillion USD by o Investment of 1.02 trillion USD required in infrastructure in the Twelfth Five Year Plan ( ): 50% from private sector (Source: Planning Commission of India) A.T. Kearney FDI Confidence Index ranks India as 5th most attractive FDI destination. Independent judiciary and single integrated system of Courts. Large English speaking workforce. Population in working age group likely to exceed 64% by Cheap and abundant labour. 2 INDIA: GROWTH STORY

3 INDIAN ECONOMIC AND LEGAL ENVIRONMENT: PRESENT ISSUES AND CHALLENGES 3 Policy paralysis and procedural delays: Projects not implemented example, Posco and ArcelorMittals 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.

4 INDIAN ECONOMIC AND LEGAL ENVIRONMENT: PRESENT ISSUES AND CHALLENGES 4 Modest inflow of Foreign Direct Investment o FDI in : billion USD o FDI in : 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.

5 INDIAN ECONOMIC AND LEGAL ENVIRONMENT: PRESENT ISSUES AND CHALLENGES 5 Large fiscal deficit: April-July – billion USD i.e. 62.8% budget estimate for Large current account deficit on account of huge imports of gold, crude oil and coal: 98 billion USD, 4.9 percent of GDP. Sharp depreciation of Rupee against US dollar - record low of INR to the dollar on August 28, (20% depreciation from the end of 2012). Declining rate of growth - India's GDP growth slowed down to 4.4 percent in the first quarter over the corresponding quarter of the previous year. Large trade deficit on account of low exports due to weak demand in major markets: April – July 9% of GDP

6 6 The Government recently liberalized sectoral entry norms and limits in various sectors. Increase in FDI inflow in India o FDI for the period for the period January-June 2013 period billion USD o FDI for the period January-June 2012 period billion USD o Percentage rise: 6% 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%. Multi Brand Retail Trading: o Earlier, FDI was prohibited. o In 2012, FDI up to 51% allowed under the Approval Route. o Certain onerous conditions had been imposed on foreign investors. o These conditions have been diluted by the Government to attract more investors to the sector. CORRECTIVE MEASURES AND INITIATIVES Key Recent Changes in Foreign Direct Investment Policy

7 7 CORRECTIVE MEASURES AND INITIATIVES Key Recent Changes in Foreign Direct Investment Policy Telecom Services: o 74% limit now raised to 100% o Up to 49% under the Automatic route and beyond 49% under the Approval route 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. 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.

8 8 CORRECTIVE MEASURES AND INITIATIVES Key Recent Changes in Foreign Direct Investment Policy 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 Credit information companies: o FDI under the Automatic route for investment up to 74%. Courier services: FDI under the Automatic route for investment up to 100%.

9 9 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.

10 10 CORRECTIVE MEASURES AND INITIATIVES Establishment of Project Monitoring Group to Track Stalled Investment Projects Special cell created in the Cabinet Secretariat in June 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.

11 11 CORRECTIVE MEASURES AND INITIATIVES Mylan- Strides Story Investment of USD 1 billion by US drug maker Mylan Inc, to acquire Agila Specialities was long pending approval by FIPB. DIPP was desirous of reconsidering the FDI Policy in the pharmaceutical sector. Prime Minister intervened and directed the ministries not to hold back pending brownfield pharma FDI proposals citing an attempted re-formulation of the policy. Clarified the application of any new policy on prospective and not retrospective basis. Underlying objective of the Government to boost foreign direct investment and narrow the current account deficit.

12 12 CORRECTIVE MEASURES AND INITIATIVES Jet-Etihad Deal 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.

13 13 CORRECTIVE MEASURES AND INITIATIVES Air Asia Deal FIPB had also cleared Air Asias 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 JVs 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.

14 14 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.

15 15 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. CORRECTIVE MEASURES AND INITIATIVES Other Measures to Revive Economy

16 16 CORRECTIVE MEASURES AND INITIATIVES Companies Act, Highlights Companies Act, 2013 which seeks to replace the six- decade old Companies Act, 1956 received Presidential assent on August 29, 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.

17 17 CORRECTIVE MEASURES AND INITIATIVES Companies Act, 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.

18 18 CORRECTIVE MEASURES AND INITIATIVES Companies Act, 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.

19 19 CORRECTIVE MEASURES AND INITIATIVES Companies Act, 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.

20 20 I NDIAN E CONOMIC AND L EGAL E NVIRONMENT : S UGGESTIONS AND W AY FORWARD 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. 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. 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. E-commerce is a huge industry in India now and with a potential for tremendous growth. Thus, FDI should be permitted in E-commerce. 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.

21 21 I NDIAN E CONOMIC AND L EGAL E NVIRONMENT : W AY 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.

22 22 I NDIAN E CONOMIC AND L EGAL E NVIRONMENT : W AY 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

23 23 THANK YOU Mohit Saraf Senior Partner Luthra & Luthra Law Offices

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