Renewed Energy for Foreign Investment in India

Prime Minister Narendra Modi, elected in May 2014, will turn the corner again in May 2019 as he completes his first five year term. We visit some of the recent developments in his government’s legal and tax policies that have potentially mended a broken administrative process from the previous administration.

Earlier this year, Mr. Modi in his speech at the World Economic Forum in Davos, Switzerland, made a powerful pitch for ‘Invest in India’, a continuation of his ‘Make in India’ agenda to attract foreign companies and to encourage start-up culture in India. Here, he famously said, “We are removing red tape and laying the red carpet”. It now almost appears as though he said what he meant, and meant what he said.

GDP Growth:

Over the past few years, India, Asia’s third largest economy after China and Japan, has delivered strong economic growth. According to the World Bank, India’s GDP growth has recovered from a three-year low and its economy will lead the pack for the next three years (see box).

(Source: World Bank) 

As an example of its corporate sector’s horsepower, India experienced record-breaking M&A deals in 2016 when it completed 505 domestic deals worth $25.1bn. While domestic M&A continued to dominate business activities, inbound transactions also stayed strong in 2016 at 362 deals worth $31.1bn. (Source: Ernst & Young, Transactions 2017).

Foreign Investment:

The most significant removal of red tape was the reform of its foreign direct investment (FDI) caps introduced by the Department of Industrial Policy and Promotion (DIPP). It eliminated an entire layer of government approval, and increased potential for foreign investment by reducing thresholds in civil aviation, manufacturing and retail, with many sectors not requiring any prior approval anymore. Where approvals are required, the DIPP has introduced ‘standard operating procedures’ which utilize online application filing methods and have laid down the application and approval process to be completed in approx. ten weeks. Rules around incorporation of limited liability partnerships have also been relaxed, likely making it a favored investment vehicle for FDI.

Tax Reform:

On July 1, 2017, India replaced its central and state tax laws with a unified Goods and Services Tax (GST). The World Bank has praised the initiative and jumped India up by record 30 places in the list of the Bank’s 2017 “Doing Business” rankings, which factors in, among other things, tax regimes of the nations (Source: World Bank Ease of Doing Business Rankings). Additionally, India finally joined countries like Australia, Canada, China and South Africa when it adopted General Anti-Avoidance Rules in April 2017. The GAAR allows tax authorities to deny tax benefits on transactions executed with the purpose of avoiding taxes (non-arms-length transactions, misuse or abuse of Indian income tax laws, lack of commercial substance, etc.). Undeniably, the most shocking moment for India came when Mr. Modi announced the sudden banning of the extant 500 rupee and 1000 rupee notes, intended to eliminate black money from the market, and to get rid of counterfeit currency. Although the brave step was mired in controversy by political parties, and resulted in drop of India’s GDP for fiscal year 2016, it seemed to have changed the image of India and boosted foreign investment in certain sectors.

Corporate Governance:

After an overhaul of the Indian Companies Act (corporations and business law of India), in over 55 years in 2013, the Indian legislature has passed the 2017 Companies (Amendment) Act, resulting in changes in accountability, disclosure requirements, investor protection, and corporate governance. Similarly, India’s securities market regulator, Securities and Exchange Board of India, has already published the Listing Obligations and Disclosure Requirements (Amendment) Regulations, 2018 (effective April 1, 2019), which replace the former Regulations from 2015, to ensure further investor protection and increase transparency.

How Insolvency and Bankruptcy Laws helped Foreign Investment:

By introduction of the new Insolvency and Bankruptcy Code, these procedures have become less cumbersome and more efficient for companies. The code is designed to take tough action against corporate defaulters and help banks recover bad loans. In parallel, the Reserve Bank of India introduced new rules around non-performing assets, which prompted banks to initiate insolvency process against companies falling in the non-performing loan portfolio, which invites auctions from investors. Foreign investors have been cautious about investing in these companies in the past, however, a change in this trend was noticed when US private equity firms like KKR and Blackrock started taking steps to enter the distressed debt space in India and exploring ways to set up their credit platforms in the country.

Generally, the government has proven to be more active in participating in improving the health of the economy, by being more inclusive and by liberalizing foreign investment policies, going head-to-head against its equally fast-growing neighbor, China. It is certain that a lot awaits India!

If you have any questions or comments, please contact Rasika A. Kulkarni in the Troy office at RKulkarni@dickinsonwright.com or 248-205-3244.