Transcript Luthra & Luthra Law Offices Mohit Saraf Senior Partner

Investing in Emerging Markets –
Where Does India Feature?
Investing in Emerging Markets 2011
The Harvard Club, New York City
Mohit Saraf
Senior Partner
November 29, 2011
Slide 1
United Nations Conference on Trade and
Development’s (“UNCTAD”) World Investment
Prospects Survey 2010–2012
Where does India rank as a prospective FDI destination?
Rank
Economy
1
China
2
India
3
Brazil
4
US
5
Russian Federation
Slide 2
Will India measure up?
o
Will this prediction become a trend?
o
Will the forecasts hold in the short term?
o
W h a t a s s u mp ti o ns s u p p o r t t h e f o r e c a s t ?
o
What is the inside story?
Slide 3
What is a good place to start?
• World Bank’s comparative survey titled Doing
Business 2012
Slide 4
BRIC BY BRIC
(and how they stack up)
Rank
UNCTAD
Doing
Business
Starting
Business
Getting
Credit
Protecting
Investors
Paying Taxes
Trading
Enforcing
Contracts
91
151
67
97
122
60
16
1
China
2
India
132
166
40
46
147
109
182
3
Brazil
126
120
98
79
150
121
118
4
US
4
13
4
1
72
20
7
5
Russia
120
111
98
111
105
160
13
Slide 5
Ease of starting a business - Challenges
China
151
India
166
Brazil
•
Sector specific framework of prohibitions, approval
requirements, investment caps, investment conditions
and exclusions.
•
Ability to find a “best-fit” solution within a restrictive
and fluid regulatory matrix.
•
Exchange control regime
•
Changing goalposts – “put options”. Occasional blips
can cause impediments.
120
US
13
Russian
Federation
111
Slide 6
Ease of starting a business - Opportunities
China
India
Brazil
151
•
Reform: A liberal trajectory
•
Very few industries where FDI is prohibited.
•
Foreign exchange reserves have gone up from USD 5
Billion in 1991 to USD 312.90 Billion in June 2011.
166
120
Emerging Sectors:
•
US
13
Russian
Federation
111
•
•
•
•
Aerospace and Defense (offset obligation)
Automotive
Banking
Pharmaceuticals
Retail and consumers
Slide 7
Getting Credit - Challenges
China
67
India
40
•
High interest rates: raised 12 times in 18 months.
•
External commercial borrowings (“ECBs”):
• regulates all-in costs,
• restricts end use
• stipulates long maturity periods
Brazil
• working capital loans not allowed
98
• not permitted in capital markets, real estate or for
US
4
Russian
Federation
98
• acquisition of other companies
•
RBI imposes directed lending and provisioning
norms (risk weights) on banks – this distorts
credit flow.
Slide 8
Access to funding - Opportunities
China
67
India
40
Brazil
98
•
Strong framework of legal rights of borrowers and
lenders (a score of 8 on the strength of legal rights
index ranging from 0-10 where OECD average is 7).
•
Incipient but vibrant Private Equity
•
Non Banking Finance Companies (NBFCs)
•
ADRs / GDRs / FCCBs
NBFCs
US
4
Russian
Federation
98
NBFCs enjoy a “light touch” regulatory regime. Concentrate
on financial sector activities which banks and financial
institutions may chose to ignore on account of heavier
regulatory burdens – E.g. capital markets related funding,
real estate funding and structured finance.
Slide 9
Protecting Investors – weaknesses and alternatives
China
India
Brazil
US
Russian
Federation
97
46
•
Strong protection: Minority investors, related party
transactions.
•
Systemic handicap – final verdict on a dispute.
•
Arbitration has emerged as a powerful alternative.
•
Bilateral Investment Treaties - party to over 60 BITS
(though unfortunately not with yet with the US.
•
Indo-US BIT on the anvil
•
BITs tend to act as a check against unbridled
exercise of executive power
79
1
111
Slide 10
Paying Taxes – Challenges and Improvements
On average, a company:
China
India
122
147
• makes 33 tax payments a year,
• spends 254 hours a year filing, preparing and paying taxes
• pays total taxes amounting to 24.7% of profit.
Recent improvements:
Brazil
150
•
In 2011 introduced mandatory electronic filing and
payment for VAT.
US
72
•
In 2011 abolished the fringe benefit tax and
improved electronic payment.
Russian
Federation
105
•
Proposed induction of “Direct Tax Code 2010” by
April 2012 which is expected to improve payment
and filing efficiencies significantly.
•
New indirect tax system proposed – remove
multiplicity of taxes.
Slide 11
Double Taxation Avoidance Treaties
• India is a party to more than 80 DTATs
• Tax treaty analyses: A key consideration for investment into India.
• DTATs with Mauritius, Cyprus and Singapore are pre-eminent - currently
relieve capital gains on disposal of Indian investments.
• Mauritius, accounts for an overwhelming 42% of the aggregate foreign
direct investment in India (next in the pecking order are: Singapore 9%, USA
7%, UK 5%)
• Vodafone’s disposal of its Indian JV assets has brought into question the
efficacy of capital gains insulation available under the Mauritius treaty.
Slide 12
Enforcement of contracts – Challenges
•
China
16
A contract enforcement:
• requires 46 procedures
• takes 1420 days
India
Brazil
US
Russian
Federation
• costs 39.6% of the value of the claim
182
118
•
30 million cases pending in Indian courts.
•
11 judges per million compared to the recommended
norm of 50.
Negate above by:
7
12
•
Taking recourse to international commercial arbitration
•
Excluding Indian procedural law under the arbitration
agreement and choosing arbitral venue outside India.
Slide 13
Thank You.
Mohit Saraf
Senior Partner
Luthra & Luthra
Law Offices
Mumbai | New Delhi | Bangalore
Email : [email protected]
Slide 14