An Overview from ASHURST

Ease of Doing BusinessIndia is one of the fastest growing economies in the world. Moody's has predicted it will grow at a strong pace of 7.5% in 2015-16, the highest among G20 economies. The 'Make in India' initiative of Prime Minister Modi, which aims to push manufacturing above 25% of GDP, has set the stage for reform.India's GDP growth has overtaken that of China in the fourth quarter of 2014 at 7.5%. According to the International Monetary Fund World Economic Outlook (April-2015), India is now the 9th largest economy in the world and at the 3rd position after China and Japan among Asian Countries. India shares 8% of Asia's total GDP (nominal). On the basis of PPP, the economy of India stands at $7,375.9 billion, making it the 3rd largest economy in the world after the United States and China.Prime Minister Narendra Modi has set himself an ambitious task of improving India's ranking in the World Bank's “Ease of Doing Business” to be in the top 50, where India has slipped 11 places to rank 142 from rank 131 in 2013.With over half of India's population under 25 years of age, it is estimated that approximately 12 million Indians will join the workforce each year. Creating employment is a priority for the Indian government and the ease of doing business is essential to both encourage inbound investment and generally push the growth of the domestic industry, leading to the creation of more jobs and the participation of a larger number of Indians in India's development.To improve the business climate, the Government has constituted a committee to recommend simpler mechanisms to replace the countless permissions needed to start an enterprise. The mandate of the committee is to study the current framework that requires various prior permissions, examine the possibility of replacing these with a regulatory mechanism, identify safeguards that need to be incorporated to do this, recommend a framework of the proposed regulatory mechanism and draft the proposed legislation.The Department of Industrial Policy and Promotion (“DIPP”) recently announced an initiative to issue a report card on the ease of doing business state-wise. A detailed questionnaire has already been prepared and sent to all state governments with a view to publish these report cards (analysing the strengths and weaknesses) on the state's performance.To achieve these ends, the Indian government has proposed new Industrial Corridors between major cities like Amritsar, Bengaluru, Chennai, Delhi, Kolkata, Mumbai and Visakhapatnam, as well as the setting-up of smart cities offering flexibility of compliance with built-up area requirements and capital conditions for Foreign Direct Investment (“FDI”). Last year, Japan signed an MoU to make Varanasi (PM Modi's constituency) a smart city and a cultural hub similar to Kyoto. More recently, following PM Modi's visit to China in mid-May, GMR infrastructure has signed an MoU with Guizhou International Investment Corp (GiIC), a consortium of 3 Chinese manufacturing firms, to set up units at its SEZ in Kakinada, a move that will see $3.5 billion worth of investments in the next 5 years.Earlier this year, the government unveiled the Gujarat International Finance Tec-City (commonly referred to as 'GIFT'), a central business district in the state of Gujarat, built on 886 acres (3.59 km2) of land. GIFT has a special economic zone (“SEZ”), an international education zone, integrated townships, an entertainment zone, hotels, a convention center, an international techno park, Software Technology Parks of India (“STPI”) units, shopping malls, stock exchanges and service units and has also been notified as the first International Financial Services Centre (IFSC) in India. Top bourses such as BSE and NSE have already signed MoUs for setting up international exchanges there and existing international exchanges are allowed to set up their subsidiaries in the IFSC under the relaxed regime.The Union BudgetIn the Union Budget 2015-16, the Finance Minister Arun Jaitley outlined the roadmap to the reforms proposed. Moody's observed that the budget has several measures that, if effectively implemented, will accelerate India's GDP, including the focus on public spending on infrastructure and incentives for the private sector. Some highlights that the Budgetfocussed on are:Simplification of procedures for Indian corporates to attract foreign investmentsBy doing away with the distinction between different types of foreign investments and bringing all within the definition of Foreign Portfolio Investors (“FPI”) and replacing individual sectoral caps with a composite cap including all FPI as well as FDI investments. For example, the insurance sector has a composite cap of 49% for foreign investors, which could be a mix of FPIs and FDI..Proposals for speedy resolution of disputesThe Budget has proposed to introduce a Public Contracts (Resolution of Disputes) Bill to streamline the