The reason some portraits don't look true to life is that some people make no effort to resemble their pictures. Salvador Dalí
At the end of October 2013, the World Bank’s annual “Doing Business” report saw India drop three places to be named the world’s 134th most viable jurisdiction to set up shop. A minor slip perhaps, but the ranking – which considers regulatory environment, investor protection and taxation among other factors – firmly entrenches India at the bottom of the BRICS group of high-growth markets. Filtering the results in certain key areas, such as enforceability of contracts, paints a bleaker picture: here India ranks 186th in the world, with only Angola, Myanmar and East Timor emerging as tougher jurisdictions to enforce a deal.
October also saw Walmart finalise its plans to end its Indian joint venture with Bharti Enterprises after six years. A few days after Walmart’s Asia chief Scott Price told reporters the relationship was untenable, the two companies announced that they had “reached an agreement to independently own and operate separate business formats in India and discontinue their franchise agreement in the retail business.” No single reason was given for the split, but Walmart has publicly opposed certain sourcing requirements imposed on foreign investors by the Indian government and Price used the joint statement to emphasise that his company “will continue to advocate for investment conditions that allow FDI multi-brand retail in India.”
The multi-brand retail story has had a few twists over the past year. In September 2012 the government allowed FDI of up to 51 per cent in the sector, subject to a number of conditions. Companies were required to devote at least half of the investment into back-end infrastructure such as processing or manufacturing and to source at least 30 per cent of their manufactured and processed products from Indian small industries (a requirement that Walmart said it was unable to meet). Another section of the rules required foreign companies to restrict their operations to cities with a population of more than 1 million. A little over two months before Walmart and Bharti split, the Cabinet Committee on Economic Affairs tried to sweeten these provisions: limiting the back-end investment requirement to 50 per cent of a company’s first $100 million tranche; allowing companies to source products from any entity with an investment of $2 million or under in plant and machinery; and giving state governments discretion in where they allow foreign companies to set up operations.
In Walmart’s case, these measures appear to have come too late. And the company’s change of strategy stirred up extensive debate in the business pages, with many commentators drawing comparisons with other recent high-profile exits. July saw Warren Buffett’s Berkshire Hathaway cease its online insurance business in India, and steel companies Posco and ArcelorMittal both drop plans to build new factories in the country, while shortly after the Walmart announcement, UK retailer Tesco was quoted as saying it will not invest in India without further clarity on FDI.
“The press are not doing India any favours,” says Nabarro’s India practice head Alasdair Steele: “for investors who are not going out there regularly it can be hard to get an accurate picture.”
So how does India look to foreign observers? We set out to gather the observations and opinions of the India desks of international law firms in order to bring the marketplace into clearer focus.
“There has been a change in scenario in India,” says Jones Day’s most active India partner Manoj Bhargava: “it is a fact that the number of deals year on year has dropped along with the growth in the economy.” The rupee witnessed its biggest fall in value for 20 years in August, coming close to 70 rupees in the dollar, and while the Reserve Bank of India’s most recent monetary policy review maintains that GDP growth for the 2013/14 financial year will end at 5 per cent, independent economists are more sceptical. “Asset quality will continue to deteriorate, particularly in public sector banks. At the same time, profitability will likely remain weak, limiting internal capital generation,” according to a report on India’s banking system published by Moody’s Investors Service. “There has been hesitancy over the economic uncertainty in India: the figures do not make you inclined to invest,” says Gerald Reger, co-head of Noerr’s India desk in Munich: “2013 has been a lost year for the Indian market as far as FDI is concerned, and this will continue until after the elections.”
India’s 2014 general elections are scheduled for May, and the intervening months are expected to be a waiting period for investors, with no large-scale transactions in the works: “deals are challenging at the moment thanks to the inbuilt stasis of the elections,” says Baljit Chohan, head of the India sales practice at Wragge.
A key campaign point for challenger Narendra Modi’s Bharatiya Janata Party has been opposition to incumbent Manmohan Singh’s FDI policies, mostly with the contention that they are too open. India’s new Pension Bill was given presidential assent in September, capping FDI at 26 per cent, which the BJP claimed as a victory against the ruling coalition’s proposals to increase the cap to 49 per cent. Modi has also been an outspoken opponent of multi-brand retail liberalisation, saying it will harm the interests of small shopkeepers, adversely affect domestic manufacturing and create unemployment. The domestic market’s response to his candidacy meanwhile has been almost universally positive, with many in the media tying the recent surge in the India stock market to his hard-nosed business sense (try searching #ModiEffect for further corroboration of the hype). Contrasted with the government-championed Land Acquisition Act, which has drawn widespread criticism for its “anti-growth” policies, the BJP’s hard-line rhetoric has won international admiration: Asian equity broker CLSA’s chief strategist Christopher Wood, in one of the most quoted statements of the election race, said “The Indian stock market's greatest hope is the emergence of Gujarat Chief Minister Narendra Modi as the BJP's prime ministerial candidate.” All of which argues for a “wait-and-watch“ approach among foreign investors. And they are watching: Steele recalled a meeting between Indian and European professionals, in which the Europeans could quote Modi’s election promises on FDI more accurately than their Indian counterparts.
