Will The Law Protect Foreign Business Investors In India?

India has had a bad reputation in the international business world for companies that come over here to do business. They have had to pay kick backs, baksheesh, to get things done and the black market in India is a huge source of illegal and pirated goods. Things are changing, however, as the modernisation of India continues and the growing middle class demands a fully functioning economy. The government is being forced to balance its protectionist stance with new laws to open up India to greater levels of foreign investment.

In 2006, foreign companies were given, for the first time, legal permission to own one hundred percent of wholesale cash and carry businesses in India. To prevent these foreign entities from operating within the retail sector the government introduced a raft of restrictions relating to group company sales. Some foreign corporations searched for loopholes in the legislation and formed partnerships with Indian retailers to allow them to reap their supply chain economic advantages. The government determined later that these company structures violated the intentions of the regulations and many foreign partners were forced to get out of these joint ventures. Compensation lawyers were consulted in some of these cases.

In 2011, the Indian government allowed foreign companies to own one hundred percent of single-brand retail operations, and at the same time to own fifty one percent of multi-brand retail operations. There was much local opposition to this opening up of the market and the multi-brand opportunity was revoked, before being reintroduced in 2012 with a host of new onerous regulations. Foreign ownership was only allowed in towns with populations greater than one million, and state bodies were given discretionary powers to ban them anyway if they so desired. Foreign businesses were required to invest at least $100 million and fifty percent of that amount had to be put into back-end infrastructure within the first three years. In addition, thirty percent of the products sold by these multi-brand, foreign controlled, retail operations had to be sourced locally from India. The result is that very few major brands have opened stores in India.

Indian companies can only borrow in foreign currency under extremely restrictive conditions imposed by the reserve Bank of India (RBI). In 2007, the RBI changed the way they viewed equity investments in the form of debt or preferred securities, treating them as illegal ways to circumvent their rules on foreign currency loans. The RBI went on to prohibit put options on equity shares to Indian investors and other such structures that foreign investors were utilising to reduce their risk in the Indian market.