India in 2012


Business and legal professionals share their forecasts for the coming year

Capital markets

Sandip Bhagat, partner, S&R Associates: The Indian capital markets experienced declining activity in 2011. The trends that impacted the Indian market include the volatility in the global financial markets, high inflation and interest rates, lower industrial output, a weakening rupee and perceptions that plans for economic liberalization had slowed. These factors may continue to influence capital markets activity in 2012.

Several regulatory changes could positively impact the equity and debt capital markets in 2012. These include the issuance by the Insurance Regulatory and Development Authority of a framework for public issues by life insurance companies, an increase in the permissible investment limits and permissible bond investments for foreign institutional investors and the introduction of a framework for credit default swaps in corporate bonds.

With respect to the disclosure requirements for equity offerings, the Securities and Exchange Board of India (SEBI) has revised the structure and contents of the abridged prospectus, as well as the bid-cum-application form. SEBI has also constituted a committee to recommend regulatory changes to simplify systems and procedures in the primary market.

Predictions-CMYKThe new takeover regulations and the bringing into force of the merger control provisions of the Competition Act in 2011 will also impact transactions in 2012. Additionally, the Companies Bill, 2011, has been tabled before parliament and one of the proposed changes is to exclude qualified institutional buyers from the definition of a “private placement”. If implemented, this would mean that transactions such as a qualified institutions placement offering could be made to more than just 49 investors.

Exits by private equity investors and the requirement for listed companies to meet increased minimum public shareholding requirements under the Securities Contracts (Regulation) Rules, 1957, may result in Indian companies seeking to approach the capital markets in 2012. Given the volatility, the market windows in which such companies are able to successfully promote their offerings may be narrow. I think companies seeking to access the capital markets in 2012 should keep documentation ready to be able to take advantage of any market windows.

The US listing by MakeMyTrip has resulted in some companies with an Indian presence looking to tap the US markets, where there may be better valuations for business. These include Indian companies in the internet and technology sectors.

Raising funds, including for capital expansion and refinancing debt, will remain a key challenge for Indian companies in 2012. Companies may continue to seek private funding or rupee debt financing. Further, there are reports that over the next year, foreign currency convertible bonds (FCCBs) worth approximately US$5.6 billion are due for redemption. The conversion prices of these FCCBs are higher than their stock prices, and Indian companies will need to consider liability management exercises to mitigate the redemption burden.

Sandip Bhagat Partner S&R Associates

While the Reserve Bank of India (RBI) has extended the time period for the buyback of FCCBs up to March 2012, companies repaying such bondholders in dollars could be further affected by the weakening rupee.

Banking and finance

Shruti Sodhi, vice-president and senior counsel, American Express (India): With the possibility of strict fiscal policies to contain economic volatility, funding avenues may become much more limited and stringent in 2012. The biggest challenge of funding business expansion overseas is foreign exchange fluctuation. The downward spiral of the Indian rupee’s exchange rate is putting huge pressure on the capacity of Indian companies to do inter-company loans to fund ambitious overseas investments. Companies are thus starting to rely on banks for foreign exchange.

Companies in India may also find it tough to fund their expansion and operations. Given the current political situation and regulatory environment, financial institutions are finding it harder to justify funding Indian companies. The availability of funds locally may become even more constrained in 2012 if economic liberalization measures are not forthcoming with government initiatives.

Shruti Sodhi Vice-President and Senior Counsel American Express (India)

Varied written and unwritten procedures and rules are deployed by banks to disburse funding requested by companies and equivalent entities. Given the liquidity crunch and higher risks, the approval process to gain funding is becoming more difficult. If the economic scenario brightens up a bit, we may see some easing up of the funding situation, since I still believe that the fundamentals of the Indian economy are sound and provide support of double-digit growth.

Given that the domestic Indian economy is quite substantial and provides fundamental strength, inward investment looks promising. However, this will only continue if the government creates a business-friendly regulatory environment, develops capital markets and pushes policies that will increase foreign direct investment. In addition, greater domestic and foreign equity infusion in the infrastructure sector would be a sure-shot recipe for opening the floodgates of investments into India.

