India – Legal and Regulatory Update

May 18, 2016

The Indian economy continues to be an attractive investment destination due to its sustained stable growth and implementation of further liberalization policies by the Government of India ("Government"). The Government’s focus remains on improving the ease of doing business in India and many effective steps have been taken in this direction.

Following our nine-month update dated October 21, 2015 (which sets out an overview of key legal and regulatory developments in India from January 1, 2015 to September 30, 2015), this update provides a brief overview of the key legal and regulatory developments in India from October 1, 2015 to April 30, 2016.

Key Legal and Regulatory Developments

Foreign Direct Investment Policy

1.      November 2015 Amendments to the Foreign Direct Investment Policy: On November 24, 2015, the Government effected several important amendments[1] to India’s consolidated foreign direct investment policy ("FDI Policy"). These amendments enable increased levels of foreign direct investment in a number of business sectors and simplify various sector-specific conditions under the FDI Policy. For a detailed analysis, please refer to our client alert dated December 8, 2015 at http://www.gibsondunn.com/publications/pages/Indian-Government-Amends-Foreign-Direct-Investment-Policy-Dec2015.aspx.

2.      Foreign Direct Investment in Insurance[2]: Total foreign investment ownership through any means, including portfolio investment, in an Indian insurance company (which includes insurance brokers, insurance third party administrators, surveyors and loss assessors), directly or indirectly (through one or more holding companies), is now permitted up to 49% without the prior approval of the Government ("Automatic Route"). Previously, foreign investment not exceeding 26% was permitted under the Automatic Route and foreign investment beyond 26% and up to 49% required the prior approval of the Government (through the Foreign Investment Promotion Board ("FIPB").

Prior approval of the Insurance Regulatory and Development Authority is required in all circumstances where there is any change in shareholding of an Indian insurance company. The ownership and control of an Indian insurance company (including the appointment of the CEO) must remain in the hands of resident Indians at all times. "Control" is defined to mean the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders agreements or voting rights agreements.

3.             Foreign Direct Investment in Pension Funds[3]: In line with the policy on foreign investment in the insurance sector, the Government has permitted foreign investment in Indian pension funds up to 49% under the Automatic Route . Previously, 26% was permitted under the Automatic Route and foreign investment beyond 26% and up to 49% required the prior approval of the Government (through the FIPB). Foreign investment in the Indian pension sector continues to be subject to the conditions set out in the Pension Fund Regulatory and Development Authority Act, 2013.    

4.             Foreign Investment in E-Commerce Activities[4]: The Government, on March 29, 2016, has clarified the position on foreign direct investment in e-commerce trading entities and e-commerce market place entities. There is no restriction on foreign investment in companies engaged in B2B e-commerce activities. In respect of companies engaged in B2C e-commerce activities, the key provisions are as follows:

(a)          E-commerce has now been defined as the buying and selling of goods and services, including digital products, through a digital and electronic network.

(b)          The term ‘digital and electronic network’ has been defined to include a ‘network of computers, television channels and any other internet application used in automated manner such as web pages, extranets, mobiles, etc.

(c)          The Government has drawn a distinction between an ‘inventory-based’ model of e-commerce ("Inventory Model") and a ‘marketplace based’ model of e-commerce ("Marketplace Model"). Inventory Model has been defined as an e-commerce business model where the inventory of goods and services is owned by an e-commerce entity and is sold to the consumers directly. Marketplace Model has been defined as the provision of an information technology platform by an e-commerce entity on a digital and electronic network to act as a facilitator between a buyer and a seller.

(d)          The Government has clarified that foreign investment of up to 100% is permitted under the Automatic Route in companies that have a Marketplace Model. No foreign investment is permitted in companies that have an Inventory Model.

(e)          Some of the key conditions that companies operating the Marketplace Model must comply with are:

(i)                 Not more than 25% of the total sales of the company can be undertaken on its marketplace by a single vendor or such vendor’s group companies;

(ii)               The company is permitted to provide support services to sellers in respect of warehousing, logistics, order fulfilment, call centres, payment collection and other similar services; and

(iii)             The company cannot directly or indirectly influence the sale price of goods or services and are obligated to maintain a level playing field.

