Doing business in India: sector-specific challenges and takeaways
Devina Narvekar gives an insightful overview of the business landscape in India
India is an exciting and fast developing market, yet, doing business in the country can be operationally challenging. If your organisation conducts business in India, it is advisable to future proof your operations against some unique market risks. To aid your decision-making process, we have distilled a few takeaways in some key sectors where India is seeing increased foreign investment.
Industrial and engineering
1. Entry: Commencing operations does not always require a locally incorporated company. It can also be achieved through a project office, branch office, liaison office or joint venture (JV) with an Indian partner, based on the scope of operations.
Tip: Each entity is subject to different laws (particularly tax). Project, branch and liaison offices have limited operational capability and hence capitalised entry modes are generally preferred.
2. Regulatory approvals: In the absence of a single window approval process, clearances are needed from multiple authorities to set up operations (especially an industrial unit). Local approvals require granular analysis and planning as the potential impact (of getting them wrong) can be high.
Tip: Meticulous planning and dedicated (in-house/third party) resources are needed to obtain regulatory approvals. The time required for these should be factored into the project planning.
3. Land acquisition: Manufacturing units require significant land which may involve procuring agricultural land that needs to be converted for non-agricultural use. This can be a complicated and costly process. Land holdings in India are often fragmented, leading to multiple ownership claims even after acquisition.
Tip: Long term leases from industrial development corporations can be procured and land aggregators can help gain access to land banks. However, these relationships must be carefully structured.
4. Financing: Setting up a manufacturing unit can be capital intensive, requiring financing at different stages. The procedure for an overseas parent company to fund an Indian entity is restricted and needs to be carefully analysed. Outward remittance of profits, fees or royalty payments by the Indian company to the foreign parent also depends on the manner in which the initial funds were deployed into the Indian company.
Tip: Examine regulations relating to foreign equity financing and repatriation routes before finalising the mode or channels of investment.
5. Internet of Things (IoT): IoT has fundamentally altered the way in which traditional industries approach business. Manufacturers will need to account for an expansion of the regulatory regime applicable to their processes and products.
Tip: Additional compliances may apply to your operations based on the threat of cyber intrusions, IP ownership issues and the application of privacy and data protection laws where personal information is collected by IoT devices.
6. Labour management: The Indian labour law regime is undergoing a major overhaul. Key changes to the law include the introduction of a uniform minimum wage, expanded social security net for unorganized and gig workers and enhanced welfare mandates and health and safety requirements. On a more practical level, labour in manufacturing entities is usually unionised and needs careful management. Labour managers who know the various undercurrents in the local area are invaluable.
Tip: Proactively update or prepare your labour policies to account for the changes to the law and also keep in mind local undercurrents when doing so.
Defence and Aerospace
1. Anti-bribery and corruption (ABC): Corruption under Indian laws is benchmarked against the concept of ‘undue influence’, which is interpreted widely and includes monetary and non-monetary bribes/influence (and even mere planning such ‘undue influence’). Corruption investigations are intrusive and protracted processes, involving multiple enforcement authorities for different offences. Companies and senior management are at risk of prosecution. Sanctions under the UK Bribery Act 2010 and other extra territorial ABC laws may also be triggered by an infraction in India.
Tip: Adopt a proactive approach to mitigating potential corruption risks in defence dealings by inter alia formulating specific whistle-blower programmes and employee training for India-specific projects, auditing high risk transactions and developing an incident response protocol to deal with any investigations.
2. Preference to local content: In line with the government’s ‘Make in India’ policy, recent tenders released by the Ministry of Defence (MoD) show a clear preference towards bids with higher proportions of local or Indian content in their products/services. To remain eligible for defence tenders and to stay competitive in the long-run, defence vendors will need to comply with indigenisation initiatives. In practical terms, Make in India for defence requires both local manufacturing and cutting edge technology; long-term collaborations between Indian and overseas vendors can often be the most effective (and, at times, quickest) way to achieve compliance - through joint ventures, licensed manufacturing and other forms of strategic partnership.
Tip: For long term commercial success, collaborations between Indian and foreign vendors should, in equal measure, be compliant with applicable laws, qualify for Make in India contracts in India, be tax efficient and offer mutually acceptable commercial positions for both parties.
3. Technology transfer: While offsets and foreign investment rules encourage JVs and licensed production, finding a local partner with the necessary technical capability is a challenge. Licensed production may make the Indian manufacturer (and the end customer) overly dependent on the licensor for updates and upgrades. Control of the JV and of the technology/production quality are inter-connected, but need to be structured to meet both parties’ interests.
Tip: Dispute resolution in case of any conflict between the partners can be a long drawn-out process, thereby diluting the value of the JV and affecting production. Protection of the technology itself and its IP is key in any tech transfer scenario, including JVs. Formulate robust agreements and IP policies to prevent dilution in the IP value.
4. Agency compliance: Foreign suppliers can only hire Indian agents who are registered with the MoD and details of engagement (including commissions/fees and the agency contract) must be disclosed to the MoD. Integrity pacts in procurement contracts typically contain conditions regarding the engagement of agents. These conditions are non-negotiable and their contraventions could mean contract termination and backlisting.