What we are seeing is probably a temporary aberration in otherwise an intact reality of India emerging as a global economic giant. Hence the only option is to wait and watch and be ready to hop on at an opportune juncture rather than waiting on the sidelines and missing the bus!

Private equity

Sridhar Gorthi, partner, Trilegal: India is poised to consolidate its position as a favoured investment destination and will benefit to some extent from the various problems that are plaguing Western economies. As capital markets continue to remain stagnant, valuation expectations are likely to fall, providing good entry points across various sectors. Despite recent reverses, possible policy reforms in sectors such as multi-brand retail trading could provide massive opportunities in 2012.

Although the recent confusion relating to put and call options in cross-border transactions has been addressed to some extent, there is a risk that structuring exit options in private equity transactions could be adversely impacted if the RBI continues to view these arrangements unfavourably. On the other hand, recent changes to the takeover code allowing the acquisition of 25% without triggering an open offer should lead to larger private investment in public equity deals in 2012.

In terms of sectors, energy, infrastructure, pharmaceuticals and technology will remain active – but in my view, the consumer sector particularly fast-moving consumer goods, could emerge as the frontrunner. Apart from that, I think we will also see an increase in deal values, with private equity funds looking at an increasing number of buy-out transactions.

With moribund capital markets and some regulatory uncertainty, the biggest challenge for private equity investors is clearly going to be to secure exits from existing investments. Many portfolio companies are going to need extensions on IPO deadlines and many deals may need restructuring. In such situations, it would be vitally important for investors to thoroughly evaluate existing transaction structures to see if the deals put together four or five years ago still work to protect their interests in the prevailing economic and regulatory environment.

Sridhar Gorthi Partner Trilegal

If existing deals need to be restructured to accommodate the investee’s request for more time, etc., this may provide a good opportunity for the investor to negotiate better and stronger protections in return.

Private equity investors could also face competition from corporate or strategic buyers which have longer time horizons for returns on investment. With many investee companies struggling to meet the return expectations of private equity funds in the current environment, a preference for corporate or strategic investors could develop.

With an anticipated increase in private equity activity across sectors and a dearth of good-quality targets, deal origination will continue to be a challenge. Funds with an established presence in India that have built strong corporate relationships over the years will clearly have an advantage.

Projects and infrastructure

Rajiv Luthra, managing partner, Luthra & Luthra: At a broad level, one of the biggest challenges facing the infrastructure sector is the continuing policy paralysis in the government and bureaucracy, which is delaying decisions on approvals and holding up reforms. This is not an issue unique to the infrastructure sector, but because the sector is heavily regulated – where approvals are required at almost every step, and from various wings of the government – infrastructure is bound to be more affected by this more than many other sectors. This regulatory uncertainty is becoming a threat to the long-term growth prospects of the country, and there needs to be a concerted political effort to emerge from this situation.

There are also sector-specific challenges which can impact growth unless they are swiftly dealt with. The shortage of domestic coal due to a number of reasons including slow growth in capacity, combined with the increasing prices of imported coal, are forming pincers which threaten to crush the coal-dependent thermal power sector. Coal production requires to be streamlined urgently, and environmental and mining policies must be reconciled with each other, to ensure that coal production gets back on track.

The effect of the financial crisis on power distribution companies is also having an impact on the financial viability of power projects and it is essential that reforms be implemented by distribution companies to ensure that they regain access to bank funds. The infrastructure sector in general is being impacted by the macroeconomic situation in India and the rest of the world, with higher interest rates, which are expected to continue into 2012, leading to increased project costs.

There are significant opportunities in a number of sectors. The government plans to add 20 gigawatts of solar power by 2022, and subsidies are available to make this sector more viable than before. It is important to ensure that regulations on issues such as local content for manufacturing of solar cells do not adversely impact growth. There are also enormous opportunities available in the roads and highways sector, with US$60 billion of investment expected between 2012 and 2017. The upcoming ultra mega power projects in states including Orissa are also major investment opportunities.

