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The year 2011 saw some major policy changes which had and will have direct impact on the businesses in India. The policy reforms are pre-requisites for taking the economy to the next level of economic development. Lex Witness is taking an end of the year recap of the major policy level changes having a bearing on businesses in India. This recap is spread over two Issues, Part 1 thereof being published in the present issue, covering significant developments in the FDI, Land Aqusition Policy, Environmental Law, Insurance and Competition Law. The remaining part titled Part II shall be covered in our February issue, including taxation, securities laws, companies bill and matters related with corporate governance.
With clear signs of national economy slowing down and the government suffering from policy paralysis, the picture does not seem to be in sync with our socio-economic aspirations and a growth target of 10% as was set forth in the current five year plan. The year 2011 witnessed some of very significant changes in policy terms affecting the general legal environment for the economy. Here is a run down on some of those changes.
Post-facto clearances: lessons from 2011
Conventional wisdom is to ensure all approvals, clearances and compliance are in place before we set forth a business venture of any size. But often times over the past few years, corporates have believed in putting the cart before the horse. The reasons for this are not difficult to find. 2011 was the year when many of these projects found themselves battling legal challenge from "social" activists, "motivated" regulatory or investigative agencies and thevery government departments and ministries that lead them up the "golden path" in the first place.
Systemic Issues
It is a known fact that the dozens of approvals and clearances are required from various state and central departments can seriously delay major project.. Ministries and group of ministers can sit on a decision ...debating the issues involved in minute details. Insiders talk about lobby groups and rivals working to scuttle and delay these decisions even further. Corruption too has been recognised as a major issue. Approvals are given for considerations other than pure merit. These are open to challenge by future governments, activists or watchdog agencies. Recent cases make it amply clear that these agencies don't just bark but do have the legal and statutory mandate to bite.
Lessons Learnt
Compliance, Compliance and compliance. The government is expected to push through Lok Pal bill, the whistle blower bill and the Citizens Charter bill shortly and these will make reliance on postfacto approvals untenable for various reasons. The systemic constrains may remain for the foreseeable future...but the way to go is compliance.
The FDI policy aims to attract and promote foreign direct investment in order to supplement domestic capital, technology and skills, for accelerated economic growth. But the problem is that it has not been able to do that as UNCTAD’s “World Investment Report 2011” has reported that India has slipped to 14th position from 8th in terms of FDI inflows in the country. There have been multiple causes for the same as the experts say that the decline in India’s position as a favoured investment destination has been owing to the reasons like high current account deficit and inflation at the macroeconomic level. Apart from that the decline has also been attributed to the delays in the approval of large FDI Projects. Besides, the taxation of cross border M&As has also been a dampener and unavailability of foreign investments in other sectors has played a significant role in the muddying of the FDI situation in the country.
Besides, the government has also been seen trying to shoot itself in the foot all the time whenever it thought of improving its image and to get over the tag of being suffering from “policy paralysis” The FDI in multi brand retailing is the latest example of how government sought to force its way without even building a consensus by trying to educate the public and taking its own allies on board and the opposition into confidence around such a sensitive and major policy decision having a bearing on the life and livelihood of millions of retailers and associated people. The six monthly review of the FDI policy by the Department of Industrial Policy and Promotion (DIPP) in October 2011 left much to be desired as it was received by the experts with views ranging from it being lackluster to “not much”.
The manipulation of the existing land acquisition law for acquiring land from the poor, debt ridden and largely uneducated farmers to favour the rich and powerful corporate came under heavy fire from the judiciary which termed it as “colourable exercise of power”. So much so that the Hon’ble Apex Court had to observe in acase concerning farmers from Hapur in U.P that “The Act has become a fraud, it seems to have been devised by people with a sick mind who have scant regard for the welfare of the common man”. The land acquisition methodology has invariably remained the same irrespective of the ideological leanings of the dispensations across the states. Invoke urgency and public purpose and acquire any land that you want to and then let the farmers run from pillar to post to get the pittance of a compensation.
It was the summer of 2011 that saw the long pending M&A anti-trust regulations in India finally coming into effect.
KEY HIGHLIGHTS:
• Applies prospectively on transactions after June 2011.
• Several types of transactions are exempt doing way with intrusive, burdensome processes eg. acquisition of less than 15% voting right, if it is in the usual course of business or purely an investment; if an acquirer has 50% stake in a firm, then further acquisition will not trigger the competition law, except where the acquisition leads to transfer from joint control to single control.
• Simple filing of information with details to be called for by the Commission in Form II only where it is not satisfied. Further, a single filing is allowed for a string of small acquisitions. This optimizes the expected timeline to around 1 month for clearing around 95% of the M&A transactions. On the other hand, where details are sought, the expected timeline is around 6- 7 months.
• The associated fees have also been kept reasonable.
CHALLENGES BEFORE CCI
• Getting reliable and recent data is difficult and is often prone to contention, example, in the case of DLF Ltd, where the CCI has imposed a penalty of 630 cr, the property developer has contested the CCI’s reliance on the data used to establish the firm as a dominant one in Gurgaon, Haryana.