Outsiders doing business in India are of course no strangers to the country’s political vacillations. Looking back over the year so far, Chohan said that his clients had struggled to create solid India strategies amid a sense of governmental and legislative incoherence, citing aviation policy as a good example. Industry analyst CAPA, in its recent outlook report for India’s aviation sector, said: “Major policy decisions, with good intentions, are frequently implemented in an ad hoc manner on the basis of limited consultation, without consideration for the overall structural dynamics of the industry and without sufficient clarity on the detail.” Such an assessment will have come as a blow to Civil Aviation Minister Shri Ajit Singh, who said in March that India was set to become the world’s third-largest aviation market by 2020. “India needs investment,” says Chohan: “but investors are waiting for a coherent political plan.”
In spite of these reservations, the commitment of foreign investors to the Indian market remains strong. “No one is quitting their plans for India,” says Reger: “the population and demography figures cannot be put aside in any consumer industry.” These numbers are indeed compelling: current estimates suggest that more than half of India’s 1.27 billion population is under the age of 25, with many identified among what Hengeler Mueller’s Daniela Favoccia calls “a growing middle class with high purchasing power and a large number of young educated people,” factors that will “keep India on the radars of foreign investors: Vodafone is a case in point.”
Along with Walmart, Vodafone has emerged as the company to watch when taking an acid test of the Indian market for foreign investors. The story of the British company’s entry into India became front-page news in 2012, when the government proposed legislation to introduce a retroactive tax on deals in which foreign firms exchange Indian assets, opening Vodafone up to a potential bill of more than $2 billion. Even while this matter remains unresolved, Vodafone has proposed to commit a similar amount of capital to buying out its Indian shareholders following the government’s decision in July to allow 100 per cent foreign ownership in the telecoms space. “You would have thought the Vodafone tax issues would have been a huge deterrent,” says Richard Gubbins, head of Ashurst’s India group: “It shows the level of investor confidence in the country, and is a great example of a great foreign company taking the long view in India.” Similarly, in an interview with Metropolitan Corporate Counsel earlier this month, chair of Kelley Drye & Warren’s international India practice Talat Ansari noted: “The demise of [its] alliance has not slowed Walmart down from planning continuous growth of its business in India.”
This “long-term view” was hailed by numerous lawyers around the world as the chief virtue a foreign investor must possess when looking at India. Gubbins has himself been active in the country since 1994, and says the picture is “very rosy” for foreign investors who are willing to employ a long-term strategy, citing the Delhi Mumbai Industrial Corridor as “an example of what can be achieved.” Built on a combination of public-private partnership and predominantly Japanese investment, the project is valued at around $10 billion, and is one of several intercity development projects currently under consideration in India.
“I am certainly not advising clients to hold back in their plans for India,” says Chohan: “but I am advising them to be careful, and to look closely at the sectors they are targeting in the country, because if they have high public involvement they are going to be tough to navigate.” Steele agrees: “Ease of doing business has not changed, as long as you don’t have to deal with the government, but the state is so pervasive that this can be hard to do.” The Arvind Mayaram Committee, set up to assess the liberalisation of FDI in India, was unequivocal in its calls to ring-fence certain industry sectors where Indian ownership and control should be mandatory. Among these, the defence and insurance sectors have been singled out in particular by industry voices calling for greater opportunities to bring foreign capital into the country.
While lawyers said they had noticed a drop in the appetite for short-term dealmaking in India, they agreed that the World Bank ranking would not sully the picture investors have of India’s potential as a business destination. Certainly compared to China they said India had the edge in terms of its demographics and its oft-repeated status as “the world’s largest democracy”: “The appeal of a democratic society is strong, certainly for Western investors,” says Reger. Steele notes the similarities between the two: “The shops I see in Indian and Chinese malls are the same, and while China has better back-end infrastructure, India is clearly holding its own.” He also hits upon the key to the ongoing willingness of investors, particularly retailers, to look to India: “the market is so huge that you don’t need an extensive penetration to make a lot of money.”
Writing on the Modi Effect, the Wall Street Journal’s India organ Mint, says “It doesn’t matter if part of it is hype – perception makes a big difference.” The same can be said of India’s FDI climate: sitting at a desk in Europe or North America, the country’s economic picture comes to investors noisily and piecemeal, and can be exciting or discouraging depending on the angle they choose view it from. It is reassuring therefore that foreign lawyers are over there, walking through the malls, and sending a more complete picture back to their clients.