Pending legislation such as the Land Acquisition, Rehabilitation and Resettlement Bill, 2011, and the Mines and Minerals (Development and Regulation) Bill, 2011, are expected to bring much needed reforms which will benefit the infrastructure sector. However, it remains to be seen if the resolve to pass these laws exists within the two houses of parliament, or whether they will fall victim to legislative delays. In particular, the definition of “public purpose” under the land acquisition bill, and the issue of compensation for project-affected persons under the mines and minerals bill, are likely to be controversial issues.

A Balasubramanian, senior director of project finance, Infrastructure Finance Development Company: Public-private partnerships (PPPs) have so far evolved around public-sector power and port projects. Independent power producers would supply power to state electricity boards (SEBs) and private terminals in major ports would coexist with public-sector terminals operated by federal port trusts. In short, the PPP model as it evolved was to hand out bankable contracts to outsource private capacity leaving public-sector incumbents intact.

This model has brought in new private capabilities, but the capacity added is insignificant. A major proportion of physical capacity and investment continues to be at the disposal of the public sector. The challenge ahead for any further meaningful progress in power and ports is to be able and willing to undertake institutional reforms to SEBs and port trusts to unleash their latent potential.

The demonstrated success of private ports in some states and of bold institutional experiments in the power sector offers hope and clues for success. Pressing reforms include dealing with issues such as tariff rationalization (power) and tariff liberalization (ports), while ensuring that tariffs are not revised to mitigate the thorny issues of transmission and distribution losses or sub-optimum port productivity.

Customers should be able to choose their supplier without attracting high switching costs. This can be achieved through genuine efforts to create open power access and better port connectivity. There should also be a level playing field between central and state governments in sector policies and access to natural resources such as coal across states, without undue advantage and unjust enrichment to mineral-rich states. Public-sector power and port entities should be corporatized so as to build solvent and responsive entities. These issues are critical for the next leap in infrastructure, but they are sensitive as they figure in the concurrent list of the constitution and call for efforts to build a national consensus with key stakeholders.

However, we may have to wait a while for global economic tranquillity before we see a resurgence in ports and power projects.

Roads will continue to attract investors and the good news is that investors have become discerning in making price bids. Aggression has given way to cautious optimism. The PPP model will continue to be used for road development but it is necessary to strengthen public-sector state road agencies and the National Highways Authority of India to augment their financial and contractual skill sets. Land acquisition will also be an issue for all infrastructure sectors.

In the telecom sector, the speed and quality of transition to price discovery by the market for spectrum and services is critical. The traction in telecom will depend on the pace, magnitude and quality with which the legal and policy logjam is tackled. Telecom investments will veer towards business models which hinge on telecom convergence.

Policy, institution, legislation and litigation are key challenges that will affect the development of infrastructure in India. Second-generation reforms are required and lawyers who have domain expertise in the infrastructure business have a tangible role to play and an opportunity to make a name for themselves.

Dispute resolution

Kumkum Sen, partner, Bharucha & Partners: I foresee proliferation of arbitration in the infrastructure sector – projects and other contracts involving construction, energy and, particularly, oil and gas. Employment and sports law disputes are also moving increasingly towards arbitration.

Kumkum Sen Partner Bharucha & Partners

Arbitration, mediation and out-of-court settlements are already the preferred option for resolving disputes and I foresee they will continue to be so. Courts in Delhi specifically encourage mediation wherever possible.

I think we all have forgotten about the government’s National Litigation Policy (NLP). All these policies have the best of intentions, but the problem lies in implementation. The NLP was intended to reduce the tendency of government and its agencies to litigate compulsively and often against each other or state governments. We haven’t come across that happening yet. In fact the Supreme Court earlier this year passed a direction abolishing the committee which had mooted the initiative to settle inter-governmental claims.