• Jurisdictional overlap with other sectoral regulators.
• Manpower shortage: The CCI, is currently operating with around 65 officials while a study has suggested hiring around 240 people for its efficient functioning.
KEY RULINGS:
All M&A filings have been approved in the short history of the second half of 2011 including the filing of UTV software acquisition by Walt Disney; the KKR holding in Magma Fincorp going beyond 15%; Reliance acquiring Bharti’s stake in Bharti-AXA Life Insurance; etc. as none were thought to be adversely impacting competition.
So the land acquisition bill titled “The Land Acquisition, Rehabilitation and Resettlement Bill, 2011” was finally tabled in LokSabha in September , 2011. The Bill again seems to be lopsided, as, in a detailed analysis of the Bill, Mr. Ram Singh, Associate Professor, Delhi School of Economics, states that the Bill provides for sufficient scope in it to be manipulatedand has been criticized by the learned sections of the society as it continues to have provisions which can be misused by states to favour companies at the expense of the rights of farmers and forest dwellers. With issues related to midway denotification, problem of post-acquisition transfers of land to private entities, in fact if acquired land remains unutilised, it should be returned to the owners. For instance, land acquired for industrial development can be transferred to a special economic zone (SEZ). Similarly, land acquired for urban development can be transferred to builders for housing projects, without violating the proposed law. The initial purpose can be defined smartly to justify several other uses as related purposes. As far as direct acquisition for companies or large-scale purchases by them is concerned, the Bill dilutes rehabilitation and resettlement provisions for affected families. Finally the issue of compensation and resettlement is also not addressed properly as the determination of compensation on the basis of circle rates or the average price of sale deeds of similar land, whichever is higher is also fraught with problems as the circle rates are more often than not much below the prevalent land value.
Being authorized to ensure efficient markets and consumer welfare through a sensible marriage of commercial considerations with the considerations of the Competition Law, the Competition Commission of India, made its presencefelt by first punishing National Stock Exchange and later DLF, the real estate leader in the country, for abusing their dominant market positions. Later on the notification of much awaited Combination Regulations officially known as the Competition Commission of India (Procedure in regard to the transaction of business relating to combination) Regulations, 2011 has also been received by the corporate world with mixed emotions.
The case concerned whether the DLF imposed highly arbitrary, unfair and unreasonable conditions on the apartment allottees of the Housing Complex ‘the Belaire’, Gurgaon.
The Commission felt that despite existence of multiple laws, the proper regulation of the real estate sector, particularly the housing sector, leaves much to be desired. The CCI observed that in order to promote overall consumer welfare, to ensure free and fair competition in real estate residential market and to set standards of conduct of enterprises engaged in similar nature of trade, it is of paramount importance that Central Government and all State Governments must come out with real estate regulations at the earliest for ensuring overall consumer welfare and todiscourage unfair trade practices that seem prevalent in the sector.
While deciding on the question of the abuse of dominant market position by DLF, CCI found that the clauses in the buyers’ agreement were so heavily loaded in favour of DLF and against the buyer that under normal market scenario, a seller would be wary of including such one-sided and biased clauses in its agreements with consumers. The impunity with which these clauses were incorporated in utter disregard to the consumers rights was held to be abusive of its dominant market position by DLF.
In fact the clauses that constituted abuse of dominant position included DLF’s sole discretion in respect of change of zoning plans, usage patterns, carpet area, alteration of structure etc of the Project. CCI further found that in case of change in location of the apartment, PLC was to be determined at the discretion of the builder and if a refund was due, no interest was paid. Buyers were not given any rights for raising any objections. Further, even if the buyer has paid the full amount, the builder can raise subordinate mortgage on the property for finances raised for its own purpose and the consumers are subjected to this mortgage. Despite knowing that necessary approvals were pending at the time of collection of deposits, DLF inserted clauses that made exit next to impossible for the buyers.
Having been authorized to determine whether any proposed combination is likely to cause or has caused an appreciable adverse effect on competition,CCI considered the proposed acquisition of the 74% stake held by the Bharti Group in two joint venture insurance companies, namely Bharti AXA Life Insurance Company Limited and Bharti AXA General Insurance Company Limited by Reliance Industries Limited and Reliance Industrial Infrastructure Limited (the Acquirers). CCI while determining the questions of horizontal and vertical combinations determined. As far as a vertical combination is concerned, a group company of the acquirers is registered as an insurance broker thereby creating a vertical relationship with the target companies. However, CCI found this to be immaterial given the significant number of other insurance brokers operating in the field. CCI’s views are summarized in its order which was delivered after surveying the number of players in the industry and the market share.
