Francisco A. Laguna & Annapurna Nandyal
In our previous post, we discussed Foreign Direct Investment (FDI) laws in India and some of the advantages for investors, such as the magnitude of the Indian market and availability of cheap and skilled labor. This post explores some of the challenges of doing business in the country and discusses some practical experiences Translegal clients have had in India.
There is no doubt that India continues to be a hot market. In 2012, the global consultancy, A.T. Kearney, ranked the country as 5th on its Global Retail Development Index (GRDI). It dropped one notch from 2011, but it is clear that India has an important, and still emerging, retail sector.
Foreign direct investment in Indian business sectors can be made in a variety of ways, including through the governmental approval process and automatic approval routes. Thus, far, despite the allowance of 100% FDI in single brand retail, joint ventures are the preferred method of investing in Indian industry. Many foreign investors, including recent market addition, Starbuck’s, prefer the joint venture model to gain access to the Indian partner’s knowledge of the local market and cultural norms, established clientele, distribution channels and in-country management.
Business likes certainty, and to attract active investors, policy makers need to ensure transparency and regulatory / administrative consistency combined with comprehensive long-term development strategy. It is not enough that India is a huge market. Companies need to have confidence in the Indian legal system, including enforcement mechanisms, and trust their local partners and counterparts.
Bureaucracy and corruption are the major factors affecting India’s image as a most favored destination for foreign investment. Transparency International released the results of its annual Corruption Perceptions Index on 5 December 2012. India was ranked 94 out of 174 countries in corruption. One issue confronting foreign investors wishing to operate in India is the vestige of the so-called “license raj”. License Raj or the Permit Raj refers to the elaborate licenses, regulations and accompanying red tape that were required to set up and run businesses in India between 1947 and 1990. Though most of them have been done away with through the years, these “permits” – read payments – can still be prevalent at the state level, even if no corresponding permit ever issues. The often close relationship between politicians, bureaucrats and businessmen has perpetuated the system of giving offerings to politicians and bureaucrats for their favorable view of a business venture.
Here are some things to look out for when doing business in India:
- If a middleman is involved, understand his / her role. Are they being used as a conduit for paying a bribe or a license raj? If fees are high, the answer is likely to be yes!
- India is a country of economic divides. Wealthy businessmen wield vast social and economic power and are used to dictating and changing terms.
- Yes often means “no”.
- Silence / avoidance of an issue means “no”.
- Negotiated terms do not necessarily mean that the parties have an agreement, especially if the foreign investor is seeking something from the Indian party. There will be attempts to re-negotiate before or at the execution of the agreement.
- Even after an agreement is signed, there may be attempts to re-negotiate more favorable terms.
- Service of process is done by the police. It is difficult (nearly impossible) to serve someone with political or financial influence.
- Expect the unexpected!
TransLegal assists clients navigate the Indian market. Contact us with your questions.