While FDI inflows are not the sole indicator of a growing economy, the fact remains that India, projected as the second most attractive destination for foreign investments, and FDI in particular, has witnessed a downtrend in the last year. While this cannot be attributed entirely to the global meltdown and its aftermath, one also does not have to look very far to identify the reasons for the decline. Some obstacles are endemic, while others are comparatively recent, but unless these are addressed speedily, we have a problem at hand.
A major grievance, which is probably the easiest to flag and has been conclusively addressed in the removal of the roadblocks and multiple interpretations, by the DIPP single document approach. Apart from consolidation, in bringing royalty under the automatic route, the sea change in getting rid of the previous or existing venture restrictions, has proved a huge relief for investors in, being liberated from the thankless task of negotiating with existing or previous partners, obtaining and submitting no objection certificates to the DIPP or FIPB, and in default, confabulating with advisors to provide justifications for creating a further footprint in India. As of April 1, 2011, except for sectors having caps, foreign investors would have a free hand.
The World Bank brings out a Report every year on the ranking of various jurisdictions, on the ease of doing business, which relies on 10 (ten) indicators, which are basic in any entry strategy, being starting a business, dealing with licences and permits, employing workers, registering property, obtaining credit, protecting investors, paying taxes, trading across borders, enforcement of contracts and closure of businesses. India ranks fairly decently in the areas of obtaining credit and protecting investor interests. With the end of the FERA regime, expropriation and mandatory dilution of stakes are things of the past, and the regulatory mechanism for investor interests is secure yet progressive. There was a perception of threat in the Vedanta Cairns ONGC face-off, of the fragility of the protection, but fortunately resolved , and no such issue was raised in BP’s acquisition of RIL’s stake.
The Indian banking and financial sector is embarking on significant reforms, with prospects of de-regulation of foreign banks. However, the NBFC sector has taken a nosedive with their prior status being withdrawn. Foreign investors are also not satisfied with the restrictions on debt instruments and shareholder loans and over all the services and skills of the sector need to improve.
On the other hand, in enforcement of contracts and dispute resolution, India’s rank is abysmally low and has been plummeting further downwards in the last five years. Can this phenomenon be attributed to a malaise in the judicial system, which prides itself on being fair, independent and transparent? There is no doubt that the speed and efficiency of our courts of law are not litigant friendly.
There is endemic backlog at all levels, coupled with outdated and old laws, which have no relevance in today’s business context. Take for example, the Indian Trust Act of 1882, which in the global scenario of offshore funds, tax havens and innovative options is an anachronism. There are multiple laws in the entire bundle of labour laws, which are inconsistent and contradictory. India’s experience in its insolvency regimes has been woeful. Cases before the BIFR are not aimed at genuine rehabilitation, but at securing a safe haven from creditors. Post SARFAESI, with asset reconstruction companies picking up debts from the banks, there have been some distress sales, but the quick turnaround of bankrupt companies are rare.
Then there have been the judgements based on the successive amendments to Section 9 of the Income Tax Act, 2962, in efforts to capture services rendered off shore in the tax net.
Though not specifically alluded to in the Bank Report, with the Vodafone decision to follow, a disquieting signal is send out. The outcome of the Vodafone appeal pending in the Supreme Court will determine the message to foreign investors.
On the other hand, earlier this month, the controversy on the POSCO, India’s biggest FDI project, effectively in limbo since 2005, was put to rest with the key environmental approval being granted. That’s a reason to be happy, but one still has to explain the delay.
Kumkum Sen is a partner at Bharucha & Partners Delhj Office and can be reached at kumkum.sen@bharucha.in
