Transcript - Luthra & Luthra
I
NDIA
: W
HERE
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H
ERE September 17, 2013 Singapore
New Delhi | Mumbai | Bangalore
Mohit Saraf
Senior Partner
INDIA: GROWTH STORY
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
Twelfth Five Year Plan required in infrastructure in the
(2012-17)
:
50% from private sector
(Source: Planning Commission of India).
2013 A.T. Kearney FDI Confidence Index ranks India as
FDI destination.
5th most attractive
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.
www.luthra.com
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INDIAN ECONOMIC AND LEGAL ENVIRONMENT: PRESENT ISSUES AND CHALLENGES
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
Government.
: Retrospective amendment in tax law o by the
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
operation of companies – example resulting in business disruption and
allocation of 2G spectrum
and cancellation of licenses.
www.luthra.com
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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 o FDI in 2012-2013: Percentage drop:
36.860 billion USD 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
Large fiscal deficit:
April-July –
52.30 billion USD
i.e.
62.8%
budget estimate
for 2013-14.
Large current account deficit
and coal:
98 billion USD
, on account of huge imports of gold, crude oil
4.9 percent of GDP
.
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).
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 .
Large trade deficit on account of markets: April – July
9% of GDP low exports
due to weak demand in major www.luthra.com
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CORRECTIVE MEASURES AND INITIATIVES
Key Recent Changes in Foreign Direct Investment Policy
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
10.87 billion USD
o FDI for the period
January-June 2012
period
10.27 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.
www.luthra.com
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CORRECTIVE MEASURES AND INITIATIVES
Key Recent Changes in Foreign Direct Investment Policy
o Telecom Services: 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
Automatic route
for investment up to
entry route changed to 49%
, with investment beyond 49% up to 74% allowed under the Approval route.
www.luthra.com
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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 o sectors: 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
100%
.
Automatic
route for investment up to www.luthra.com
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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
delayed beyond the stipulated time frame.
that have
70 projects
worth
50 billion USD
cleared including 35 power projects worth
27 billion USD.
www.luthra.com
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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. www.luthra.com
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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 sector.
of reconsidering the FDI Policy
in the pharmaceutical 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
retrospective
basis.
on prospective and not
Underlying objective of the Government to and narrow the current account deficit.
boost foreign direct investment
www.luthra.com
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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
authorities
.
fruitful dialogue between the investor and regulatory
Deal bodes well for
more conducive foreign investment climate
in the Indian aviation sector where carriers are burdened with debts and make losses.
www.luthra.com
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CORRECTIVE MEASURES AND INITIATIVES Air Asia Deal
FIPB had also
cleared Air Asia’s proposal
domestic airlines in a JV with Tata Sons.
to launch 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.
www.luthra.com
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CORRECTIVE MEASURES AND INITIATIVES
Supreme Court decision
Supreme Court judgment
Limited (“BALCO”) v.
Bharat Aluminum Company 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.
www.luthra.com
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CORRECTIVE MEASURES AND INITIATIVES Other Measures to Revive Economy
Various measures introduced by Commerce Minister for revival of SEZ scheme in April o 2013 and
SEZ (Amendment) Rules, 2013 notified on 12 August 2013: Reduction
in
minimum contiguous land area
requirement for an SEZ o
Flexibility
in utilization of land parcels for multiple sectors o o
No
minimum
Exit policy land area
requirement for for SEZ units introduced .
IT/ ITES SEZ
Relaxations in
External Commercial Borrowings (ECB) norms
housing projects and for general corporate purposes.
for low-cost affordable
Permission to non-residents
, including NRIs, to
company on a recognized stock exchange acquire shares of a listed Indian
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
houses of the Parliament: passed by the both the
Foreign investors can hold up to 26% stake
in the sector.
Union Cabinet gave in-principle
units-
paves way for
approval to subsidize setting up of chip-fabrication 7.5 Billion USD worth projects
investments in semi-conductor sector.
to set up chip fabrication units: boost www.luthra.com
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CORRECTIVE MEASURES AND INITIATIVES
Companies Act, 2013- Highlights
Companies Act, 2013 which seeks to
decade old Companies Act, 1956
assent on
August 29, 2013.
replace the six-
received Presidential 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
mandatory.
of financial statements
now made www.luthra.com
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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
rotation.
not liable to retire by
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
an “industrial company”.
and not only to
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CORRECTIVE MEASURES AND INITIATIVES
Companies Act, 2013- Highlights
Indian company can be
merged with a foreign company
Fast track merger
subsidiaries introduced.
for small companies and holding wholly-owned 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.
www.luthra.com
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I
NDIAN
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CONOMIC AND
L
EGAL
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NVIRONMENT
: S
UGGESTIONS AND
W
AY FORWARD
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.
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.
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.
www.luthra.com
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I
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CONOMIC AND
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NVIRONMENT
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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.
www.luthra.com
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I
NDIAN
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CONOMIC AND
L
EGAL
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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
and Services Tax (GST) regime.
Goods 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 o Stake of less than 10% - FII Stake of more than 10% - FDI www.luthra.com
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THANK YOU
Mohit Saraf Senior Partner Luthra & Luthra Law Offices [email protected]
+91 11 41215100
www.luthra.com
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