mARCH 2012 www.lawyer-monthly.com Legal Focus 69 Foreign Investment in India

Looking further into the issues surrounding, Lawyer Monthly speaks to Justin Bharucha, partner at Indian law firm Bharucha & Partners. The firm has three offices in two cities with 38 lawyers and offers expertise in different fields of legal practice with litigation, arbitration, corporate mergers and acquisitions, capital markets and banking finance being its core areas.

Q

Please give me an overview of foreign investment in your jurisdiction currently.

Foreign investment in India is administered by the Government of India, the Reserve Bank of India (RBI) and, to a limited extent, the Securities Exchange Board of India (SEBI). The Government of India acts through the Department of Industrial Policy and Promotion of the Ministry of Commerce (DIPP), and the Foreign Investment Promotion Board (FIPB). The DIPP formulates policy on foreign direct investment (FDI) circulated by means of ‘press notes’ (consolidated bi-annually), and the FIPB is responsible for implementing this policy. The RBI acts under the provisions of the Foreign Exchange Management Act, 1999 (FEMA) and is empowered to formulate regulations and circulars under the FEMA. The RBI is additionally charged with monitoring and enforcing the regulations. SEBI regulates FIIs and FVCIs.

Over the last two decades India has gradually

expanded the scope of foreign investment.

Foreign investment in India is categorised

into either (ii) Foreign Direct Investment (FDI) or (ii) portfolio investments by foreign institutional investors (FIIs), non-resident Indians (NRIs) and others like foreign venture capital investors (FVCIs).

Over the last two decades India has

gradually expanded the scope of foreign investment. Under the current regime, FDI up to 100% is permitted in most sectors under the automatic route (i.e. without obtaining any prior approval) and foreign investments in only certain sectors requires Government’s approval and is also subject to sectoral caps.

Q

what are your opinions on the recent decision by the Indian Supreme Court in favour of Vodafone, a decision that will allow the company to pursue its plans for its initial public offering in India?

The Vodafone decision should increase in- vestor confidence in India, having reinstated the sanctity of DTAAs and validity of bona fide structures for FDI in India, Effectively, the decision isn't 'new' law - it only dismisses the Indian Revenue's claim to tax offshore transaction under the extant Income Tax Act. Having said that, the potential General Anti Avoidance Rules (GAAR) under the proposed Direct Taxes Code may take away from the effect of this decision and that is a development we will monitor.

Separately, positive investor sentiments

emanating from the Vodafone decision have been marred by another decision of the Supreme Court earlier this month in which it cancelled 122 telecom licences issued to telecom operators in early 2008. While the Supreme Court has, arguably, decided the matter, in fact the decision brings into question the sanctity and bona fides of Indian policy makers. Media reports indicate that the Department of Telecommunications has indicated that as many as 24 issues have arisen, each issue concerning more than one operator, which need to be addressed following this decision and the ramifications are yet to be fully appreciated.

Q

why do you think India is so attractive to foreign investors at the moment?

The foreign investment reforms drive that the Government has demonstrated over a period of time bodes well for the investment scenario in India. This is best exemplified by the recent policy decision allowing 100% FDI in single brand retail despite stiff opposition from certain stakeholders. Also, in recent decisions,

the Supreme Court of India has reaffirmed that the foundations of Indian justice system are based on the rule of law.

Significant reforms to the Companies Act have been pending since 2002. This must be expeditiously implemented. Strictly relating to FDI, the Government of India and RBI must work towards reconciling their conflicting positions on policy decisions: illustratively, on options granted to foreign investors. Another area that is in urgent need of reforms is employment law. LM

Q Contact Details:

what legislative changes do you feel there is a need for?

Justin Bharucha - Partner Bharucha & Partners Hague Building,

9 S S Ram Ghulam Marg, Mumbai 400001

Tel: +91 22 6132 3900 Fax: +91 22 6633 3900

Email: justin.bharucha@bharucha.in Website: www.bharucha.in