Most quasi-judicial tribunals do not take much initiative towards settlement, but if parties settle out of court, they are happy for disposal on consent terms. The Company Law Board on the other hand encourages companies to settle shareholder and other disputes.

Pursuant to the recommendations of the Law Commission in 2003, the Commercial Division of High Courts Bill, 2009, was introduced in parliament to provide for adjudication of commercial disputes, including a wide ambit of cases involving foreign investment and collaboration. With the pecuniary jurisdiction of the division of the high court pegged at ₹50 million (US$900,000) and above, the purpose was to provide an effective mechanism for speedy resolution of commercial disputes involving high stakes. This bill, to the best of my knowledge, has gone into hibernation.

Tax and IP-related cases will dominate in litigation. There could be some reshuffling if a new Companies Act is in place. The direct tax code (DTC) and the goods and services tax (GST) are on the anvil and will change the character of tax litigation.


Rohan Shah, managing partner, and Parth Contractor, associate, Economic Laws Practice: The year 2012 was anticipated to be a watershed year in terms of the reinvention of tax laws in India, with the expected introduction of the DTC and the GST. However, it is very likely that neither of these regimes will be introduced on 1 April 2012 as planned.

While the DTC is in an advanced stage of readiness for introduction, there are still some open issues in relation to general anti-avoidance rules (GAAR), branch profit-tax calculation, controlled foreign corporation (CFC), place of effective management, exempt-exempt-exempt method of taxation, etc.

The revised discussion paper only provides draft proposals of the DTC and does not state how the provisions will appear in the final draft of the code, making it difficult for businesses to gear up for its introduction. The GST too, may not see the light of the day in the coming year owing to open issues in relation to the autonomy of states, the rate of taxes, composition of the GST Council, to name a few. Given all this, it is very likely that both the DTC and GST will only be introduced with effect from 1 April 2013.

Having said this, it is likely that there will be clarity on provisions in the DTC relating to GAAR, CFC and advanced pricing arrangement and a negative list of taxation for services in the GST.

The change in regime, coupled with the stricter attitude of the tax authorities in India (especially the Vodafone tax controversy and other similar cases), has undoubtedly raised the level of uncertainty in relation to tax positions vis-à-vis India, keeping foreign investors away.

Hopefully the judgment in the Vodafone case will offer guiding principles in relation to issues of indirect transfer of shares and India’s territorial jurisdiction to tax these shares. The Vodafone judgment is also being closely watched as it may render a resolution of the 140-odd other transactions which have been impacted by it. However, the Vodafone controversy may not be the end of the road. We may well witness one more round of litigation in relation to the transfers in which treaty partner countries are involved.

Rohan Shah Managing Partner Economic Laws Practice

It may also be important to note that US$10 billion of transfer pricing adjustments, primarily on marketing intangibles, have been made by the Indian tax authorities, which is likely to cause a huge escalation in transfer pricing litigation. As always, awareness and preparation will be the key.

Mergers & acquisitions

Rajan Gupta, Partner, SRGR Law Offices: We expect that the M&A market in 2012 will be sluggish in many sectors at least in the first half of 2012. Owing to the uncertainties in European economies, companies globally are cautious about M&A. The uncertainties of the euro crisis and its implications have led corporates to tread cautiously.

While Europe and the US battle through tough economic environments, global companies may see a relatively stronger earning capacity in Asian countries including India. At this moment, we understand that various companies in the West have sufficiently strong balance sheets, but lack the opportunity for growth in their respective countries and thus may consider merging with companies in Asia to meet their growth objectives.

The biggest opportunity for both Indian and international companies in India is currently in the renewable energy sector. The government is taking effective and dynamic steps towards encouraging growth with various schemes and incentives for investment. Investments in this sector, as well as the oil, energy and resources sector, appear promising, especially with the availability of better financing facilities.

Indian companies are expected to continue looking for good-quality acquisition targets in Europe, Africa and Asia, in the manufacturing, mining and services sectors. For international companies, M&A transactions are a less risky alternative to investing in new plants or equipment where they would be required to set up to support that investment.

