Business and legal professionals gaze into their crystal balls and share their predictions for the year ahead
India Business Law Journal invited senior lawyers, corporate counsel and a risk and security expert to predict the economic, legal and geo-political developments that will impact domestic and international businesses in 2010.
Economic growth and revival
Balaji Rao, managing director, Starwood Capital India: Given the financial roller coaster ride experienced in the last two years globally, and in India over the last year, it is extremely challenging to stick one’s neck out in forecasting the future. However based on the factors of sentiment and momentum, I believe that 2010 will be characterized by signs of recovery, rebound and revival around the world and especially in emerging markets like India.
The liquidity awash in the system will be directed towards deleveraging in developed economies and towards capital formation in India. We are therefore likely to witness a steady flow of foreign institutional investment and foreign direct investment into sectors such as automotive, pharmaceuticals, real estate, banking, financial services and insurance.
These funds will flow into the capital markets as well as the debt markets, pulled by the robust growth that is likely to resume in the industry and service sectors. There is a possibility that these capital inflows might create bubbles in certain micro-sectors given the underserviced and undersupplied nature of the Indian economy. Investors need to be both cautious and prudent while choosing their investment deals as very often the wisdom of the crowd turns into the madness of the mob. It is also important that investors understand that perseverance and patience are fundamental prerequisites of investments into India, a country in which time is often the most undervalued factor of production.
The challenge facing investors in 2010 will be to get the right proposal at the right price with the right partner encapsulated in the right time-frame, but is that not always the case?
William Kirschner, partner & coordinator of India practice, White & Case: I think the indicators are positive for transactional work involving Indian corporates, but I do not expect in-bound private equity or financing work to return to pre-crisis levels during 2010. I think it will be another big year for Indian banks and a good year for Indian funds.
Nipun Gupta, head of India group, and Divya Sharma, associate, Bird & Bird: While India has certainly not been unaffected by the global economic problems that dominated 2009, it remains a popular choice for foreign investors and has emerged as one of the front-runners among international investment destinations. We predict that this trend will continue in 2010 and we expect to see renewed investment activity in numerous sectors, particularly in all forms of energy (including nuclear and renewable energy) and telecoms (as long as the 3G auctions proceed as planned).
The Indian government has stated its intention to attract more private investment into infrastructure; 2009 has seen some progress in this sector. The global economic downturn, a shift in the cost of international borrowing versus that of Indian lending and the opportunities in other countries suggest that project financing will continue to gather momentum in the year ahead. We anticipate that transport, roads, ports, urban infrastructure and water will be key areas of activity. We are keenly watching the policy level changes that may be made to make such projects more attractive to foreign investors.
Education is another sector to watch in 2010. The government has announced wide-ranging reforms to the sector and there is the possibility that foreign universities will be permitted to set up in the country. Private-public partnerships will continue to gather momentum in the education sector as well as in other areas such as water and healthcare. We also anticipate a strong revival in the technology sector, which has regrouped following the Satyam debacle in 2009. Life sciences and pharmaceuticals are likely to witness higher levels of investment activity.
Corporate finance will continue to be active in 2010. It is likely to be buoyed by the government’s plan to offload stakes in certain public sector undertakings through the capital markets route.
Government policy has invariably acted as a facilitator for foreign investment in India. However, several ambiguities over existing laws, not to mention regulatory uncertainties concerning new ones, are likely to weigh heavily on the minds of investors in 2010. The government recently issued new guidelines relating to certain aspects of the country’s foreign direct investment (FDI) policy. Some of these guidelines have clarified existing aspects of FDI policy, but others have raised ambiguities. For example, do the new guidelines indirectly permit foreign investment in multi-branded retail if the investments are routed through companies owned and controlled by Indian persons or entities? Questions have also been raised on the treaty override provisions of the proposed Direct Tax Code and the implementation regulations of the Competition Act, which is set to have a significant impact on mergers and acquisitions in the country. The government’s success in clarifying such ambiguities and achieving a smooth implementation of the new Competition Act and tax code will be key to building and sustaining an attractive investment environment in the coming year.
Kirtee Kapoor, partner & head of India, Davis Polk & Wardwell: It will be a very busy 2010!
Padmakar Rao, vice-president & company secretary, Bennett Coleman & Co: I firmly believe that we are at an inflection point and that India is poised to take off on a growth trajectory. With a strong and progressive government at the centre, we can definitely look forward to further liberalization of the economy and faster globalization of our leading industries and services during 2010. The legal profession will contribute in a big way to the future of India’s growth.
Legislation and liberalization
Rajiv Luthra, managing partner, Luthra & Luthra: The past few years have seen increasing momentum in the development of the Indian legal landscape in virtually all spheres. India has shrugged off its post-liberalization lethargy and the consolidation of gains has set in. I expect this dynamism to continue in 2010 with some major changes.