While the above clarifications have removed ambiguities in relation to foreign investment in entities engaged in B2C ecommerce activities, there are certain grey areas that have arisen as a result of these clarifications. For example, (a) services have now been included within the definition of e-commerce – the presumption earlier was that this only includes goods, (b) there is also no guidance on what constitutes ‘influencing the sale price of goods directly or indirectly’ or how a ‘level playing field’ should be maintained by companies that have a Marketplace Model. Further clarity is required on these aspects.

5.             Foreign Investment in Asset Reconstruction Companies[5]: The Government has permitted foreign investment in asset reconstruction companies up to 100% under the Automatic Route. Previously, foreign investment of up to 49% was permitted under the Automatic Route and foreign investment beyond 49% and up to 100% required the prior approval of the Government (through the FIPB).

Insurance

On October 19, 2015, the Insurance Regulatory and Development Authority issued the "Guidelines on Indian Owned and Controlled" Insurance Companies (the "Guidelines") to further clarify the requirements with regard to Indian ownership and control of Indian insurance companies. The Guidelines apply to all Indian insurance companies that receive foreign investment. The Guidelines state that the ownership and control of an Indian insurance company (including the appointment of the CEO) must remain in the hands of resident Indians at all times. "Control" is defined to mean the right to appoint a majority of the directors on the board of the company or the power to control the management or policy decisions of a company by virtue of shareholding, management rights, shareholders agreements or voting rights agreements. For detailed analysis, please refer to our client alert dated October 22, 2015 at http://www.gibsondunn.com/publications/pages/Ownership-and-Control-of-Indian-Insurance-Companies-with-Foreign-Investment.aspx.

Financing

The Reserve Bank of India ("RBI") has promulgated the External Commercial Borrowings ("ECB") Policy-Revised Framework ("Revised Framework"). The Revised Framework lays down a more liberal approach for ECBs, whether they are long-term foreign currency denominated ECBs or Indian Rupee denominated ECBs. The Revised Framework expands the list of eligible borrowers, recognised lenders and reduces the restrictions on use of proceeds (i.e., end-use of the ECB). The Revised Framework became effective on December 2, 2015 with the publication of the relevant regulatory notifications in the Official Gazette of India. Borrowers were permitted to receive ECBs under the previous ECB regime until March 31, 2016 (if they had already executed the ECB agreement prior to the date of effectiveness of the Revised Framework). Additionally, borrowers that were in negotiations with lenders (at the time the Revised Framework became effective) were also permitted to execute ECB agreements under the previous ECB regime until March 31, 2016 for certain specific purposes such as working capital for airlines, loans for low cost affordable housing projects, etc. For detailed analysis, please refer to our client alert dated January 4, 2016 at http://www.gibsondunn.com/publications/Pages/Reserve-Bank-of-India-Introduces-Revised-ECB-Framework.aspx.

Start-ups

1.             The Government launched a new initiative on January 17, 2016 aimed at providing various benefits to start-up companies in India. The following are key provisions in relation to start-up companies:

(a)          A "start-up" has been defined to mean an entity incorporated/ registered in India  (i) for a period of up to 5 years from the date of its incorporation/ registration and (ii) its turnover in any financial year has not exceeded INR 250,000,000 (approx. USD 3.67 Million) and (iii) it is working towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

(b)          The Government has clarified that a business would be considered a start-up only if it aims to develop and commercialize (i) a new product or service or (ii) significantly improves an existing product, service or process that will create and add value for customers.

(c)          The RBI has made appropriate amendments to its foreign exchange regulations to state that  Foreign Venture Capital Investors ("FVCIs") are now permitted to invest in all start-ups, regardless of the sector that the start-up is engaged in. Prior to this amendment, FVCIs were permitted to only invest in a list of permissible sectors. Certain other benefits announced by the RBI for start-ups include (i) transfer of shares with deferred consideration, escrow or indemnity arrangements for a period of 18 months; (ii) simplification of the process for dealing with delayed reporting of FDI; (iii) easing access to rupee denominated loans under the ECB framework; and (iv) easing operational restrictions on overseas subsidiaries of start-ups.

(d)          Start-ups are also exempted from certain statutory provisions relating to inspection under certain labour legislations in India by self-certifying compliance with such legislations.

