India Business Law Journal –  September 2013

Reducing the trust deficit

‘The governorship of the central bank is not meant to win … votes or Facebook likes’

A timely reminder from Raghuram Rajan, the new governor of the Reserve Bank of India (RBI), on his first day in office. In cautioning that some of his actions would not be popular, Rajan signaled there were tough times ahead for India.

While there is no doubt about Rajan’s resolve to do the right thing, there is little that he or any regulator can achieve without having invested in a relationship of trust with the masses. Rajan clearly understands this. His widely publicized speech referred to the importance of transparency and predictability and of the RBI becoming a “beacon of stability”.

Impressive rhetoric, but can Rajan be expected to walk the talk?

While a change of guard at the RBI has left observers hopeful of more coherent and practical policymaking from India’s central bank, there is little expectation that it is anything other than business as usual at most other branches of the Indian establishment.

This month’s Cover story focuses on an area where a radical shakeup would go a long way towards improving the country’s reputation as a business-friendly jurisdiction: India’s inevitably problematic taxation regime.

The problems faced by companies – both within India and outside – that find themselves embroiled in disputes with India’s tax man are legendary. And with little being done to overhaul the system, not only is there a “trust deficit”, as Ravishankar Raghavan at Majmudar & Partners calls it, but it also seems that some investors are running out of patience. Samsuddha Majumder, a counsel at Trilegal, observes that “in some cases [the fear of tax litigation] could be the basis of decisions on whether to invest in India or not”. He adds that this “was not so before 2012”, when Vodafone became embroiled in its now-infamous dispute with India’s tax authorities.

A lot has changed since the Vodafone dispute flared up; there is now much greater vigilance when it comes to matters of taxation and most companies understand that they can’t afford anything less than an extremely robust tax compliance system. Yet writing in this month’s Vantage point Rajinder Sharma, the general counsel for South Asia at DuPont India, says that “even the best-made tax plans can fall apart when tax officials use a fine-tooth comb to find every opportunity to generate additional revenue for the exchequer”.

While generating revenue is critical for the government and the country, there needs to be a realization in the corridors of power in New Delhi that businesses require high levels of clarity and certainty. If these cannot be provided and investors continue to be spooked by the potential of running into unforeseen tax disputes, the damage to India could be immense.

In this month’s Spotlight we turn our attention to India’s new Companies Act, which seeks to ensure that the legal infrastructure for companies operating in India is fit for purpose. The act introduces several new concepts: one person companies, mandatory corporate social responsibility obligations and at least one woman director for certain classes of companies. But as our coverage reveals, there are still many grey areas, and since the supporting rules are yet to be notified, a complete picture of how the new act will impact companies operating in India is yet to emerge.

Another area in which change is afoot is in the legal infrastructure surrounding hydrocarbon exploration and production in India. In What’s the deal? we provide an in-depth look at new revenue sharing contracts that are set to replace the production sharing contracts that have been used so far.

The new contracts aim to address the chronically low success rates that plague exploration projects in India, and our coverage examines how the changes will affect companies operating in the sector. As it stands, India is dependent on imported hydrocarbons and only time will tell if the restructuring of these contracts will assist the country in its drive towards self-sufficiency on this front.

This month’s Intelligence report provides a detailed analysis of the current trends in outbound investment from India. Just a few years ago, cash-rich Indian companies embarked on a bold global shopping spree, snapping up distressed companies that had fallen victim to the global financial crisis. But now the nature of outbound investment is markedly different.

Indebted, and weakened by the rupee’s tumble, India Inc has been forced to adopt a more cautious approach. The deals are still flowing, but they are smaller in size and no longer motivated primarily by rock-bottom valuations.

“Given the current state of the market, Indian companies are making small but strategic investments by either purchasing assets or companies from liquidators or companies that have the relevant technology or intellectual property,” explains Nipun Gupta, a partner at Bird & Bird.

Russell Holden at Taylor Wessing in the UK, meanwhile, reports that the “more challenging outlook” for the Indian economy has led many companies “to focus on their existing Indian businesses and to ‘get their house in order’ at home before looking to expand abroad”.

Be that as it may, there is no stopping the flow of outbound investment. This is good news for lawyers, both inside India and elsewhere.