First and foremost is the introduction of a new Direct Tax Code, which promises to overhaul the Indian income tax system. Judging by the official draft in circulation, the code appears to be a mixed bag: while it seeks to rationalize the baseline corporate tax rate to 25%, it will also impact the tax planning considerations of existing and future foreign investments. Parts of the proposed code are likely to override India’s existing tax treaties and may deny previously available tax benefits, for instance the capital gains tax benefit available to those structuring investments through Mauritius. Furthermore, the proposed introduction of stricter anti-avoidance rules could marginalize legitimate tax planning. Although the code is not due to come into effect until April 2011, the debate over its provisions and implementation is likely to be prominent in 2010. Domestic and foreign enterprises would be well advised to use the year ahead to prepare for its introduction.
Another exciting bill which has obtained cabinet approval and is set to be debated in the coming year is the Civil Liability for Nuclear Damage Bill. The bill comes hot on the heels of civil nuclear energy cooperation agreements between India and various other countries, including the US, France and Russia. The bill is broadly in line with internationally accepted principles of channelling liability to nuclear operators: media sources indicate that it could cap such liability at US$500 million. A stable and sound liability regime will certainly facilitate the growth and development of India’s nuclear power industry.
The education sector, which is very close to my heart and crying out for reform, is expected to be revitalized by the Foreign Educational Institutions (Regulation of Entry and Operations) Bill, which contemplates permitting foreign universities to start operations in the country under Indian regulation. Furthermore, a revamp of the regulatory regime is expected through the creation of an overarching authority for higher education across disciplines. This development is promising not only for foreign universities, but also for the Indian higher education sector, where there is a pressing need for financial and technical collaboration. Education is a cornerstone of economic growth and these proposals bode well for future investment opportunities.
The Indian real estate sector, which has been a favoured recipient of foreign investment since liberalization in 2006, is also set for a regulatory overhaul. The government has released a draft of the Model Real Estate (Regulation of Development) Act, which contemplates the creation of state-specific regulatory watchdogs whose sanction would be required for all real estate projects above a certain minimum threshold. The draft act defines key players such as “promoters” (developers) and contractors, and delineates responsibilities, including for any misstatements in advertising materials or prospectuses. The intention appears to be to introduce good governance and regulation in a hitherto largely unorganized sector. While primarily intended to benefit home-buyers, I expect that the right mix of regulation would serve to make this sector even more attractive to investors.
Finally, the long awaited overhaul of the corporate law framework cannot be left unmentioned. The new Companies Bill pending in parliament seeks to introduce, among other things, more effective corporate governance norms and ease of business organization. An interesting innovation is the introduction of “one-person companies”, which I’m sure will help entrepreneurial minds. The bill aims to make regulation a shareholder-centric affair and reduce the role of government through measures such as class action suits, potent audit committees and empowered independent directors. With 2009 exposing how much of a sham corporate governance can be, it will be interesting to see the final contours of this legislation.
Legal market reform
Lalit Bhasin, president, Society of Indian Law Firms: I foresee a wave of mergers, takeovers and consolidations taking place among Indian law firms in 2010. There will also be an inflow of Indian lawyers back to India after their non-productive stints abroad. We will see a brain drain occurring in reverse mode, which will strengthen India’s legal market. In addition, in 2010 India will begin to reap the rewards of recent improvements in legal education, with a large number of highly competent and technically savvy law graduates joining the profession.
The debate over the entry of foreign law firms is likely to drag on through 2010 and beyond. The government is not currently contemplating any change in policy to allow the entry of foreign law firms as legal services are not part of the offer made during the Doha round of WTO negotiations.
With liberalization unlikely in the year ahead, foreign law firms are finding loopholes through which to enter the Indian legal market directly or indirectly, despite the stay granted by Bombay High Court prohibiting foreign law firms from opening liaison offices or practising the law in India. I expect to see this trend continuing and intensifying during 2010, and although I am not against pure and simple referral arrangements on a mutual and reciprocal basis (such arrangements have existed for many years), anything more than that is certainly objectionable as it is contrary to the spirit of current laws and regulations.
David Jacobs, head of India, Baker & McKenzie: We are observing increasing lawyer mobility in India and we expect this trend to continue in 2010. We also foresee the momentum that is driving foreign law firms to form tie-ups with Indian law firms continuing during the year ahead. However, Baker & McKenzie’s strategy of maintaining close relationships with a limited number of leading Indian law firms will remain unchanged.
In my view, opening up India’s legal sector will be essential to the continuing development and growth of the country in the global economy. I am confident that liberalization will happen in India, and while the timing is still unclear, I do not anticipate any major progress will be made on this issue during 2010. For Baker & McKenzie, India remains an important market and we will continue to work closely with a number of leading Indian law firms to address our clients’ business needs until such time when local regulations permit foreign law firms to establish an onshore presence.