institutional arrangements for resolution of such disputes. Similarly, for the quick resolution of commercial disputes, the budget has proposed to set up exclusive commercial divisions in various courts in India. On April 22, 2015 during the just concluded Budget session of the Indian Parliament, the Union Cabinet, chaired by Prime Minister Modi, has approved “The Commercial Division and Commercial Appellate Division of High Courts and Commercial Courts Bill, 2015”.Bankruptcy LawThe Finance Minister also proposed legislative reform by way of a introduction of a bankruptcy law as a priority for improving the ease of doing business in India.The Indian government has implemented an investorFriendly FDI policy under which FDI up to 100% is permitted under the automatic route for most sectors (no permissions required from the Central Government) and activities and FDI limits is increased in the following sectors:Defence sectorUp to 49% equity investment permitted under the automatic route with certain conditions and proposed investments above 49% to be taken up by the Cabinet Committee on Security on a case-to-case basis, in particular if such investment involves accessto modern and state-of-the-art technology to India. Portfolio investments have been permitted in the Defence sector for up to 24% through the automatic route. A number of conditions have been relaxed and removed, making the sector more investor friendly.Railway InfrastructureUp to 100% private and foreign direct investment under the automatic route in construction, operation and maintenance of the infrastructure projects in the railway sector has been permitted subject to meeting sectoral laws and with the condition that FDI in excess of 49% in sensitive areas will need to be approved by the Cabinet Committee on Security on a case-to-case basis from a security view-point.Construction DevelopmentThe FDI policy has been amended easing area restriction norms, reduction of minimum capitalization and easy exits from the project. In order to boost low-cost housing, provision for conditions of area restriction and minimum capitalization would not apply to cases committing 30% of the project cost to affordable housing.InsuranceFDI has been raised from 26% to 49%.Manufacturing of medical devicesFDI up to 100% is permitted.Legal ReformsThe passing of key legislations pending in the Indian Parliament related to land reforms, taxation, labour laws and some other sectors, and their implementation should give an impetus to foreign investors by significantly impacting the ease of doing business in India.The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement (Amendment) Bill 2015The Bill changes the acquisition of land for 'private companies' mentioned in LARR Act 2013 to acquisition for 'private entities'. A private entity could include companies, corporations and non-profit organisations.Amendments to the Companies Act, 2013To improve the ease of doing business and to increase transparency in governance, the Indian Parliament has in May 2015 passed the Companies (Amendment) Bill 2014, which will become law once notified in the official gazette.Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000These regulations have been amended by introducing various liberalised policies such as permitting the issue of certain equity shares against any funds payable by the investee company.The Goods and Services Tax BillPerhaps India's most ambitious indirect tax reform plan to date, the GST Bill aims to forge a common market.Labour Law ReformsThe Union government plans to replace 44 laws with 5 codes relating to wages, industrial relations, small factories, social security and welfareMore Effective Arbitration ProcessThe Union Cabinet has approved amendments to the Arbitration and Conciliation Act 1996 which include reducing the scope for early judicial intervention where the arbitration clause or agreement's validity is questioned.Bringing back the Black MoneyHigh on the government's agenda, the Indian Parliament has during its recently concluded Budget session passed the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill 2015 to enable government to bring back undeclared wealth (“black money”) stashed in overseas bank accounts.Final WordThe Indian government has been proactive in its reforms with regard to ease of setting-up of businesses through G2B websites and streamlining applications for efficient and timely approvals. The Indian government is trying to move towards e-Governance to simplify processes which will contribute greatly towards the ease of doing business in India and the impact of these changes would be seen over the coming years.Richard Gubbins is the head of India Practice at Ashurst, LondonGopika Pant is Senior Partner, Indian Law Partners.

The above article was published in India Inc's print edition of the India Investment Journal launched in June 2015 in conjunction with the Policy India Roundtable 2015.