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Mohit Saraf Senior Partner November 29, 2011

Mohit Saraf Senior Partner November 29, 2011. Investing in Emerging Markets – Where Does India Feature? Investing in Emerging Markets 2011 The Harvard Club, New York City.

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Mohit Saraf Senior Partner November 29, 2011

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  1. Mohit SarafSenior PartnerNovember 29, 2011 Investing in Emerging Markets – Where Does India Feature? Investing in Emerging Markets 2011 The Harvard Club, New York City

  2. United Nations Conference on Trade and Development’s (“UNCTAD”) World Investment Prospects Survey 2010–2012Where does India rank as a prospective FDI destination?

  3. Will India measure up? • Will this prediction become a trend? • Will the forecasts hold in the short term? • What assumptions support the forecast? • What is the inside story?

  4. What is a good place to start? • World Bank’s comparative survey titled Doing Business 2012

  5. BRIC BY BRIC(and how they stack up)

  6. Ease of starting a business - Challenges • Sector specific framework of prohibitions, approval requirements, investment caps, investmentconditions and exclusions. • Ability to find a “best-fit” solution within a restrictive and fluid regulatory matrix. • Exchange control regime • Changing goalposts – “put options”. Occasional blips can cause impediments.

  7. Ease of starting a business - Opportunities • Reform: A liberal trajectory • Very few industries where FDI is prohibited. • Foreign exchange reserves have gone up from USD 5 Billion in 1991 to USD 312.90 Billion in June 2011. • Emerging Sectors: • Aerospace and Defense (offset obligation) • Automotive • Banking • Pharmaceuticals • Retail and consumers

  8. Getting Credit - Challenges • High interest rates: raised 12 times in 18 months. • External commercial borrowings (“ECBs”): • regulates all-in costs, • restricts end use • stipulates long maturity periods • working capital loans not allowed • not permitted in capital markets, real estate or for • acquisition of other companies • RBI imposes directed lending and provisioning norms (risk weights) on banks – this distorts credit flow.

  9. Access to funding - Opportunities • Strong framework of legal rights of borrowers and lenders (a score of 8 on the strength of legal rights index ranging from 0-10 where OECD average is 7). • Incipient but vibrant Private Equity • Non Banking Finance Companies (NBFCs) • ADRs / GDRs / FCCBs NBFCs NBFCs enjoy a “light touch” regulatory regime. Concentrate on financial sector activities which banks and financial institutions may chose to ignore on account of heavier regulatory burdens – E.g. capital markets related funding, real estate funding and structured finance.

  10. Protecting Investors – weaknesses and alternatives • Strong protection: Minority investors, related party transactions. • Systemic handicap – final verdict on a dispute. • Arbitration has emerged as a powerful alternative. • Bilateral Investment Treaties - party to over 60 BITS (though unfortunately not with yet with the US. • Indo-US BIT on the anvil • BITs tend to act as a check against unbridled exercise of executive power

  11. Paying Taxes – Challenges andImprovements • On average, a company: • makes 33 tax payments a year, • spends 254 hours a year filing, preparing and paying taxes • pays total taxes amounting to 24.7% of profit. • Recent improvements: • In 2011 introduced mandatory electronic filing and payment for VAT. • In 2011 abolished the fringe benefit tax and improved electronic payment. • Proposed induction of “Direct Tax Code 2010” by April 2012 which is expected to improve payment and filing efficiencies significantly. • New indirect tax system proposed – remove multiplicity of taxes.

  12. Double Taxation Avoidance Treaties • India is a party to more than 80 DTATs • Tax treaty analyses: A key consideration for investment into India. • DTATs with Mauritius, Cyprus and Singapore are pre-eminent - currently • relieve capital gains on disposal of Indian investments. • Mauritius, accounts for an overwhelming 42% of the aggregate foreign • direct investment in India (next in the pecking order are: Singapore 9%, USA • 7%, UK 5%) • Vodafone’s disposal of its Indian JV assets has brought into question the • efficacy of capital gains insulation available under the Mauritius treaty.

  13. Enforcement of contracts – Challenges • A contract enforcement: • requires 46 procedures • takes 1420 days • costs 39.6% of the value of the claim • 30 million cases pending in Indian courts. • 11 judges per million compared to the recommended norm of 50. Negate above by: • Taking recourse to international commercial arbitration • Excluding Indian procedural law under the arbitration agreement and choosing arbitral venue outside India.

  14. Thank You. Mohit Saraf Senior Partner Luthra & LuthraLaw OfficesMumbai | New Delhi | BangaloreEmail : msaraf@luthra.com

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