Baker & McKenzie has been in Singapore since the early 1980s and in China since the early 1990s. We believe the liberalization of the legal sectors in these countries has contributed to their growth. While it is true that such liberalization has created greater competition for the top-end local law firms, it has resulted in significant benefits for their clients, the introduction international best practice to the legal profession and the sharing of the extensive and diverse legal expertise that is required for deal-making. This gives foreign investors the confidence to invest significant amounts of capital. Furthermore, the entry of international firms has provided both local law firms and local lawyers with much richer opportunities.
With India fast becoming a destination for Asian investment and, at the same time, a generator of outbound investment, we expect to see increased M&A work in the year ahead, particularly in the energy and natural resources sector. This trend is demonstrated by recent deals on which Baker & McKenzie has advised, for example, the acquisition of PT Barasentosa Lestari coal mine by GMR Energy and the investment of Reliance ADAG in a coal mine project in south Sumatra, Indonesia.
Shardul Thacker, partner, Mulla & Mulla & Craigie Blunt & Caroe: During the economic meltdown, few young lawyers found the opportunity to make lateral moves or risk branching out and starting their own law firms. However, in 2010 I expect the Indian legal market to regain its former vibrancy.
In the last two years, several Indian law firms have formed alliances and “best friends” relationships with foreign firms. It now seems clear that foreign law firms will not be permitted to enter India, even to practise the law of their respective jurisdiction, any time soon. Indeed, on the basis of recent comments made by the law minister, it seems that the wait could be anything up to five years or more.
As a result, 2010 is expected to see the consummation of more official relationships between Indian and foreign law firms. And since the number of leading international firms that are keen to enter India is greater than the number of leading Indian firms, the Indian firms will often have the upper hand. At the same time, some Indian law firms will split, resulting in the creation of new entities for tie-ups with foreign law firms. It will be a win-win situation. Lawyers in newly formed Indian firms will be able to attract work, through their peers at Indian corporates, based on the platform of their alliance with a foreign firm. They will offer quality work at a competitive rate.
Throughout 2010, Indian law firms will be driven to add value by recruiting good talent at market rate remuneration and modernizing their practices through the implementation of best-practice administrative systems and upgraded technology. Foreign law firms will increasingly draw talent from India’s top 20 law colleges, while the students, for their part, will increasingly view the law as a mainstream profession.
Clearly the legal profession in India is going through a metamorphosis. This is set to continue until the Indian legal market is ready (and willing) to accept foreign law firms, and until Indian law firms are able to establish their presence in the global legal market in a competitive sense.
IP protection and enforcement
Andrew Ong, vice-president, markets, legal & IP, Nokia: India is certainly taking the right steps in terms of IP protection and I expect this to continue in 2010. One recent example is the blocking of cloned or fake international mobile equipment identities (IMEIs) on mobile devices. This decision was taken mostly from a security standpoint (to prevent terrorists using mobile devices which are not legitimate), but the effect is that counterfeit devices which normally have cloned IMEIs cannot be used on Indian operator networks.
Ashwin Julka, partner, Remfry & Sagar: The government is committed to improving the environment for IP owners in India and several key developments are expected to take place in 2010.
A bill enabling accession to the Madrid Protocol is likely to come through this year and an optical disc law, which will tackle counterfeiting more effectively, is in the offing. Furthermore, an Indian “Bayh-Dole” law is being contemplated to promote research and development at Indian universities.
In an effort to boost the transfer of technology into the country, it is likely that royalty caps for technology transfers and for the use of trademarks of foreign companies will be lifted in the year ahead. Under the current regime, royalty payments of up to 1% of domestic sales and 2% of exports may be made for the use of a brand name. In cases where the use of a trademark is accompanied by the transfer of technology, the cumulative permissible rates are 8% for exports and 5% for domestic sales. In my opinion, such a relaxation will be of immense significance to technology-driven sectors such as infrastructure, pharmaceuticals, automotive and communications.
Other eagerly awaited developments are rulings from the Supreme Court and a division bench of Delhi High Court involving Novartis’ cancer drug Glivec (wherein section 3(d) of the patent law has been challenged), and Bayer’s patent for Nexavar (India’s first case on patent linkage). Both decisions are bound to have a significant impact on Indian patent jurisprudence and are expected within the first quarter of 2010.
Speaking of the courts, it is common knowledge that the Indian legal system has its share of delays. Hope has come recently through a Supreme Court ruling which requires all IP matters to be concluded within a four-month period. However, the proof of the pudding is in the eating and it remains to be seen how vigorously this ruling will be implemented.
With the start of 2010, India also enters the home stretch in the run-up to the Commonwealth Games (to be held in Delhi in October), an event that is likely to bring IP enforcement issues into the spotlight.
