Much has been said of the liberalisation of the Indian economy. Has there been much real progress?

Yes, there has been enormous progress despite the fact that, in some instances, it has been two steps forward one step back. India started a process of economic liberalisation in the 1990s. One of the main features of this process has been to simplify the rules and regulations to attract foreign investment. Before the 1991 Industrial Policy, Indian entrepreneurs very often had to seek government permission to set up industries (they needed industrial licences). Prior permission was also required for foreign direct investment, which generally had to be accompanied by a transfer of technology.

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This was all changed; the industries where industrial licences are required are very limited and most industries are now open for 100% foreign direct investment. In certain industries, there have been foreign investment caps but these are also becoming more relaxed.

Why does India seems to lag behind countries such as China for FDI?

It is difficult to pinpoint the pluses and minuses of two huge countries which are run on different political models. China has done well: India could do better. Reforms in India have been piecemeal. However, this has been a deliberate policy of the government which did not wish to introduce shock reforms. Reform of exchange controls has been gradual.

The policy of the government to privatise certain public sector industries (aluminum, oil) has not been without hiccups. This is partly because the government is facing opposition from within its own ranks; those sections who believe that the only way to maintain these entities as wholly Indian is to keep them in the public sector.

Liberalisation has also been influenced by Indian entrepreneurs who, for a long time, had virtual monopolies under the licensing system. Previously, it was government, as the elected representative body of the people, that decided on the entry of FDI. While taking away its own discretion in its liberalising policies it managed to give veto rights to the Indian private sector on certain aspects of FDI.

This was given in the form of Press Note 18, issued on December 14, 1998. The note specified that if investors had a previous joint venture or technology transfer/trade mark agreement in the same or related field in India, they could: a) not use the automatic route for a new joint venture and/or technology transfer and would have to apply specifically for new investment in another enterprise; and b) “It would be for the foreign investor/technology supplier to justify to the Foreign Investment Protection Board as to how the new proposal would not jeopardise the interests of the existing joint venture or technology/trade mark partner or other stakeholders. The Foreign Investment Protection Board will have the sole discretion to either approve the application (with or without conditions) or reject it.”

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This caused great concern among foreign investors. It has put extraordinary power in the hands of Indian private-sector industrialists who already have tie-ups in that they could effectively prevent foreign investors coming into India even if their own joint venture was not doing well.

Is the legal environment easy to understand?

The commercial legal system is based on the Anglo Saxon model and the principles are easily understood by Anglo Saxon lawyers and those involved in international work.

One drawback is that the courts are jammed with cases and dispute resolution can take a long time. However, there is now the 1996 Arbitration Act. This Act is easing things up slightly as it is clearer than the 1940 Arbitration Act. Also, a party can only apply to a court in limited circumstances, thus reducing dilatory tactics. The act also encourages conciliation as a means of dispute resolution.

Tony Khindria is the founding partner of Lexindia, an Indian law firm with offices in London, Delhi and Paris. He is author of Foreign Direct Investment in India, published by Sweet & Maxwell and Tony Khindria on Business Law, published by Butterworths LexisNexis, which will be available later this year

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