Looking for a silver lining


The storm clouds gathering over India may be just what the country needs

There is no downplaying the chaos that can result from a worsening balance of payments situation and the downward movement of the rupee. But this may be what it takes to make the Indian government stop dithering and act. The regulatory uncertainties and bureaucratic delays that have plagued the country over the past few years cannot continue. Status quo is no longer an option.

Leader Looking for a Silver LiningAs we report in this month’s Cover story (Frustrated funds, page 17), investment into India is being seriously affected. Our review of the state of play in the private equity sector reveals that the total amount invested in the first quarter of 2012 was just over half the amount invested in the same period last year.

This is the third consecutive quarter of decelerating private equity investment. Moreover, there was not a single deal above US$200 million. In the same quarter last year there were five.

According to many observers, the root cause of this decline lies in regulatory uncertainties, bureaucratic roadblocks and policy paralysis. Government dithering on tax rules has also been highlighted as a problem.

As Sumir Chadha of WestBridge Delaware Advisors says, private equity and venture capital investors need “a stable, long-term, clear tax policy from the government.

“Changing tax rules in the middle of a fund creates a lot of uncertainty.”

Some investors may have turned their sights elsewhere, but others are fighting back. A few are using the bilateral investment treaties signed by India to pursue claims against the government, which they blame for losses on their investments.

In A two-way street (page 25), we show how investors from Estonia to Ecuador have used bilateral investment treaties to bring a variety of claims against governments around the world. How India handles the claims against it will be watched closely both inside the country and overseas.

Foreign investors are also fighting back by taking action against individual companies. One such investor is The Children’s Investment Fund (TCI), a hedge fund which has a track record in shareholder activism. TCI, which is a minority shareholder in Coal India, has taken up arms against both the company and the Indian government (A blackened record, page 33).

Minority shareholder groups in India are applauding TCI’s bold moves – it has instructed its lawyers to initiate legal action against Coal India and its board of directors – but others are doubtful of its chances. It is too early to tell who will blink first, but either way a lot hinges on the outcome of this dispute.

If TCI goes to court, chances are one of India’s eminent senior advocates will argue its case. This “specialist class of arguing lawyers”, as one lawyer puts it, is much sought after, especially in high-stakes cases (Persuasive partners, page 29).

However, as our coverage reveals, some observers see problems with the way senior advocates are being chosen and believe that standards are falling as a result. Others worry that senior advocates are overstretched – often through no fault of their own, but merely because they are in great demand.

As a result, Amar Gupta at J Sagar Associates says, “working with senior advocates can be a demanding process and requires a lot of patience and perseverance”.

Heavy demands are also being placed on the judiciary. Writing in this month’s Vantage point (In support of free speech, page 23), Amitabh Lal Das, the general counsel for Yahoo! in India, points out that “India’s laws on defamation, obscenity, etc., are not black and white”. Consequently, he argues that judges, and not the government, should determine whether online content is “obscene or defamatory or unlawful in any other manner”.

Demands such as this would add to the pressures on the courts. Is it time to lessen the dependence on oral arguments to speed up matters in court and if so, what would this mean for senior advocates and other litigation lawyers?

This month’s Intelligence report (Tested waters, page 39) focuses on Mauritius, where barristers dominate the legal market. Around 40% of India-bound foreign direct investment is channelled through this island nation, making it extremely significant to India’s economic development.

While in recent years Mauritius has built up an impressive financial services sector, its origins as an offshore financial centre for India are firmly rooted in the double taxation avoidance agreement it signed with India in 1982.

But with India set to introduce new anti-avoidance rules next year, there are concerns about the future of Mauritius as a tax-efficient jurisdiction. It is too early to tell what the new rules will be or how they will affect Mauritius’ position as an investment gateway to India, but the spectre of change is already giving many stakeholders the jitters: “[It] beggars belief that the Indian government is implementing these measures in the context of the global economic turmoil,” says Mukund Gujadhur at TM&S Gujadhur Chambers in Port Louis in Mauritius.

India needs a steady hand on the rudder at times like this.