 "When law took its own course")
Key issue is practicality of implementation: Koushik Chatterjee
ON COMPANIES ACT
While the current Parliament will be remembered for its poor productivity, it has been able to push some new legislations like the Companies Act, the Land Acquisition Act and recently the Lokpal Bill. India needed a new Companies Act about a decade back, but it took a very long time to enact it.
The new Companies Act is largely referred to as a delegated piece of legislation with substantive operating procedures captured in the Rules that are still evolving. It captures several new principles based on the experience of the earlier Act, takes into account the changing environment and governance requirements and, of course, incorporates provisions that are clearly a knee-jerk reaction to mis-endeavours in recent corporate history. The key issue is the practicality of its implementation and the compliance to the provisions on day one. As the Rules are still being released in tranches, in draft form, it would have been much better to make an explicit statement regarding the overall transition time of one year. The mandatory spending on sustainability is an inclusive thought and will potentially have a huge impact on society if deployed well and efficiently.
The other provisions are in accounting and governance framework that recognises that consolidated financial statement of a company is important, and I hope this sets the background for the introduction of group taxation. No legislation is perfect and this Act is also not perfect. However, it provides the platform for the next stage of corporate governance evolution by capturing the essence of the changing nature of the macro environment, aims to be more inclusive and stands up for more accountability, transparency and efficient decision making by the users of capital.
ON CSR
India mirrors the global challenges arising out of widespread environmental degradation, income inequities and poverty. In this light, the two per cent CSR spend provided in the Companies Act, 2013 is a major step that attempts to ensure economic development with social equity.
What needs to be highlighted is that, more than financial resources alone, businesses possess the transformational capacity to create game-changing social business models, given their entrepreneurial vitality, innovation, genius and creativity. Such innovative business models can have a multiplier impact on sustainable livelihood creation and environmental replenishment. Global research by experts such as Michael Porter and Mark Kramer of Harvard have established that societal value creation delivered through a strategic business context is more meaningful. We believe that CSR delivered in the context of business can ensure that social investments are far more replicable, scalable and sustainable. In the long run, this strategy also sharpens the competitive capability of enterprises critical to ensuring sustained growth and the ability to support socially meaningful initiatives.
It is imperative that the focus of CSR spending be on outcomes. Business innovation will only be spurred when markets reward responsible business. Going forward, this will need the creation of institutions, new systems of incentives, rating and auditing to enable enlightened consumer choice. When civil society is thus empowered, CSR will become an integral part of the business value proposition. This will go a long way in creating a sustainable economy for future generations.
ON M&A
2013 saw an alignment of the term 'control' under foreign direct investigation (FDI) and Securities and Exchange Board of India (Sebi) regulations. From an FDI standpoint, the regulator was forced to expand its 2009 definition to pave way for the Jet-Etihad deal. What lay at the core of the deal were clauses in the agreement giving Etihad certain affirmative powers of management. The Foreign Investment Promotion Board, extending the definition of 'power to appoint majority directors' to include 'power to control the management, voting, or policy decisions', took a strict view before granting approval. This was logically followed by the Cabinet Committee's decision to align the 'control' definition. The change, prima facie, seemed to augur well but poses challenges. One, FDI regulations have sectoral caps in select sectors. Further, rules embrace definition of 'foreign owned or controlled Indian companies' which are not reckoned for threshold purposes. With expansion of 'control', will mere veto power or affirmative rights in favour of the foreign investor lead to JV's as foreign-controlled? This poses difficulty if structures were put in place prior to alignment. Two, t0he debate if affirmative rights include negative control is open. The Sebi appellate tribunal judgment of 2010 in Subhkam's case ruling that negative rights are not covered came as a relief to private equity players. This was subsequently settled by Sebi on the basis that the decision (of the SC) has no precedence value. Investors will have to be prepared for a coordinated approach by the regulators. Sebi is likely to set precedence as Indian jurisprudence in this area shall evolve over time. In the meantime, parties to the agreement shall have to watch for the clauses.
ON FDI
In a significant development earlier this year, one of the most important decisions that was key to influencing investment in India was the government’s approval to increase foreign direct investment (FDI) limits in 12 sectors, including defence and telecom.
While India struggled for long with its FDI rules, these changes introduced a consolidated policy and marked renewed interests from global telecom giants and retailers alike. This development also liberalised FDI norms across key sectors, which was long awaited.
Resilience of the Indian markets has always made the region an attractive and preferred destination. As FDI limits were raised across several key sectors, the move signalled that the Indian government was serious about attracting overseas investments and funds, giving further impetus to the Indian economy. The government also relaxed sourcing and investment rules for the retail sector, which could see international retail giants set foot in India in the coming years.
