India Business Law Journal – March 2008

Reform’s unstoppable march

As elections loom, a shaky coalition government going slow on reform is no surprise. But the fact that it is still trying bodes well for India

One conclusion that India-watchers may glean from this month’s issue of India Business Law Journal is that the reform process has picked up almost-unstoppable momentum.

Witness the recent announcement by the Cabinet Committee on Economic Affairs of significant, if not wide-reaching, liberalizations to foreign investment policy in such politically sensitive sectors as aviation and natural resources. Many observers believe the reforms would have been bolder had a general election not been on the cards. But the fact they were announced at all at such a politically inopportune moment is indicative of a deep-rooted change that has taken hold at all levels of the political establishment.

Even in the most conservative of institutions, there are small, yet encouraging signs of movement. Indeed, the Bar Council of India has taken welcome steps towards lifting its long-standing ban on law firm websites.

Writing in this month’s Vantage point, Vijaya Sampath, group general counsel at Bharti Enterprises, acknowledges the tremendous strides that have been made thus far in reforming sectors as diverse as telecommunications, pharmaceuticals and finance. She laments, however, that despite unprecedented economic growth, India’s infrastructure is still a shambles and 300 million people are living in abject poverty. The challenge facing reformers, she argues, is to design and implement reforms that will facilitate “inclusive” growth.

Perhaps it was the pursuit of this goal (although sceptics argue it was the pursuit of winning an election) that moved India’s finance minister, P Chidambaram, to announce a Rs600 billion (US$15 billion) farm loan waiver in his recent budget. The budget focused on easing the burden of the rural poor, but has been derided by the Indian media as “populist”. It included a 50% hike in short-term capital gains tax and a new tax on commodities transactions.

Many observers are disappointed that the budget didn’t do more to stimulate investment in infrastructure, a sector highlighted so poignantly by Sampath. As our hypothetical case study of Project Windstorm forcefully illustrates, infrastructure investors are still enmeshed in complex and overlapping – not to mention corrupt – regulatory procedures. Simplifications to these processes are long overdue: Infrastructure development is not only crucial to India’s economic expansion, but also a necessary condition for achieving some measure of “inclusive” growth.

For evidence of the benefits that stem from a light bureaucratic touch and clear-cut regulatory procedures, look no further than the astonishing expansion of India’s IT industry. This month’s Intelligence report focuses on Bangalore, the epicentre of the technology revolution. In just a couple of decades, the city has made the transition from legal backwater to “legal capital of the south” – a bustling service-sector economy that supports prominent local law firms alongside some of the most profitable offices of their national counterparts. Our coverage charts the recent migration of Delhi and Mumbai law firms to the Karnataka state capital, and reveals that Bangalore’s home-grown legal practices have survived – and in many cases flourished – in the face of competition from the larger and better-resourced new arrivals. This scenario may resonate with those debating the reform of India’s legal market and the possible entry of foreign law firms.

In many respects, the ability of regulators to respond quickly to domestic and international challenges is as important as the depth of any changes that are made.

Nowhere is this more true than in the turbulent arena of capital markets, where fluctuating stock exchanges have imposed some severe fund-raising difficulties on cash-hungry Indian corporations.

In 2005, the Securities and Exchange Board of India (SEBI) made it mandatory for corporates to list on a domestic exchange before they could take advantage of overseas listings. The markets soared as a result, but several years of growth recently gave way to a significant slump. As this month’s Cover story reveals, such volatility has given would-be issuers the jitters. Two domestic IPOs have been postponed, yet attractive international sources of finance remain largely off-limits. SEBI’s restrictions now appear counter-productive. Indeed, one prominent lawyer has speculated that the current crisis may spur SEBI on to relax its restrictions on foreign borrowing and overseas listings.

In the absence of such liberalization, ingenious local and international lawyers have mapped out alternative routes for their Indian clients to access international capital. A number of Indian corporations have successfully listed on London’s Alternative Investment Market (AIM) through Isle of Man-based entities as a result of one such innovation.

Governments and rule-makers can’t always be relied upon to introduce necessary reforms in a timely manner. But the evidence suggests that Indian companies – and their legal advisers – have become adept at picking up the regulatory slack and forging new business opportunities in the face of policy paralysis.