All in all, 2010 promises to be an extremely interesting year for IP owners and their legal advisers.
Dinesh Jotwani, director, intellectual property, Asia-Pacific, Symantec Legal: I am optimistic that 2010 will bring about greater protection and enforcement of intellectual property rights in India. Since the recent reelection of Manmohan Singh’s Congress-led government, we have been encouraged by what we perceive as an improvement in the time taken for decision making and also an improvement in transparency within various government departments.
Long-awaited amendments to the Copyright Act are finally going to be tabled in parliament in the upcoming session and we hope these amendments, which seek the adoption of World Intellectual Property Organization treaties, will be passed. We are also pleased that the copyright wing of the Human Resources Ministry is contemplating the establishment of a copyright cell that will coordinate efforts across government departments to influence legislation, build public awareness and promote the effective enforcement of intellectual property rights.
Earlier this year, PH Kurien of the elite Indian Administrative Services was appointed controller general of the Indian Patent Office (IPO). The appointment is of monumental significance and reflects the growing importance of this office.
Symantec and the Indian software industry at large eagerly await the roll-out in 2010 of the Indian Patent Manual, which will clarify the patentability of software-related inventions that have technical effect. Furthermore, in light of the fact that the IPO will start functioning as an international search authority in June 2010, we and rest of the industry are keenly watching the government’s efforts to modernize the country’s IP regime.
With IP owners in India still suffering huge losses from abuses of their intellectual property, the establishment of dedicated IP courts with fast-track mechanisms for expediting IP-related disputes is a development that we hope to welcome in 2010. Delhi High Court has already taken a lead in granting search and seizure orders in IP matters that can be served anywhere in India. High court rules pertaining to best practice in IP cases will go a long way towards spreading this awareness to other jurisdictions in India, and making the courts more efficient and accessible to IP owners.
Some state governments have recently introduced laws to include video and audio piracy under the prevention detention laws. This reflects the recognition of state legislatures that those involved in acts of intellectual property abuse either harm or endanger the security of the general public (whether directly or indirectly) by using the proceeds of piracy to fund and perpetuate organized crime. We hope that in 2010, more Indian states will adopt such legislation and broaden the ambit to include violations of intellectual property rights for all industries and sectors.
Operational risk and security
Steve Vickers, president & CEO, FTI-International Risk: India enjoyed a respite from foreign-orchestrated terrorist attacks in 2009 and is looking to maintain this positive momentum in 2010. However FTI-International Risk believes that this lull is likely to be temporary as the major threats to the country’s security have yet to be contained.
Although no terrorist attacks occurred in 2009, senior security officials say a dozen foreign-inspired plots were foiled. Few details are known of these incidents, but Indian and US officials have hinted that they may be linked with Pakistani terrorist groups such as Lashkar-e-Taiba, which was responsible for the attacks in Mumbai in November 2008.
Relations between the two nuclear neighbours have been in a deep freeze since the Mumbai attack, and the threat of military confrontation remains a danger. Indian army chief general Deepak Kapoor recently warned that a limited nuclear war was “very much a reality in South Asia” and each country has forward deployed substantial combat forces close to their shared borders.
One of India’s main grievances is that Pakistan has not taken sufficient steps to crack down against Lashkar-e-Taiba. Although the group is officially banned and a handful of senior operatives were arrested for the Mumbai attack, most of its leaders and networks continue to operate under other guises such as charities and political organizations. This includes its founder, Hafiz Saeed, who heads one of these charities called Jamaat-ud-Dawa. Sources speculate that the key reason why the Pakistani authorities have been reluctant to close down Lashkar-e-Taiba is because of its popularity, which in turn stems from its active involvement in fighting for Kashmiri independence.
With no diminution in the terrorist threat, India has been devoting resources to strengthening its internal security and intelligence capabilities. Increased funding has gone to expanding paramilitary and counter-terrorist units and providing them with specialized equipment. Reforms have also been made to improve cooperation and the sharing of information among intelligence agencies, which includes the establishment of an online national intelligence grid network. But as the internal security apparatus has suffered from long neglect, this increased funding and structural makeover is unlikely to overcome serious shortcomings in the near term.
Besides the terrorist threat, India suffers from a number of long-running secessionist conflicts with militant groups in its border states. The most serious at present are taking place in Assam and Manipur in northeast India, and Kashmir in northwest India. As these confrontations are localized, they receive little international media attention, but they have resulted in more casualties than the terrorist attacks conducted by Lashkar-e-Taiba.
India also faces border tension with China. Sino-Indian border tensions flared up in the summer of 2009 due to increased Indian troop deployments in Arunachal Pradesh and Indian claims of Chinese violations along the line of actual control. These tensions have yet to be resolved and could flare up again in 2010. FTI-International Risk therefore assesses that the security risk faced by India remains high for the year ahead.