However, for global investors to enter India, there needs to be more clarity on India's FDI policy, especially in retail. More importantly, with general elections round the corner, there is political uncertainty, which could also be a hindrance to any immediate investments. While the opening up of retail, telecom and defence, among other sectors, was a first step, we do hope more policy improvements are laid out by the government in the coming years, adding more clarity to policies, thus making India a top destination for FDI.
ON CAPITAL MARKETS
2013, which may largely be perceived to be uneventful from a growth and policy action point of view in many areas, India has managed to retain its preferred foreign investment destination status. Foreign direct investment (FDI) in 2013 is almost on a par with the previous year. In rupee terms, the FDI inflow is down only two per cent in the first nine months of this calendar year. While the depreciation of the rupee has contributed towards bridging the gap, it is noteworthy that even in Dollar terms, the FDI inflow is down just about 10% - total FDI inflows from January to September 2013 being $16.85 billion, against $18.7 billion during the same period in the previous year. The key reason for this performance is that the long-term Indian growth story, based on demographics and consumption, is still intact.
During the current year, we attracted FDI in most of the sectors which were liberalised recently. Accordingly, we saw foreign investments coming in sectors like aviation, telecom and consumer retailing. Further, some of the existing foreign companies like GSK and Unilever which are here for many years, have displayed significant commitment to India by way of offers for stake enhancement. This has been possible only because of the favourable investment environment and the long-term growth prospects. We have also seen major activity through the private equity route. In both minority as well as control transactions, private equity continues to be an important source of capital.
The 2014 election results will be crucial. But more important is what would happen post the elections. Capital market activities will certainly be impacted by the new government and policy dynamics thereafter. Tapering may have a short-lived impact on the FII flows. However, strategic and long-term FDI investments will not be impacted, as these decisions are based on a long term strategic view.
ON COMPANIES ACT
While the current Parliament will be remembered for its poor productivity, it has been able to push some new legislations like the Companies Act, the Land Acquisition Act and recently the Lokpal Bill. India needed a new Companies Act about a decade back, but it took a very long time to enact it.
The new Companies Act is largely referred to as a delegated piece of legislation with substantive operating procedures captured in the Rules that are still evolving. It captures several new principles based on the experience of the earlier Act, takes into account the changing environment and governance requirements and, of course, incorporates provisions that are clearly a knee-jerk reaction to mis-endeavours in recent corporate history. The key issue is the practicality of its implementation and the compliance to the provisions on day one. As the Rules are still being released in tranches, in draft form, it would have been much better to make an explicit statement regarding the overall transition time of one year. The mandatory spending on sustainability is an inclusive thought and will potentially have a huge impact on society if deployed well and efficiently.
The other provisions are in accounting and governance framework that recognises that consolidated financial statement of a company is important, and I hope this sets the background for the introduction of group taxation. No legislation is perfect and this Act is also not perfect. However, it provides the platform for the next stage of corporate governance evolution by capturing the essence of the changing nature of the macro environment, aims to be more inclusive and stands up for more accountability, transparency and efficient decision making by the users of capital.
Koushik Chatterjee
Group ED (fin and corp), Tata Steel
Group ED (fin and corp), Tata Steel
ON CSR
India mirrors the global challenges arising out of widespread environmental degradation, income inequities and poverty. In this light, the two per cent CSR spend provided in the Companies Act, 2013 is a major step that attempts to ensure economic development with social equity.
What needs to be highlighted is that, more than financial resources alone, businesses possess the transformational capacity to create game-changing social business models, given their entrepreneurial vitality, innovation, genius and creativity. Such innovative business models can have a multiplier impact on sustainable livelihood creation and environmental replenishment. Global research by experts such as Michael Porter and Mark Kramer of Harvard have established that societal value creation delivered through a strategic business context is more meaningful. We believe that CSR delivered in the context of business can ensure that social investments are far more replicable, scalable and sustainable. In the long run, this strategy also sharpens the competitive capability of enterprises critical to ensuring sustained growth and the ability to support socially meaningful initiatives.
It is imperative that the focus of CSR spending be on outcomes. Business innovation will only be spurred when markets reward responsible business. Going forward, this will need the creation of institutions, new systems of incentives, rating and auditing to enable enlightened consumer choice. When civil society is thus empowered, CSR will become an integral part of the business value proposition. This will go a long way in creating a sustainable economy for future generations.
