India Business Law Journal – June 2011

The frustrating search for clarity

Do regulatory inconsistencies and bureaucratic delays point to a crisis in decision making?

Dithering, to some extent, is inevitable in a country as large and diverse as India. But two decades after it began dismantling barriers to entry, the necessary systems should have been developed to enable the government to make timely, transparent and consistent decisions. Despite this, opaque processes, bureaucratic roadblocks and regulatory contradictions continue to blight India as an investment destination. And foreign investors are now encountering a new hurdle: a sharp increase in the number of deals that are being subjected to national security reviews (Trouble at the border?).

While caution on national security grounds is certainly justified, what is troubling is that there are no guidelines or timetables under which the reviews are conducted. As a result, decisions are ad hoc and there is no knowing how long it will take for an approval to be granted.

This issue’s Cover story (Mixed signals) focuses on another pillar of India’s regulatory infrastructure that has the potential to derail big-ticket M&A deals: the introduction of mandatory merger controls. Most observers broadly welcome the move, but as we show, the implementation of the controls is being marred by contradictions between the competition act, the implementing regulations and various ministerial notifications. There are also fears of conflicts with other regulations. For example, delays resulting from compliance with merger control requirements could result in some deals falling afoul of the country’s capital markets rules.

The task of putting things right rests with India’s competition regulator, the Competition Commission of India. Whether this body has the wherewithal to rise to the challenge is a matter of some debate. The stakes are high. Most observers agree that the effective implementation of a merger-control regime is vital for the health of Indian and international businesses.

Another factor that is inextricably linked to the health of the country’s businesses is the standard of corporate governance. And here responsibility falls on the shoulders of company directors. In this month’s Vantage point (Raising the bar), Omkar Goswami, a director of several prominent Indian companies, argues that if standards of governance are to improve, company directors must raise their game. Goswami believes that too many of the country’s directors have a “box-ticking” mentality when it comes to carrying out their fiduciary responsibilities. He notes that significant improvements have been made in recent years, but warns that it is still difficult to recruit directors who have “the necessary skill sets, who do their homework and are truly independent”. Companies that don’t get this right, he says, will “be in trouble, sooner or later.”

In sectors plagued by regulatory uncertainties and political sensitivities, the burden shouldered by company directors is particularly heavy. India’s nascent gambling industry, for example, is regulated by a patchwork of state and central laws, many of which undergo frequent changes as politicians pander to the demands of various interest groups (Taking a gamble on gaming). The laws have created several no-go areas and all foreign direct investment is banned. Yet loopholes that allow betting on games of “skill”, combined with a handful of local laws that have legalized gambling in certain states, have enabled the industry to take root. This year alone, new casinos are set to open in Sikkim and Daman. The latter will occupy a 5,700 square-metre space leased from a luxury resort that is part foreign-owned. As we report, this is a significant development that may pave the way for other foreign investors to take one step closer to a sector that remains frustratingly out of bounds.

Another sector in which the opportunities available to foreign investors are strictly limited is insurance. Policy reform in 1999 facilitated foreign investment of up to 26%, but since then, despite hints at further liberalization, there has been little progress (The long wait for reform). Prospective investors are now pinning their hopes on the Insurance (Amendment) Bill, 2008, which is yet to be passed by parliament. The bill contains several key changes, among them an increase in the foreign investment cap to 49%.

In this month’s Intelligence report (Leading the field) India Business Law Journal presents its fifth annual survey of the India-related legal work being undertaken by foreign law firms. In what has been an interesting year, we find that a number of foreign firms have strengthened their India practices despite their growing frustration at being kept out of the country.

Our coverage reveals the current leaders in the race to win leading roles on high-profile India deals. It also highlights a wide range of firms with diverse India-related capabilities that should remain on the radar of corporate counsel.

India Business Law Journal is now entering its fifth year of publication. Since its launch in June 2007, we have scrutinized complex transactions and regulations with the aim of providing meaningful analysis and practical advice to our readers. We have also sought to foster intelligent debate on key issues and, where possible, to bring clarity to areas of confusion or ambiguity.

This has been both a challenge and a privilege, and something that all of us at India Business Law Journal have enjoyed immensely. As we continue on this journey, we would like to thank our readers, our contributors, our advertisers, our correspondent law firms and our editorial board members. We look forward to continuing to serve you in the years ahead.