A Bright Indian Future

Tuesday, October 22, 2013 - 15:57

The Editor interviews Talat Ansari, Chair of Kelley Drye & Warren LLP’s International India Practice in New York.

Editor: India’s economy has been in a downward trend recently but is expected to improve owing to the various steps taken by the government to spur growth as well as a good agricultural output. What steps have been taken to improve infrastructure?

Ansari: The prospects of the Indian economy recovering are positive. A recent press release issued by the Ministry of Commerce and Industry indicates that there has been an export growth of 11.2 percent and a decline in imports by 18.1 percent. This has led to an improvement in the trade deficit and the strengthening of the rupee.    

The government has taken a host of measures towards improving infrastructure, for example:

  • Foreign direct investment (“FDI”) in telecom services (including telecom infrastructure) has been increased from 74 percent to 100 percent. Investments can now be made in the telecom sector under the automatic route, i.e., without any prior government permission up to 74 percent and with prior permission for investments above 74 percent.
  • As regards FDI in airports, investment in greenfield projects is permissible up to 100 percent under the automatic route. FDI in existing projects is allowed up to 100 percent (74 percent under automatic route and with prior permission for investments above 74 percent).
  • FDI in exploration of oil and natural gas fields and infrastructure related to marketing of petroleum products and natural gas is permissible up to 100 percent under the automatic route.
  • Indian companies can avail themselves of external commercial borrowings for investments in new projects, modernization and expansion of existing production units in specified infrastructure sectors.
  • Investment debt funds that act as vehicles for refinancing existing debt of infrastructure companies have been set up.
  • The provisions of the [Indian] Income Tax Act, 1961 allows tax holidays in the form of deductions up to 100 percent of profits from business in certain specified infrastructure projects.
  • The government has recently constituted the Cabinet Committee on Investments for clearing stalled infrastructure projects and for identifying key projects required for implementation on a time-bound basis.

Editor: One of the core problems has been the curtailment of investment activity over the past couple of years. What measures have been taken to improve the core sector production performance of coal, steel, power and cement?

Ansari: The Ministry of Power is monitoring capacity addition of ongoing generation projects. Several joint ventures have been formed for manufacturing super critical boilers and turbine generators for thermal power plants. The government is making efforts to increase the availability of gas to power plants to increase domestic production of gas and facilitate import of re-gasified liquefied natural gas (RLNG). FDI up to 100 percent, under the automatic route, is permitted in the power sector for generation, transmission and distribution.

The government has taken proactive measures to improve its production in the core sectors. The Ministry of Coal has recently set up a committee to devise a Public Private Partnership Policy framework with Coal India Limited as one of the partners in order to increase production of coal. Coal India Limited has adopted modern technologies for coal mining and is in the process of further upgrading. FDI in coal and lignite mining for captive consumption by power projects, steel and cement units and other eligible activities are permitted up to 100 percent under the automatic route, subject to certain conditions. FDI for setting up coal processing plants is also allowed up to 100 percent under the automatic route. 

The government has set up an Inter-Ministerial Group for effective coordination amongst the state governments, different ministries and various other agencies for expediting the implementation of several projects in the steel sector. Public sector undertakings are in the process of implementing large-scale expansions in the crude/finished steel capacity. Import of critical raw materials for the steel industry such as coking coal, non-coking coal, scraps etc. is subject to no or very low customs duty.

Editor: What does India need to do to end its structural economic problems as well as inflation?

Ansari: The current state of inflation in India is a result of a combination of factors.

One of the main causes of the current inflation is the failure of the government to bring in required legislative reforms at the right time, mainly because of a lack of political consensus.

The government has taken various steps to increase coal production. These steps include emphasis on implementation of new projects and expansion of existing projects, improving coal evacuation and movement, and the involvement of the private sector.

However, the Reserve Bank of India in its monetary policy has hiked the repo rate by 25 basis points to 7.5 percent. Repo rate is the rate of interest that banks pay when they borrow money from the RBI to meet their short-term fund requirements.  Further, the RBI has also relaxed the minimum daily cash reserve ratio to 99 percent from 95 percent. Cash reserve ratio is the amount of funds that a scheduled bank is required to maintain with the RBI.

Editor: Foreign Direct Investment (FDI) in India has been opened up in many areas; however, there are still some areas that are restricted. Please discuss specific areas where foreign investment is limited.

Ansari: The government has recently liberalized FDI in several sectors. However, certain sectors still remain restricted, such as:

  • Aviation - FDI in aviation in air transport services is permissible up to 49 percent under the automatic route. Recently, the government has rejected the proposal to increase the limit of the FDI in air transport services from 49 percent to 74 percent.
  • Multi-brand retail trading - FDI in multi-brand retail trading is presently capped at 51 percent subject to government approval. 
  • Banking - FDI in banking is permitted up to 74 percent (up to 49 percent under approval route, and above 49 percent and up to 74 percent under government route). 

