XII. Useful Business Advice

Checklist of Considerations for Dutch investors

With the liberalization story unfolding over 20 years since the landmark reforms in 1991, India is becoming a mature investment destination, even as there is a continuing trend of improvements and further liberalization in regulations and market conditions. India is no longer a nascent market for foreign investments, and it is important, particularly for first time investors, to fully understand the implications of investing or prospecting business opportunities in India.

There are a number of success stories from the Netherlands of companies that have set up growing and profitable businesses in India. At the same time, the going has not been good for several others, including a few large companies. Small companies and first time entrepreneurs can find it difficult to comprehend and deal with the plethora of procedures and regulations, and build scalable businesses in India. It can be said that the Indian market is large and yet a complex of many small markets, and requires a differentiated approach depending on the business sectors and target markets. As a result, there is an increasing understanding that sustaining success in India requires a long-term approach and a reasonable threshold of enterprise size and investment levels. This may well explain the difference between the successes and failures among Netherlands companies operating in India.

a) Your India rationale

• Identify your overriding reason for doing business in India- selling imported goods into India; producing locally for the market; sourcing for other markets; outsourcing for existing markets; etc.
• Identify the critical ‘India Advantage’ for your business and revalidate it through careful study of market and consumer behavior.
• Estimate and plan for the threshold levels of investments and ;sunk costs’ you need to invest in India to establish a sustainable presence

b) Business Culture

• Indians are easy to work with but at the same time lack teamwork skills.
• Indians generally appear friendly but avoid grilling them during due diligence
• Foreign partners can expect ‘overwhelming hospitality’
• Indians can be described to be having a ‘No problem’ mindset and believe that there is a solution to everything
• Everybody knows Mr. Big: Namedropping is a common feature of the Indian business culture. Everybody has some amount of access to powerful/influential people. The access to corridor of power is often cited as a means of showing one’s own influence.
• Indians are astute and tenacious negotiators
• Agreements are not cast in stone, as there is a very high possibility of clauses getting renegotiated. The intent is ultimately more important than content
• Most of the states are business-friendly
• India has a well laid legal system/process; however it is extremely overloaded and tardy.
• Taxes are high and procedures are intricate
• The culture of tipping (‘baksheesh’) for speeding up provision of services exists in moderation

c) Pre-investment Phase
Market analysis

• Consider the large amount of secondary data available in India before commissioning primary research; you may find that you do not need a very accurate estimate, given the vastness of Indian market.
• Indian markets are very price- sensitive, conservative, and operate under peer group psychology. Drastic changes in consumers’ spending patterns take time.
• Adopt a regional focus while having a national agenda.
• Do not ignore the rural markets.
• Speak and listen to compatriots operating in India.

d) Business structure

• Consider carefully the ‘need’ for a local partner: in most activities, the government regulations allow a 100% foreign ownership.
• You may find that you actually need a Country Manager, and not an Indian investor partner.
• If a local partner is preferred, carry out a due diligence review, and also check the memorandum and articles of association of the proposed joint venture company thoroughly.
• As far as possible, choose a private limited structure, which gives the most flexibility framing articles and involves fewer statutory requirements.

e) Contracts

• Signatures have no weight and most agreements are renegotiable. This is especially so in view of the slow legal enforcement process. Financial commitment of the partner is the surest confirmation of implementing ventures.
• Understand the full implications of taxation on lump sum, royalties, etc and also terms like ‘net’ and ‘gross’ payments.
• Involve detailed ‘force-majeure’ clauses and arbitration conditions in agreements, besides clear exit clauses upon the occurrence of specific conditions in the venture.
• Enforce all oral understandings in writing; do not leave anything uncovered- even in confidential agreements.
• Always have an exit clause in your partnerships.

f) Investment Phase
Location aspects

• Understand the zoning and environmental aspects applying to the location.
• Check out property titles, and preferably buy land directly from the Government.
• Ensure that property titles are transferable to the company and do not remain in private names or under power of attorney.
• Understand tax and other incentives available in various locations.
• Check out availability of resources logistics, and transportation, besides social amenities and living conditions before finalising your business and factory location.

g) Management/personnel

• Determine the actual need for posting expatriates at various levels, especially as a Director.
• Understand all local employment terms, income levels and social costs, before finalising an HR policy.
• Outsource as much work as possible.
• Avoid locations known to harbour militant trade unionism.