Kurush Grant,
Executive director, ITC
Executive director, ITC
ON M&A
2013 saw an alignment of the term 'control' under foreign direct investigation (FDI) and Securities and Exchange Board of India (Sebi) regulations. From an FDI standpoint, the regulator was forced to expand its 2009 definition to pave way for the Jet-Etihad deal. What lay at the core of the deal were clauses in the agreement giving Etihad certain affirmative powers of management. The Foreign Investment Promotion Board, extending the definition of 'power to appoint majority directors' to include 'power to control the management, voting, or policy decisions', took a strict view before granting approval. This was logically followed by the Cabinet Committee's decision to align the 'control' definition. The change, prima facie, seemed to augur well but poses challenges. One, FDI regulations have sectoral caps in select sectors. Further, rules embrace definition of 'foreign owned or controlled Indian companies' which are not reckoned for threshold purposes. With expansion of 'control', will mere veto power or affirmative rights in favour of the foreign investor lead to JV's as foreign-controlled? This poses difficulty if structures were put in place prior to alignment. Two, t0he debate if affirmative rights include negative control is open. The Sebi appellate tribunal judgment of 2010 in Subhkam's case ruling that negative rights are not covered came as a relief to private equity players. This was subsequently settled by Sebi on the basis that the decision (of the SC) has no precedence value. Investors will have to be prepared for a coordinated approach by the regulators. Sebi is likely to set precedence as Indian jurisprudence in this area shall evolve over time. In the meantime, parties to the agreement shall have to watch for the clauses.
Mukesh Butani
partner, BMR Legal
partner, BMR Legal
More From This Section
Investors need clarity on retail policy: Sarosh Zaiwalla
ON FDI
In a significant development earlier this year, one of the most important decisions that was key to influencing investment in India was the government’s approval to increase foreign direct investment (FDI) limits in 12 sectors, including defence and telecom.
While India struggled for long with its FDI rules, these changes introduced a consolidated policy and marked renewed interests from global telecom giants and retailers alike. This development also liberalised FDI norms across key sectors, which was long awaited.
Resilience of the Indian markets has always made the region an attractive and preferred destination. As FDI limits were raised across several key sectors, the move signalled that the Indian government was serious about attracting overseas investments and funds, giving further impetus to the Indian economy. The government also relaxed sourcing and investment rules for the retail sector, which could see international retail giants set foot in India in the coming years.
However, for global investors to enter India, there needs to be more clarity on India's FDI policy, especially in retail. More importantly, with general elections round the corner, there is political uncertainty, which could also be a hindrance to any immediate investments. While the opening up of retail, telecom and defence, among other sectors, was a first step, we do hope more policy improvements are laid out by the government in the coming years, adding more clarity to policies, thus making India a top destination for FDI.
Sarosh Zaiwalla
Senior partner, Zaiwalla & Co
Senior partner, Zaiwalla & Co
ON CAPITAL MARKETS
2013, which may largely be perceived to be uneventful from a growth and policy action point of view in many areas, India has managed to retain its preferred foreign investment destination status. Foreign direct investment (FDI) in 2013 is almost on a par with the previous year. In rupee terms, the FDI inflow is down only two per cent in the first nine months of this calendar year. While the depreciation of the rupee has contributed towards bridging the gap, it is noteworthy that even in Dollar terms, the FDI inflow is down just about 10% - total FDI inflows from January to September 2013 being $16.85 billion, against $18.7 billion during the same period in the previous year. The key reason for this performance is that the long-term Indian growth story, based on demographics and consumption, is still intact.
During the current year, we attracted FDI in most of the sectors which were liberalised recently. Accordingly, we saw foreign investments coming in sectors like aviation, telecom and consumer retailing. Further, some of the existing foreign companies like GSK and Unilever which are here for many years, have displayed significant commitment to India by way of offers for stake enhancement. This has been possible only because of the favourable investment environment and the long-term growth prospects. We have also seen major activity through the private equity route. In both minority as well as control transactions, private equity continues to be an important source of capital.
The 2014 election results will be crucial. But more important is what would happen post the elections. Capital market activities will certainly be impacted by the new government and policy dynamics thereafter. Tapering may have a short-lived impact on the FII flows. However, strategic and long-term FDI investments will not be impacted, as these decisions are based on a long term strategic view.
Sunil Sanghai
Managing director, head of banking, India, HSBC
Sunil Sanghai is also chairman, FICCI’s Capital Markets Committee
Managing director, head of banking, India, HSBC
Sunil Sanghai is also chairman, FICCI’s Capital Markets Committee