Rajan Gupta Partner SRGR Law Offices

In addition to acquisitions in the energy and resources sectors, there may be activity in the fields of technology and pharmaceuticals. With the increasing patentability and protection of IP in India and better government moves and initiatives aimed at providing access to life-saving drugs, both multinational companies and domestic players are examining the prospects offered by the local market in this sector.

There is also rising demand for innovative drugs to treat the chronic illnesses that the changing lifestyles of more affluent Indians have produced.

We thus expect increase in M&A activity only in the second half of 2012 when there may be better understanding of the impact of current eurozone crisis globally.

Intellectual property

Vikram Grover, partner, Remfry & Sagar: With fluctuations in nearly all areas of the economy and stunted growth if not a negative drop, I see an opportunity for IP owners to leverage their assets in various ways. Increasing mergers and acquisitions will lead to IP changing hands and a depressed economy will also see heightened licensing of existing IP. Therefore, traditional IP leveraging in commercial transactions such as technology transfer, licensing, etc., should continue, while liquidity concerns could result in increased IP financing, specifically, securitization and collateralization of IP assets.

Patents and trademarks will be the most active areas. In the field of pharmaceutical patents, evergreening will be the most mooted issue. Public interest will continue to be a guiding principle in granting relief at the interlocutory stage. The issue of compulsory licensing will also gain momentum.

Another area which will become contentious is inventions which pertain to business methods or computer programmes per se or algorithms, which are currently excluded from the scope of patentable inventions.

The use of trademarks or trade names as metatags and keywords is likely to receive the attention of the courts. As of now, jurisprudence is nascent and mushrooming on the subject.

Vikram Grover Partner Remfry & Sagar

Tightening liquidity and the absence of judicial precedents could pose problems for rights owners. Moreover, high development costs and low imitation costs in most industries lead to the omnipresent threat of piracy.

Rights owners should closely monitor their assets for potential violations. In these tumultuous times, businesses may consider hiving off IP assets to immunize themselves on account of unfavourable economic trends. Particular attention to the proper valuation of IP assets should be undertaken to derive optimum returns.

Legal recruitment

Lee Ignatius, head of executive search, and Ritvik Lukose, CEO, Vahura: A recent trend that will continue in 2012 is the difficulty in recruiting good partners. Some firms are looking for young partners, many of whom aspire to set up their own firms and hence are unwilling to join a large setup. Other firms are looking for partners with a transferable book of business. Portability of clients and the rainmaking abilities of a partner are becoming important. Recruiting such partners, who will be able to fit into the firm, will be a big challenge.

Busy days ahead: India expects US$60 billion to be invested in road projects over the next five years.
Busy days ahead: India expects US$60 billion to be invested in road projects over the next five years.

If we step back a bit, law firms tend to lose lawyers at the two to three-year level when they move to another firm or leave to pursue an LLM. The other experience band is five to seven years when many lawyers choose to move in-house, take a break or drop out of the profession all together. This is something that we see every year.

Many lawyers also leave because of a bad junior boss who does not know better. Training senior associates and junior partners on how to lead and mentor a team will help reduce burn-out and improve retention.

The market has become a lot more competitive with the entrance of new firms. The tightening of the global economy is not helping matters. Given the impending slump in the economy in 2012, firms may provide modest salary increments and a higher emphasis on variable pay to keep remuneration in line with the movement of revenue.

The path to partnership is becoming longer and some firms are introducing new designations between senior associate and partner as a reflection of this. Review systems are also being revamped.

Effective and clear communication channels at a firm are vital, especially when it comes to expectations of fee-earners and how they will be reviewed. Creating a professional, dynamic and transparent environment at work will go a long way in retaining people.

Firms should spend plenty of time communicating to their lawyers and set clear expectations. New systems should be carefully introduced to lawyers and they should be told how these systems will affect them. Using specialist consultants to study compensation patterns will help dispel myths about how much a competitor is paying. Talent management and the training of future partners are critical.