“Crisis and deadlocks when they occur have at least this advantage, that they force us to think”
Wise words from Jawaharlal Nehru, India’s first prime minister, that seem particularly pertinent right now. For while the turmoil of Nehru’s India can hardly be compared with the turbulence of today, the introspection triggered by scandals that are currently rocking India suggests the country is at a point unlike any other in its recent past.
Among the many headline-grabbing events that are causing disquiet, one stands out for investors: the deal struck between Edinburgh-based Cairn Energy and the mining giant, Vedanta Resources, transferring ownership of Cairn India – an oil and gas exploration and production company. The deal needs a nod from the government in order to go through, but that has not yet happened. The ensuing deadlock is being watched closely both inside and outside India.
Our Cover Story (Waiting for a nod, page XX) provides a behind-the-scenes look at the intricacies of the deal and explains how the current deadlock is rooted, in part at least, in a dispute between Cairn India and its state-owned partner, Oil and Natural Gas Corporation. Drawing on the insights of oil analysts and lawyers, our coverage reveals how the Indian government has used the deal as an opportunity to renegotiate an old production sharing contract.
Suspicions of government meddling are troubling investors. But could this simply be a case of a confident India flexing its new-found muscle?
Another sector that may find itself on the receiving end of government muscle-flexing is banking. Prompted by the recent financial downturn, the country’s banking regulator, the Reserve Bank of India (RBI), is deliberating how best to ride-out the effects of any future crises. As a result, it has renewed its efforts to assert control over foreign banks.
As we detail, in the first of this month’s Spotlights (Root and branch reform, page XX), the RBI has initiated discussion on a proposal to have what are currently branch offices of foreign banks convert themselves into locally incorporated subsidiaries. This would ensure that certain assets would be ring-fenced, and could not be rushed out of the country if they were required to bail out a failing operation elsewhere.
While many international banks consider their presence in India to be vital, most are loath to put themselves under greater regulatory control. The RBI tried to implement similar reforms in 2005, but they were thwarted by reluctance on the part of the banks. This time, an accompanying package of incentives may succeed in sweetening the pill. The RBI is yet to finalize its plans for altering the status quo, but the chances are whatever it puts in place will become mandatory for all new banks looking to enter India.
Over recent years, as “crisis and deadlocks” have increasingly reared their heads, the flow of investment into India has fluctuated. As a result, while there is still widespread optimism about the country’s future, investors have become increasingly skittish. Nowhere is this more evident than in the fickle world of private equity.
This puzzling paradox is the focus of our second Spotlight (Funds in flux, page XX). Our coverage analyses the regulatory and systemic challenges that are frustrating investors. While Valérie Demont, a partner at Pepper Hamilton, laments the “absence of a developed debt market” others decry the complex regulations and tax structures that conspire to diminish the attractiveness of investing in India. But, frustrations aside, the fact remains that India is too large a market to ignore.
In fact, it was the size and promise of this market that attracted Honda to India 27 years ago. The joint venture it forged with Hero, a domestic bicycle maker, went on to become the largest manufacturer of two-wheeled vehicles in the world. But as India opened its markets, the two partners grew restive and earlier this year they parted ways in a “cordial and amicable manner”.
Then came the daunting task of disassembling the venture that both parties had spent almost three decades putting together. Our in-depth coverage of the split (Riding Solo, page XX) reveals the challenges that were encountered as the two parties struggled to disentangle their assets. It also sheds light on the delicate balancing act that Hero had to perform in order to finance the separation while staying off the regulator’s radar.
Fortunately, the breakdown of the Hero-Honda partnership didn’t degenerate into a legal dispute. But many other companies with complex business relationships in India are not so lucky. When disputes arise, there is an increasing tendency for parties to try arbitration before throwing themselves into the log-jam of India’s court system. Arbitration is often heralded as being eminently preferable to the courts, but writing in this month’s Vantage point (What has gone wrong with arbitration?, page XX) Sidharth Sharma, an in-house counsel at Tata, argues that it has lost its way.
Sharma contends that arbitration in India has descended into a mere clone of what it set out to replace. He laments the lack of enforceability of awards and frequent judicial interference in the arbitral process.
This month’s Intelligence report (Back on the map, page xx) examines the rich yet underutilized legal market in the southern city of Chennai. The regional economy is booming, but despite this and the city’s eclectic mix of sole practitioners, young home-grown partnerships, and the offices of a few adventurous national law firms, most sizable clients in Chennai look to Mumbai for their legal needs. Is this changing and if so, what is driving the change? Intriguing questions that we answer with insights from lawyers – young and old – in the hometown of many of the country’s finest legal minds.