h) Running the business

• Do not be led by expedient solutions! Follow all provisions of the Factories Act, Industries Regulation Act, Labour Act and others applying to your business.
• Have a good liaison agent and outsource all government related issues - it can save you time and unnecessary problems
• Follow accounting and management practices as per the Companies Act, and appoint an Auditor and a Chartered Secretary to take care of essential statutory compliance needs.
• Deal with each circumstance on its own terms: generalization is difficult in India, and it is important to assess specific issues and find specific solutions for each case.
• Social customs differ among states, and local adaptation is required in business policies and practices

i) Safeguarding Interests in Joint Ventures
Some important issues arising in management control of joint ventures are explained below:

• The most important fact concerning joint ventures is that the Indian corporate laws override any private contractual terms between the partners, unless such terms are addressed and reflected in the Articles of Association of the joint venture company.
• The joint venture company itself is not a party to the joint venture agreement until it has executed a mirror agreement with the foreign partner; and in the absence of a formal collaboration agreement between the implementing company and the foreign partner, the rights of foreign parties shall only be addressed by the Articles of Association and not by the agreements signed by the Indian partner prior to incorporating the entity.
• Indian companies are generally owner-managed or closely controlled through nominee Directors, except in widely held public-limited companies. Therefore the nomination rights of Indian and foreign shareholders are important in exercising control. Foreign partners must take care to negotiate nomination rights based on actual shareholding ratios and not to a blanker right irrespective of actual holdings of the partner
• Articles of Association often tend to restrict sale of shares for a minimum specified period (usually ten years), which may be beneficial to some partners but not always to others. Have clear clauses on the right to exit from a venture by selling to the remaining partners and provide them in the Articles of association.
• Joint venture agreements are private contracts and any rights and disputes between the founders must be addressed through the provisions of the agreements themselves. Given the slow process of legal settlements in India, provide for arbitration for settling partner disputes, which come under the purview of International Commercial Disputes.
• Take special care to see that the Articles provide for sending notices of meetings outside India (Indian Company law only requires notice to be sent within India) and for the appointment of Alternate Directors, who may be residents of India. Such rights do not exist automatically and must be provided specifically in the Articles of the Company
• Articles of companies may provide for special quorum in form of affirmative votes of specified Directors in some decisions, to safeguard interests of each partner

With due attention to the finer points of Indian laws during the negotiation stages, and with appropriate local advice, foreign entities can build in sufficient safeguards to protect their legitimate business interests in joint ventures, without getting into protracted litigation. However, care must be taken to select advisors having sufficient relevant expertise in solving joint venture problems, which is a nascent area in India.

However, problems can occur in joint venture structures despite adequate caution in the initial stages. Some of these problems between the Indian and foreign partners can have serious implications for the success of the venture, especially when they cannot be resolved by reference to the contractual provisions alone.
j) Dispute Settlement
Settlement of business disputes can be through the mainstream court process or through the alternative process of arbitration and conciliation. However, some disputes can be resolved only through the mainstream judicial process in courts. The legal machinery can be painfully slow, and verdicts in civil suits can take several years. There are more than ten million cases pending in Indian courts, and there is a serious shortage of judges. Therefore, the best course of action for expeditious settlement is to settle disagreements by negotiations.

Arbitration is a legally recognized dispute settlement mechanism in India, and is embodied in the Arbitration and Conciliation Ordinance, 1996 which covers domestic as well as international arbitration and the enforcement of foreign Awards. The Act can be invoked if there is an explicit arbitration clause or a separate agreement between parties to refer differences to arbitration.
Arbitration can be provided through the following channels:

• Arbitration Council of India
• Joint Business Councils/Joint Chambers of Commerce
• Trade Commission of the respective country
• International Chambers of Commerce.

The Arbitration Ordinance provides for the following important clauses:

• Arbitrators can be of any nationality unless otherwise agreed by the parties
• Indian Evidence Act will not bind arbitration, i.e. witness evidence is not mandatory.

International Commercial Arbitration: India has accepted the United Nations Commission on International Trade Law (UNCITRAL) model law on International Commercial Arbitration, to bring greater uniformity between its law and needs of international arbitration. Under these provisions, foreign arbitration awards can be enforced in India - against proof/evidence of such awards-. Arbitration awards are final and binding on parties, subject to set time limits for responsive action such as application correction/interpretation, setting aside the award.

Considering the number of pending cases, senior law officials have been pressing for increased usage of mediation, a legally enforceable process started in 2001 through which the parties could reach a settlement facilitated by a person designated by the court. Mediation could be beneficial from a business perspective through facilitating speedy conflict resolution, saving time and money. However, if the parties at dispute do not agree with the outcome, the matter can revert to the court.