Tip: The nature of functions undertaken by an intermediary would typically dictate the legality of their role. Use your agents as consultants and advisors so they can offer valuable background assistance to you in responding to SQRs, internally clarifying MoD communication, internally formulating responses to tender documentation and restrict their external facing role, to the extent possible. If they are performing agency functions (such as front ending bid submissions, participating in contract negotiations, etc.) disclose all payments to the MoD and ensure payments are compliant with defence procurement, tax and foreign exchange laws. Periodically, audit agents to ensure such compliance.
Digital business and technology
1. Barriers to entry: Not all digital business ventures can be set up by foreign owners without entry conditions. Some products and services are heavily regulated (e.g., e-commerce) and others require licenses (e.g., operating payment systems). Given the interconnected nature of digital business, your product or service may impinge on one or more regulated sectors.
Tip: Review your offering to make sure it (or any part thereof) is not prohibited, requires a license, or is subject to operational restrictions.
Data protection and privacy: Indian privacy laws are undergoing a major overhaul. The Digital Personal Data Protection Bill 2022 envisages inter alia a data protection authority, higher standards for consent, regulation of personal data of minors and higher standards of compliance for ‘significant data fiduciaries’.
3. FinTech regulation - progressive but restrictive: A number of regulatory changes impacting FinTech and payments have been in the pipeline for some time. Most recently, the RBI started regulating payment aggregators and digital lending businesses. While the RBI promotes digital payments, it keeps a tight check on licenses, compliances, etc., in furtherance of its aim of consumer safety and benefit.
Tip: Regulations, when issued, are usually very restrictive, mandating substantial, prudential, governance and reporting requirements. Relaxations are rarely granted and usually only given for good consumer-benefit reasons.
4. Unsolicited communications: Commercial communications sent using telecom resources (via phone calls and SMS) for the purposes of information, solicitation or promotion of commercial transactions, are subject to a number of restrictions including prior consent of the recipient and anti-spamming regulations.
Tip: These restrictions do not currently apply to emails or internet- based (i.e., OTT) messaging services.
5. Access to encrypted content: The Government’s concern over inaccessibility of encrypted data may result in service providers being approached to provide access to encrypted content over their networks.
Tip: Include confidentiality provisions in your agreements with service providers to limit disclosures. Contractually, require service providers to have access policies in place to deal with any such decryption/access requests.
1. Regulatory framework and tariffs: Each state in India has its own solar and wind policy (these policies are broadly on the same lines but differ on some key aspects). This could lead to a lack of uniformity in the Power Purchase Agreements (PPAs) entered into with various distribution companies (DISCOMS). Standard PPAs mostly have no provisions for developers to renegotiate tariffs in case of delays. They also do not provide for security against payment defaults (though the government has recently introduced the issue of letter of credit for specific segments). Hence, negotiations can become a long, drawn-out process, involving the state electricity regulatory commission.
Tip: Note some states have better structured PPAs. Seek clarifications for deviations during the bidding process.
2. Asset management: Turnkey asset management is still at a very nascent stage with disclosures and governance-based models still few and far between. Exercise close oversight and control over the asset manager.
Tip: Having a robust asset management agreement is not sufficient. Close oversight is preferable, appointment of full-time employees based in India, frequent site visits and board control over the asset SPV is crucial.
3. EPC contracts: EPC contracts need to clearly communicate obligations, responsibilities and risks. The EPC cost might vary based on tax efficiency, so contracts need to be structured well. All the aspects of the project including commercials, scope, technicalities, timelines, performance and payment milestones, construction schedules, etc. must be read together (along with their impact on each other), understood and carefully reviewed.
Tip: Forget about the Silver Book (or any other standard) when you carry out EPC contracting in India. Issues pertaining to land, right of way, etc. are significant and development in India can be challenging.
4. Financing: Contrary to the global trend of limited recourse/non-recourse financing, lenders in India demand promoter support during the project tenure. For foreign promoters, this is exceptionally tough due to stringent investment and borrowing regulations. Green bonds are upcoming with the first sovereign graded green bond issue likely to come out next year.
Tip: Be ready for tough negotiations and documentation if you want to borrow in India.
5. Dispute resolution: Government PPAs generally provide for the central/state/joint electricity regulatory commission as a forum for adjudicating disputes and not an independent forum such as SIAC/LCIA.
Tip: Segregation of tariff disputes to the commission and non-tariff related disputes to an independent forum (arbitration) has better chance of succeeding during negotiations with a DISCOM.
6. Sale of projects: Approvals for stake sale are needed from multiple agencies like DISCOMs, lenders, nodal agencies, etc. The buyer will have to re-apply for a permit (as these are mostly not transferable), leading to a tedious, inefficient process.
Tip: Plan and communicate well. Keep realistic and not very aggressive timelines. Stay in constant touch with the lender.
Devina Narvekar is a principal associate at BTG Legal