Roochi Tripathy and Priyanka Devgan of Verus in Mumbai look at doing business in India
India continues to be a growing economy through 2015-16 with a GDP growth of about 7.3% (targeted to be 7.9% in 2016) and plenty of high inbound deals. Domestic laws and regulations are undergoing radical changes to address various challenges faced by the global investors in the country. Some of the key developments are:
Sea change in Indian FDI policy
India has seen significant changes in its FDI policy owing to the sustained push by the Government to liberalise the economy and promote manufacturing in India.
100% FDI is now permitted under the automatic route in most sectors including duty free shops, ecommerce (online market place model), brownfield airports, construction-development projects, animal husbandry, teleports, DTH, mobile TV, non-news TV channels and LLPs (in sectors where 100% FDI is allowed).
Government has liberalised certain sectors which hitherto permitted FDI to the extent of 100% with investment beyond 49% under Government approval route in the following sectors: Scheduled and Domestic Regional airlines (100% automatic for NRIs), defence sector and Single Brand Product Retailing.
Significant changes in FDI norms in the financial sector have also taken place during this period with corresponding changes in the FEMA rules. Foreign investors are now allowed to invest up to 100% in the capital of an ARC. Additionally, FDI without permission from FIPB will be permitted in AIFs, REITs, INVITs after amendment of the FEMA Rules. Foreign investment in sectors which are under the automatic route have been permitted to provide flexibility for structuring such investment. Changes in the FEMA Rules have also been made to include OCI Card holders as NRI’s and investments by NRIs on repatriable basis are now considered as domestic investments.
A new start up policy
In January 2016, the Government acknowledged the growing startup sector by passing the Startup Action Plan. This Action Plan aims to create an ecosystem, which encourages innovation and economic growth. Other than providing funding support, some of the key highlights are self-certification regarding compliance, lower incorporation and IPR costs, and creation of a mobile based application to streamline all start-up related matters.
Changes in the IPR regime
Indian Government has formulated a National Intellectual Property Rights Policy to strengthen and lay down the road map for intellectual property in India. Additionally, the Indian Patent Rules were amended and a new applicant entity called “start-ups’ was introduced providing them with cheaper patent applications. The amendment also provide for an expedited First examination report. In the Trademark sector, the draft Trademark (Amendment) Rules, 2015 have introduced the concept of a “soundmark”.
Changes in the taxation policy affecting M&A
Government has commenced on the much delayed process of renegotiating old DTAA’s beginning with the India- Mauritius DTAA. Now shares acquired through Mauritius route post 1 April 2017 will be subject to Capital Gains Tax. The concept of a service PE and Fee for Technical Services has also been introduced. The amendment of the treaty with Mauritius is also expected to end similar benefits on CGT available from Singapore. The DTAA with Cyprus has also been renegotiated with similar terms on CGT as the Mauritius DTAA.
To ensure continued investor interest, the CBDT has introduced the Safe Harbour Guidelines as per provisions of Section 9A of the Income Tax Act. The guidelines specify that subject to fulfilment of conditions “manager of an eligible investment fund” will not be considered “tax resident of India” merely because it carries on fund management activities in India.
Insolvency process overhauled
Keeping in mind the need for adequate provisions for fast dissolution of assets and winding up of companies, the Government has notified the Insolvency and Bankruptcy Code, 2016. The RBI as part of the bad debt clean-up has also introduced the Strategic Debt Restructuring scheme wherein the lenders can acquire majority control of the company and take adequate steps to recover their amount. Earlier in June, 2016, the RBI notified the “S4A” – Scheme for Sustainable Structuring of Stressed Assets. This medium allows for resolution mechanism for large “sustainable debts” of over Re500 crores where projects have started commercial operations. These mechanisms are expected to draw investments from foreign investors and funds in stressed assets.
Amendments to the arbitration and conciliation act, 1996 (“arbitration amendment”)
The Arbitration Amendment has introduced major changes with respect to international commercial arbitration and enforcement of foreign award. Now, only the higher judiciary i.e. the High Court in States will hear jurisdiction disputes (except the appointment of an arbitrator). In case of challenging any international award, the Arbitration Amendment has laid down that an award passed in international arbitration will be set aside on grounds of public policy only if: (i) award is vitiated by fraud or corruption; (ii) contravenes fundamental policy of Indian law; or (iii) conflicts with basic notion of morality and justice. Furthermore, under the Arbitration Amendment, only two provisions i.e. one on court’s power to grant interim reliefs (Section 9) and two, on rendering assistance in taking evidence (Section 27) will be applicable to international arbitrations held outside India, unless where parties, by agreement have excluded the applicability of Sections 9 and 27.
New company courts
Government has established the National Company Law Tribunal and National Company Law Appellate Tribunal with effect from June 1 2016 that will replace the Company Law Board, the Board of Industrial and Financial Reconstruction, the Appellate Authority of Industrial and Financial Reconstruction and the Company Courts. These courts have been established to provide a single court that would deal with all winding up, insolvency cases under the Insolvency and Bankruptcy Code etc.
The Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act, 2015 has been enacted to expeditiously handle commercial disputes arising from transactions with merchants, bankers, financiers, traders etc. having a value of more than Re1 crore.
With reforms ranging from resolving insolvency, trading across borders, payment of taxes etc. India is set to rise above in the “ease of doing business” making India one of the most attractive investment destinations of the 21st century.
About the author
Roochi heads the emerging companies and start-up practice at Verus. Roochi started her career as a lawyer at ICICI Bank’s corporate legal group where she was part of the international banking team. She had the opportunity to steer many transactions during her tenure. After her stint with ICICI Bank, Roochi started her independent practice and took on an entrepreneurial role as she founded a travel company and legal announcement platform. With increasing interaction with entrepreneurs, she gradually has built a niche practice advising start-ups especially in the financial services field. Her clients also include P2P lending platforms, food and artisan based startups, bus and truck aggregators etc.
About the author
Priyanka is an associate with Verus. Her principal areas of practice are corporate finance and M&A. She often advised clients on regulatory aspects of M&A transactions including tender offers, insider trading and competition law aspects.