India is one of the fastest growing economies in the world. India's positive economic outlook and regulatory reforms have made it an attractive market for foreign investors. While many barriers to foreign investment have been removed, there still remain formidable challenges for a foreign investor doing business in India. Understanding and preparing for these challenges is the key to success in India. We discuss some of the key challenges in the paragraphs that follow.
Foreign Investment
• Foreign investors can now invest directly in most sectors in India without obtaining the prior approval of the Indian government. However, there are still several sectors where a foreign investor cannot directly invest or must first obtain the approval of the Indian government.
• Convincing the government about the viability and usefulness of a project may prove to be a challenge for foreign investors.
• Prior approval of the Indian government is also required in cases where a foreign investor plans to start a new venture which is in the "same" field as an existing joint venture. The Indian government will grant approval only if both the foreign investor and its existing Indian joint venture partner is able to convince the government that the new venture that the foreign investor proposes to commence will not jeopardize the interests of the existing Indian joint venture partner and other stakeholders of the existing venture.
Real Estate
Foreign companies investing in real estate in India should be aware of the following restrictions:
• The minimum capitalization requirement, when the investment is routed through a wholly-owned subsidiary of a foreign company, is U.S. $10 million, and U.S. $5 million, when the investment is routed through a joint venture established with an Indian joint venture partner.
• Money invested in real estate in India cannot be repatriated for a period of 3 years without first obtaining the approval of the Indian government.
• Investors have to comply with certain minimum land development requirements. For instance, in the case of construction projects, an investor has to develop a minimum built-up area of 50,000 square meters.
• At least 50 percent of the project has to be developed within a period of 5 years from the date of obtaining the necessary statutory approvals.
• Investors are prohibited from selling undeveloped land.
Labor & Employment
• Negative covenants in employment contracts in the form of non-compete clauses are unenforceable beyond the term of the contract.
• While terminating employment contracts, investors should be careful to comply with relevant laws such as Industrial Disputes Act, Shops and Establishments Act and state specific employment orders. These laws lay down specific rules for employment and termination.
Intellectual Property
• India still lags behind many developed nations in its implementation and enforcement of intellectual property laws. Foreign investors must take adequate measures to protect their intellectual property rights from infringement and misappropriation.
• Indian patent law requires the owner of a patent to obtain the consent of the joint owner of the patent before such person or entity licenses, assigns or sells the invention covered under the patent.
• In an action where an owner of a patent seeks to enjoin a third-party from infringing the patent involving a life saving drug, Indian courts have often balanced the public good involved in making the drug freely available to the public with that of the rights of the patent holder. Often times, courts in India have give preference to the public good in making the drug covered under the patent available to the public, either freely or at minimal cost, over the commercial interest of the patent holder.
• Care should be taken while drafting contracts that involve the assignment of copyrights. For instance, if the term of the assignment is not specified in the contract, Indian copyright law will restrict the term of assignment to 5 years. Also, if the territory is not mentioned, the territory is deemed to limited to India. Furthermore, the assignee must exercise his rights within one year of the assignment. Otherwise, the assigned rights will revert to the assignor after the said period.
Delays In Courts
• One of the biggest challenges that foreign companies face while litigating in India is the problem of delay, with cases sometimes taking several years to be resolved. While alternative forms of dispute resolution such as arbitration are available, they are yet to gain complete acceptance. Arbitrating a dispute within India may also contain a considerable risk of delay at the first level of dispute resolution.
Corruption
• Corruption is a big hurdle when doing business in India. As per the Transparency International's Corruption Perception Index, in 2005, India ranked 92nd out of 159 countries in a study measuring perceptions about corruption. Foreign investors should avoid violating local and foreign anti-corruption laws.
• Political and regulatory risks can also pose a major challenge. Investment in sectors which require continuous interface with various regulatory authorities expose the investor to delays in implementing the project thus affecting their profitability.
• Foreign investors also face the challenge of dealing with rampant bureaucracy at various levels of federal, state and local governments.
Inadequate Infrastructure
• India's weak infrastructure manifested by its poor energy supply, unpaved roads, ineffective airports and ports pose a major challenge to foreign investors.
• Infrastructure inefficiencies like inadequate power generation adds a significant cost factor for manufacturing companies in the country.
Published November 2, 2009.
