India Update April 2009

Welcome to the April edition of Freehills’ India Update.

India Update is our regular newsletter covering recent Indian legal and business developments and highlights.

In this edition of India Update we cover the following issues:

Easing of foreign investment rules
Elections in India
GFC affects India but growth still relatively strong
Promoters must disclose shares used as security for loans
Satyam fiasco
Macquarie launches new infrastructure fund in India

Easing of foreign investment rules

The Government of India has recently clarified and liberalised its foreign investment policy relating to downstream investment.

Previously, there was some confusion as to whether any investment made by an Indian holding company having any foreign shareholding was required to obtain prior government approval. One of the conditions of approval was that the funds for the investment in India would have to come from overseas. 

In recent months, the Indian government changed its policy on this matter by issuing press notes 2, 3 and 4 of 2009.

Two key developments flow from the changes, now:

• any investment made by an Indian company into another Indian company will not be counted as foreign investment if the Indian company making the investment is majority owned and controlled by resident Indians. (At the same time, the meaning of ‘ownership’ and ‘control’ has been clarified), and
• any downstream investment by companies owned or controlled by non-Indians would have to follow the same requirements as for direct foreign investment.

Under India’s existing foreign investment regulations, foreign investment in most sectors is under ‘automatic’ route, that is no foreign investment approval is required.

However, in certain sectors, including telecommunication, insurance and real estate, government approval is required for investments above certain thresholds. Such investments may in some cases also be subject to additional conditions (for example, the board needs to comprise of a majority Indian nationals).

For a further discussion on these changes and its implications on investments, please see the following article in Live Mint¹, a leading Indian business daily (which is the Wall Street Journal’s Indian content partner) which was written by Freehills’ Rohit Kumar.

Notwithstanding the global financial crisis, foreign direct investment into India for April to November 2008 was US$19.79 billion. This was an increase of an enormous 90 per cent on the corresponding period the previous year. Investments from three Asian countries Mauritius, Singapore and Japan contributed more than 55 per cent of the total inflows during the period. However, this may not reflect the true underling source of the investment as foreign investors from many countries often choose to invest into India via Singapore and Mauritius because of the favourable tax treaties such countries have with India.

If you have any questions or require more information on foreign investment into India, please contact a member of the India team.

Elections in India

India, the biggest democracy in the world, is currently in the midst of its general federal elections.

The Indian elections, held every five years, have always been logistically challenging due to large number of electorates. This year, voting will be conducted at 828,804 polling stations across the country with voting to take place through electronic voting machines. It is the largest ballot in the world with an estimated electorate size of 714 million voters.

The elections will be conducted through April and early May with the results expected to be announced on 16 May 2009.

The fight for power in this year’s election is between the ruling United Progressive Alliance, the existing coalition government in India lead by the Congress party and the National Democratic Alliance, lead by the Bhartiya Janata Party.

GFC affects India but growth still relatively strong

In recent years, India’s economy has been one of the stars of the global economy. Indian GDP grew 9.6 per cent in 2006 and 9.2 per cent in 2007.

However, as with all countries, the global financial crisis (GFC) has hit India, with GDP growth for the 2008-09 period slowing to 7.1 per cent. In their global economic forecast updates, the World Bank, the Asian Development Bank and the OECD have projected 2009-10 growth rates between four and five per cent for India.

Indeed the rapid rate of growth is diminishing…..yet this must be considered in comparison to the projection that GDP for the developed OECD countries for 2009 is expected to decline by 4.3 per cent.

So plenty of opportunities still exist in India.

Promoters must disclose shares used as security for loans

The Securities and Exchange Board of India (SEBI), India’s stock market regulator, has made it mandatory for promoters of listed entities to disclose details of shares they have provided as security to financiers. This change has been made to provide greater transparency in the ownership of securities of listed companies.

The new rules by SEBI mandates two kinds of disclosures: event-based disclosures, which must be made as and when the shares are provided as security; and periodic disclosures, which must be made when companies report their quarterly statements to the stock exchanges.

A large number of Indian promoters have already made disclosures under this new law. In majority of cases, the disclosures which have been made relate to shares provided as security for raising money for the company.

Satyam fiasco

In one of the biggest corporate frauds in India, Mr B. Ramalinga Raju, the CEO and the founder of Satyam Computers, India’s fourth largest IT services company, admitted that his company had been falsifying its accounts for years, overstating revenues and inflating profits by US$1 billion.

Unfortunately this shows that India is not immune from corporate scandals which have occurred in Western economies.

The regulatory and criminal investigations in the matter are ongoing and have extended to some of the company’s key executives as well as the auditor.

The Satyam episode has brought the role of independent directors into sharp focus. Indian law requires Indian public held companies to ensure that independent directors constitute at least half of their board, an effort to enhance the corporate governance.

The scandal is expected to lead to various corporate governance reforms.

Following the scandal, the government facilitated a competitive sale process to sell a controlling interest in Satyam, which retains a solid underlying business. The process, which involved many bidders, culminated in Tech Mahindra Ltd, a joint venture of local business conglomerate Mahindra and BT, agreeing to acquire 31 per cent of the company. Under the Indian takeovers law, Tech Mahindra will be required to make an open offer to all other shareholders for a further 20 per cent of the company.

Macquarie launches new infrastructure fund in India

Macquarie Group and State Bank of India, India’s largest bank, have launched a new fund to invest in infrastructure projects in India. So far the new fund, Macquarie-SBI Infrastructure Fund, has raised capital of $1.45 billion. The total size of the fund, including the contributions from Indian domestic institutions, is anticipated to be between $2.8 billion and $4.2 billion.

It is expected that the new fund will invest in essential service assets generating long-term cash flows, such as transport infrastructure, telecom, power and logistics projects and investments will include greenfield projects and existing businesses.

The growing Indian economy and population needs further infrastructure investment with many private investment opportunities expected to arise in coming years.

Freehills India team

Freehills is the Australian law firm of choice for many leading Indian companies investing in Australia and South-East Asia. We won the India Deal of the Year award in 2007 for Tata Power’s acquisition of PT Kaltim Prima Coal and PT Arutmin Indonesia.

We have been the most active Australian law firm in India. The Freehills India team is currently advising a number of ASX top 100 companies on their investments into, and operations in, India. We also advise major Indian companies on their investments in Australia and other parts of SE Asia.

We have excellent relationships with leading Indian law firms, investment banks, Indian government bodies and the big four accounting firms in India as well as Austrade.

Freehills is committed to strengthening its India practice group and has employed a number of Indian-qualified lawyers. The mix of Indian lawyers based in our Sydney and Melbourne offices and Australian lawyers with Indian experience enhances the understanding of the Australian-Indian investment and capital flows.

More information

For information regarding possible implications for your business, contact a member of the India team.