(e)          Eligible start-ups (established between April 2016 and March 2019) are entitled to a tax deduction of one hundred per cent of the profits and gains derived by them, for a period of three years, from a business involving innovation development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property.

Real Estate

The Real Estate (Regulation and Development) Act, 2013 ("RERA") was notified on March 27, 2016. RERA seeks to establish a regulatory framework to govern transactions between buyers and promoters/sellers of real estate projects. It establishes state level regulatory authorities with the objective of  (a) ensuring that residential projects are registered, and their details uploaded on the authorities’ website; (b) ensuring that buyers, sellers, and agents comply with obligations under the RERA; and (c) advising the government on matters related to the development of real estate. RERA also imposes a requirement that at least 70% of the funds collected for a particular real estate project from buyers will be invested solely in such project. It seeks to protect buyers by prohibiting advertisements promoting real estate projects which have not obtained all regulatory approvals along with an additional provision for penalties for delay in construction.

Antitrust

On March 4, 2016, the Government, through the Ministry of Corporate Affairs issued a number of notifications (the "Notifications") which have substantially (a) amended and increased the merger control thresholds and, (b) amended as well as extended the existing target based exemption under the merger control regulations in India for another five years.

1.       Target Based Exemption: On March 4, 2011, the Government had introduced a de minimis target based exemption (i.e., based on the valuation of assets or turnover of the target company) which excluded certain transactions from the provisions of Section 5 of the [Indian] Competition Act, 2002 (the "Competition Act") for a period of five years. Transactions that fell below the threshold did not have to be notified to the Competition Commission of India ("CCI"). The Government, through the Notifications has extended the exemption for another five-year period, i.e., until March 4, 2021. The values of asset/turnover thresholds under this exemption have also been raised.

2.       Merger Control Thresholds: Section 5 of the Competition Act sets out the asset and turnover thresholds that are required to be satisfied for a transaction to qualify as a "combination". A qualifying combination is required to be mandatorily notified to the CCI for prior approval, unless the target based-exemption discussed above is applicable. The Notifications have amended and increased these thresholds. Please refer to our client alert dated March 15, 2016 for more details, including these revised thresholds: http://www.gibsondunn.com/publications/Pages/Indian-Government-Amends-Merger-Control-Regulations.aspx.

Arbitration

The Arbitration & Conciliation (Amendment) Ordinance, 2015 ("Ordinance") was promulgated on October 23, 2015 to introduce substantial changes to the [Indian] Arbitration & Conciliation Act, 1996 (the "Arbitration Act"). The Ordinance was approved by both houses of the Indian Parliament and was published in the official gazette on January 1, 2016 after receiving Presidential assent as the Arbitration and Conciliation (Amendment) Act, 2015 ("Amendment Act"). The primary objective of the Amendment Act is to encourage expeditious resolution of disputes and transparency in arbitration proceedings. The Amendment Act has reformed domestic arbitrations, foreign seated international commercial arbitrations (in so far as the Arbitration Act applies to them) and international commercial arbitrations seated in India by reducing delays and limiting the scope of judicial intervention. For detailed analysis, please refer to our client alert dated November 10, 2015 at  http://www.gibsondunn.com/publications/pages/Government-of-India-Amends-Indian-Arbitration-and-Conciliation-Act–1996.aspx.


[1]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn12_2015.pdf

[2]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn1_2016.pdf

[3]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn2_2016.pdf

[4]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn3_2016.pdf

[5]       http://dipp.nic.in/English/acts_rules/Press_Notes/pn4_2016.pdf


Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. For further details, please contact the Gibson Dunn lawyer with whom you usually work or the following authors in thefirm’s Singapore office:

India Team:
Jai S. Pathak (+65 6507 3683, jpathak@gibsondunn.com)
Priya Mehra (+65 6507 3671, pmehra@gibsondunn.com)
Bharat Bahadur (+65 6507 3634, bbahadur@gibsondunn.com)
Karthik Ashwin Thiagarajan (+65 6507 3636, kthiagarajan@gibsondunn.com)
Sidhant Kumar (+65 6507 3661, skumar@gibsondunn.com) 


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