India FDI reforms explained

Author: Ashley Lee | Published: 4 Oct 2012
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India’s FDI reforms were a landmark event for foreign investors discouraged by the country’s  notorious policy paralysis. But in-house  counsel cautiously await their  implementation.

 

While  the  announcement of FDI reforms is a sign that India is reopening to foreign investment, counsel warn that clients  are concerned about changes following the announcement.

 

Last November foreign investors were surprised when the Indian government announced the opening of FDI in multi-brand retail,  then retracted it after political opposition.

 

Trilegal partner  Saurabh  Bhasin said,  “While there are positive feelings that the government  is finally making important decisions on much-needed reforms, there’s some level of cynicism and anxiety in seeing how these reforms play out,” he said.

 

A Singapore-based private equity lawyer agreed that the reforms had received a positive response, and added that the easing of restrictions in the retail and airline sectors is especially significant because both will especially benefit from FDI.

 

But the reforms – especially FDI in multi-brand retail  – are politically contentious. The counsel noted thatopposition in the country may cause a rethink, if not on the fundamentals of the policy itself, then on some of the details around it.

 

“Only time will tell whether the implementation is effected in such a way as to give certainty to investors that their investments will not be subject to policy change or amendment going forward – as such, we can expect investors to be circumspect in the way they take advantage of these reforms,” said the source.

 

Back-end infrastructure investments

 

But investors are already concerned with some aspects of implementation. The Indian government is requiring foreign investors in multi-brand retail to invest  $100 million in back-end infrastructure.

 

Although foreign investors have complaints about the high cost of opening in India, Bhasin  stressed that there are advantages: while multi-brand retailers must form joint ventures with Indian companies with a 51% ownership cap, they can fully own their back-end infrastructure.

 

“International companies were always allowed to have 100% ownership in back-end infrastructure, such as cold storage, but no one put money into it before because they couldn’t have a front-end presence,” he said.

 

Bhasin hoped that the FDI in multi-brand retail reforms will spur public-private partnerships, and may mean that the government takes a closer look at much-needed infrastructure reforms.

 

Further reforms


But sources agree that the Indian government must do more to continue encouraging foreign investors. The counsel recommended that it continue to take steps to reduce the uncertainty of the General Anti-Avoidance Rules (GAAR).

 

Aside from GAAR, the lawyer suggested further relaxation and clarification of FDI laws. Most critically, the government must focus on reform to resolve inter-governmental agency disagreement on fundamental FDI issues, which would result in confidence around the investment environment and a reduction in policy risk.