Editor: There has been a change in the investment policy as to single-brand retail trading as well as multi-brand retail. How many retailers have taken advantage of the relatively new single-brand retail trading policy allowing for 100 percent ownership by foreign investors?

Ansari: According to the information available in the public domain, the government has, between April 2010 and May 2013, approved 18 FDI proposals in the single-brand retail sector, worth approximately USD 173 million. In June 2013, two other FDI proposals worth USD 6.54 million were also approved by the government.

Editor: There are still limitations on investments under the multi-brand investment policy. Please describe the part of the policy that requires retailers to obtain 30 percent of the procurement value of manufactured/processed products from “small industries.”

Ansari: The FDI policy with respect to local sourcing norms in multi-brand retail was amended on August 22, 2013: at least 30 percent of the value of procurement of manufactured/ processed products purchased must be sourced from Indian micro, small and medium industries, including agricultural cooperatives and farmer cooperatives.

  • Such industries must have a total investment in plant and machinery of an amount not exceeding USD 2 million [USD 1 million prior to amendment] at the time of installation, without providing for depreciation on such plant and machinery.
  • The procurement requirement of 30 percent should be met, in the first instance, as an average of five years’ total value of the manufactured/processed products that are purchased beginning April 1 of the year during which the first tranche of FDI is received. Thereafter, the procurement requirement would have to be met on an annual basis.
  • The amendments in the FDI policy relating to multi-brand retail trading is expected to bring a balance between the various business exigencies of the multi-brand retail trading entity and intent of the policy with regard to extending the benefits of the FDI policy in multi-brand retail trading to a large number of small industries. These policy decisions are aimed at increasing foreign investments in India and boosting the flow of foreign funds.

Editor: Why has this created a rupture in the relationship between Wal-Mart and Bharti? What has their relationship been up until the present? What future plans does Wal-Mart have for retailing in India?

Ansari: Bharti and Wal-Mart had announced their venture in November 2006 and established the first cash-and-carry store in May 2009 in Amritsar. Wal-Mart had strenuously opposed the 30 percent local sourcing norm as discussed. Based on the information available in the public domain, Wal-Mart had expressed inability to meet 30 percent sourcing requirement from small industries, saying it could source only about 20 percent. It also stated that the revised FDI policy with regard to multi-brand retail trading by way of conditions prescribed relating to procurement of 30 percent of manufactured/processed products stood as a "critical stumbling block," and it is not sure about the viability of such a policy introduced by the Indian government.

The demise of this alliance has not slowed Wal-Mart down from planning continuous growth of its business in India. Wal-Mart is interested in working with the government towards advocating viable investment conditions for FDI in multi-brand retail trading in India.

Editor: What restrictions are placed on foreigners investing in real estate in India in terms of capital investment and land use?

Ansari: Under the FDI policy, a non-resident Indian or person of Indian origin is not allowed to invest in a firm or proprietorship concern engaged in any real estate business. FDI is expressly prohibited in the real estate business or construction of farmhouses. FDI in the construction of townships, housing, built-up infrastructure and development projects is permitted up to 100 percent, subject to certain conditions. 

Editor: What measures has India taken to fight corruption? How do foreign companies avoid tripping up on the FCPA when doing business in India? What compliance procedures should they have in place?

Ansari: The Indian government has taken various steps, legislative as well as judicial, to weed out corruption from the country.

  • The government has introduced legislation - including the Judicial Accountability Bill, Public Procurement Bill, Lokpal Bill - aimed at eradicating corruption at various levels. The Supreme Court of India’s recent judicial pronouncement ousting convicted politicians from continuing as elected representatives helps in eradicating corruption amongst the elected officials.
  • A company that in the course of its dealings anticipates violation of FCPA may establish a mechanism for employees to report to the management concerns about unethical behaviour, actual or suspected fraud, or violation of the company's code of conduct or ethics policy. This mechanism could also provide for adequate safegaurds against victimisation of employees who avail themselves of the mechanism and also provide for direct access to the chairman of the audit committee in exceptional cases.
  • The whistleblower policy may also be communicated within the organisation. In addition to having an effective internal control system to check bribery and extortion, it is imperative that the company provides training to its employees on a regular basis and acquaints them with the provisions of  antibribery legislations such as the FCPA, the UK Bribery Act and the Indian Prevention of Corruption Act.
Please email the interviewee at tansari@kelleydrye.com with questions about this article.