No longer a step into the dark, but learning from the past is essential for a successful business in the future
By Nandan Nelivigi and Dr. Markus Burianski

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The challenges of doing business in India are well-documented. In the World Bank’s 2015 “Ease of Doing Business” index, India placed 142nd out of 189 countries. It ranked 156th on ease of paying taxes and fell almost to the bottom of the list on ease of enforcing contracts. Fortunately, investing in India today is no longer a step into the dark. Many multinationals have invested in India over the past two decades, and their experiences—good and bad—offer important lessons for companies that wish to enter or expand their activities in the country. While there are no easy rules for success, we offer the following guidelines to help navigate India’s complex business and regulatory landscape in the belief that those who learn from the past and strive to understand the present are most likely to succeed in the future.

Understanding the regulatory regime

While changes to India’s business laws can be frequent and sometimes unexpected, they are not arbitrary. India’s laws and regulations reflect the political compromises required to balance the complex and conflicting demands of multiple constituencies. These compromises often emerge from a process of trial and error and are reflected in loosely drafted policies, clarifications, amendments and occasional policy reversals. The resulting rules can have unintended consequences, and some are so convoluted as to be impracticable. But the history of why and how these compromises were made reveals the intentions of the legislators who drafted them. This is key to navigating India’s legal landscape. Companies that understand the motivations driving policies are more likely to understand how rules will be interpreted in the future—and will be better able to position themselves for success.

India’s foreign exchange regulations, for example, are not just bureaucratic hurdles. The policy rationale behind India’s aversion to foreign debt stems from the 1991 foreign exchange crisis that nearly caused India to default on its foreign currency obligations. As a result, Indian companies can borrow in foreign currency only in accordance with very restrictive conditions while equity investments are subject to more liberal rules. Many investors, driven by commercial imperatives, made equity investments in India that were redeemable like debt obligations and subsequent ­regulatory pronouncements ultimately rendered these structures unenforceable. This consequence could have been avoided if the rationale—namely, debt or debt-like obligations are not favored— had informed the transaction structures.

Interpret regulations conservatively

In developed countries, with some exceptions, authorities are more likely to apply commercial laws as written, prioritizing an understanding of what the law actually states over what the lawmakers intended. In India, rules are often more loosely articulated, leaving room for authorities to account for legislative intent when the rule is applied.

Faced with regulatory ambiguities, foreign investors often rely on technical interpretations that open up attractive commercial opportunities. But even the most elegant technical solutions are vulnerable when they conflict with the lawmakers’ underlying objectives, regardless of what the regulation in question explicitly states. When the economics of a deal depend on an aggressive, technical interpretation of the law, companies should think twice. In such instances, companies should hew to conservative interpretations that do not leave their business models vulnerable to later decisions by authorities.

Evaluate joint venture opportunities in forensic detail

The benefits of partnering with locals can be significant as they often understand the market and culture better than foreign firms. They usually have strong relationships with Indian authorities and other businesses, and are likely to have the necessary infrastructure in place to produce, distribute or sell products in the country. But the downside of joint ventures can also be significant, particularly if they require investors to yield too much control over their businesses. For instance, Haier, the large Chinese home appliance and electronics maker, had more success in India without a partner than it did with one. The venture came apart after it became clear that the partners had different strategic objectives and Haier subsequently reentered the market on its own.

Investors should investigate their options in granular detail to ensure they understand how potential partners operate at every level of their organizations. This includes engaging in a rigorous analysis to assess cultural fit and conducting due diligence into the background and capabilities of potential partners. Remember also that India’s many family-owned businesses (which still constitute a significant portion of corporate India) often take very different approaches to running their companies compared to large foreign, independently managed, companies. Foreign companies that enter into partnerships with family-owned businesses must take care to ensure that the venture meets their operating and performance expectations, particularly in areas such as corporate governance, accounting and compliance.

Build in commercial protections

Despite the hurdles involved in enforcing contracts against counterparties in India, the importance of having carefully drafted commercial contracts cannot be overstated. Certain foreign companies may be persuaded to accept contractual arrangements in India of a lower standard than they would typically accept in developed markets. However, in our experience, when such investors find themselves in a dispute, they find that ambiguities and omissions in their contractual arrangements often severely compromise their ability to protect their rights. Here we highlight steps investors should take to build commercial protections into their dealings in India.

Create balanced and equitable contracts

In joint ventures, it is critical to ensure that each partner has meaningful skin in the game so that each is attentive to the risks and rewards of the venture. The partner with a small financial stake in the venture may be willing to take bigger risks that could lead to risky bets, delays, cost overruns and other completion risks. It is also important to ensure that benefits are allocated fairly among all participants. Agreements that disproportionately reward one partner are likely to cause conflict down the line. More ­generally, foreign companies can protect themselves by developing deeper relationships with domestic partners. Foreign companies that have been able to commit to a long-lasting, mutually beneficial arrangement that encourages all parties to think about more than just short-term opportunities, are the most likely to succeed in their venture with an Indian partner. Similarly, foreign companies that engage in multiple businesses with the same domestic partner are also likely to see enhanced chances of success.

Trust, but verify

Investors must take steps to ensure prudent measures are established at the outset of a partnership. Investors should appoint independent auditors to maintain and verify the accuracy of the venture’s accounts and ensure that they comply with the law and internationally recognized accounting standards. It is also wise to secure the right to appoint and remove key officers who don’t meet performance and other standards and negotiate terms that give clear approval rights for major decisions. And whenever possible, buttress contracts with collateral security. Unsecured commitments are risky by definition, and investors should be particularly diligent in vetting potential partners that cannot provide collateral.

Once a relationship is up and running, foreign investors should work closely with the management of their Indian partners. Merely securing seats on the board won’t be sufficient, as most Indian boards have relatively little influence on how businesses are run.

Plan the exit and resolve disputes offshore

Planning the exit up front can enable companies to limit their losses, avoid or de-escalate disputes, and minimize disruption of business. There should be clarity on which entity will have control of the company if the joint venture is dissolved—and which partner will own each asset if the company is dissolved along with the joint venture.

Further, since resolving a business dispute in Indian courts can take up to a decade or more, foreign companies should make every effort to resolve conflicts through offshore arbitration or, in limited circumstances, through non-Indian courts. Even when Indian law is the basis of the contract, it is important to agree to settle disputes through arbitration seated outside India.

The difficulties faced by Enercon, the German turbine manufacturer, in its dispute with its Indian joint venture partner illustrate the challenges and the lessons. The dispute arose in 2007 reportedly on account of differences in business strategy between the partners and resulted in the German management being denied access to financial information and board meetings. It took the parties seven years just to resolve disputes about the validity of an inadequately drafted arbitration clause and to overcome interference in the dispute by Indian courts and authorities.


In conclusion, India’s promise is tremendous. But, while the risks of investing in India may diminish as its business climate improves, most companies and investors cannot wait for that to happen. They recognize the need to act now to enter or expand their operations in the country, and, fortunately, they can mitigate the risk of doing so by implementing lessons from those that have already entered the market, whether successfully or not. Indeed, by building thriving businesses in India, foreign ­companies can help the country realize its potential, accelerate progress and
fuel a virtuous cycle of economic and social returns.


Editor’s note:
The authors would like to thank Kanika Sharma, international law clerk at White & Case, for her support regarding this article.


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