ON IRDA’S POLICY DECISIONS
In insurance sector, the year 2011 brought cheers for some and sent jitters to some others. Individual health insurers have been allowed to choose their insurer freely like motor insurance as IRDA has implemented portability i.e. transfer of credit for pre-existing conditions and time bound exclusions from one insurer to another. Insurance Brokers have been allowed to enter into arena of claims consultancy by charging a fee provided claim amount is
On November 14 2011, The Insurance Regulatory and Development Authority (IRDA) notified Regulations titled IRDA (Issuance of Capital by Life Insurance Companies) Regulations, 2011. These regulations allow the insurance companies to approach primary capital markets for raising capital. The regulations require life insurance companies desirous of undertaking IPOs to comply with ICDR Regulations of SEBI. Thus making it mandatory for insurance companies to comply with the requirements of both IRDA as well as SEBI, besides the Insurance Regulator shall primarily keep an eye on the Insurance companies to determine whether an insurance Company qualifies for approaching capital markets. i.e. whether it has satisfied the qualification requirements. On the other hand, SEBI’s role is primarily with respect to disclosure regulation, i.e. whether the offering document contains all the necessary disclosures. With a 10-year operational requirement only a few players will be able to qualify for tapping capital markets through IPOs. But the real concern about the timing of the Regulations with capital markets being bearish already and fears being expressed that Euro-Zone crisis coupled with a slowing national economy which may snowball into a full blown economic slowdown in such circumstances it is anybody’s guess that the real benefit of the Regulations would not come immediately to the Insurance Sector.
The most important events in 2011 which made news in the area of environment laws have been the conditional approval being granted by the Ministry of Environment and Forests toLavasa, the hill township project on the outskirts of Pune and the Issues related to mining across the country. It seems that compliance with environmental regulations is not viewed very positively by the players which probably wish to abide by it by circumventing it. As may be seen that in the mining sector be it Vedanta’s Lanjigarh Project or Sterlite’s Niyamgiri Project or Posco’s steel plant at Jagatsinghpur or be it Mining Projects at Karnataka including Bellary, Tumkur and Chitradurga districts and finally mines in Goa all have suffered from the problems of one kind or the other ranging from problem of regulatory approvals of one kind or the other were withdrawn and in some the problem of illegal mining had gone to such an extent that Hon’ble Supreme Court had to step in and stop the mining altogether. With factory output shrinking from 11.5 percent to 5.1 percent this October led by a steep decline in manufacturing, mining and capital goods and stalled mining projects due to different reasons including environmental issues do not bode well for the economy.
With controversial conditions of Press Note 1 of 2005 being excluded from the FDI policy, a foreign investor with an existing joint venture/technology transfer/trademark agreement no longer needed the prior approval of the Government or a noobjection certificate from the Indian partner for entering into a fresh venture in the same field if the investment was otherwise within the automatic route. This effectively opened the doors for additional FDI and technology inflows across industry sectors and was easily the highlight of the year. Significantly, FDI in Limited Liability Partnerships (LLPs), was permitted through the Government approval route in sectors where 100% FDI was allowed through automatic route and which did not have any FDI linked performance conditions. However such LLPs were not allowed to operate in agricultural/plantation activities, print media and real estate business. While sectors like civil engineering and financial services are more likely to benefit from such FDI, the restriction on borrowing and downstream investment may render such LLPs unsuitable for sectors like infrastructure which heavily rely on both.
There was joy for Private Equity (PE) investors mid-year when the government deleted a draconian clause from the FDI policy which provided that only equity shares, debentures and preference shares as specified with no in-built options of any type were eligible instruments for FDI. Since put and call options are commonly used by such investors to exit their portfolio companies, there were concerns that the clause could damage prospects of PE investment in the country and was therefore deleted.
Towards year end, the FDI policy was also tweaked in response to some recent acquisitions of domestic pharmaceutical companies by multi-nationals. The acquisitions had sparked fears that they could stunt the growth of domestic drug companies and also affect the affordability of generic drugs. Taking note of this, the FDI policy now differentiates between green field and brown field investment in the pharmaceutical sector. While the former would continue to have FDI up to 100% under automatic route as earlier, the latter can have it only with Government approval for a period of six months and thereafter under the oversight of the Competition Commission of India (CCI).
Interestingly, India business Inc. largely viewed all these developments as “too little, too late”, as the concerns in FDI were reflected in July 2011, the World Investment report of the United Nations Conference on Trade and Development (UNCTAD) which focuses on FDI trends worldwide at the regional and country levels, sounded the warning bells. It confirmed a 31% dip in FDI inflows to India as compared to the past year. This resulted in India sliding down from 8th position to 14th position in rankings for FDI receiving nations.
All in all it can be said that we may be gearing ourselves up for a new year but it seems that the year gone by had its fair share of good as wells as some disconcerting issues. With bated breath and resolve to do our best towards the overall improvement of the economy and polity we must welcome the new year so that the fears expressed are negated and India is able to keep its tryst with its destiny.
The LW Bureau is a seasoned mix of legal correspondents, authors and analysts who bring together a very well researched set of articles for your mighty readership. These articles are not necessarily the views of the Bureau itself but prove to be thought provoking and lead to discussions amongst all of us. Have an interesting read through.
Lex Witness Bureau
Lex Witness Bureau
For over 10 years, since its inception in 2009 as a monthly, Lex Witness has become India’s most credible platform for the legal luminaries to opine, comment and share their views. more...
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