India still a minefield for investors, despite Modi's pledges

Lang Jia says Modi 's government must take concrete steps to simplify the tax and regulatory regime, as pledged, while ensuring policies are consistent across the states

PUBLISHED : Tuesday, 09 June, 2015, 3:00pm
UPDATED : Tuesday, 09 June, 2015, 3:00pm

One year into his term, Indian Prime Minister Narendra Modi has yet to fulfil his promises of bringing in better days and cleansing the systemic corruption plaguing the daily lives of most people.

There have been many well-packaged initiatives, but most are surrounded by jingoism. Take the "Make in India" campaign; doing business with India can be challenging, given the complexities of laws across various states and issues related to retroactive taxation and the like.

Concerns about investment risks cover a wide range of issues, from corruption and politics to corporate governance and tax, not to mention the complicated, inefficient judicial system. Notwithstanding India's rule of law, its "demographic dividend" and its growing base of consumers, far-reaching systemic problems in these areas have turned off many prospective long-term investors. Investors have instead favoured China, even with its one-party rule, underdeveloped laws and judiciary, and pervasive corruption.

Multinational companies currently involved in billion-dollar tax and capital gains rows in India are hogging the limelight but these overshadow what is potentially a much bigger issue: the Ministry of Corporate Affairs plans to implement sections 396 and 397 of the Companies Act, which give the government the power to order the amalgamation of an insolvent subsidiary into its parent company and, further, to supersede the parent company's board of directors with government-appointed directors.

These powers are based upon vague "public interests" which the government claims need to be protected. But these sections are a direct threat to the basic concept of limited liability and pose risks to all multinationals that set up in India through a wholly owned subsidiary.

With no judicial precedents defining what constitutes "public interests" that are related to a private company, investors are at risk of arbitrary, capricious and potentially politically motivated action against their companies.

The use of sections 396 and 397 has very serious implications for Modi's "Make in India" strategy, and will result in a stifling of innovation and technology developed in India. It is widely accepted that many new ventures fail and limited liability companies are routinely set up by a parent company, or group of companies, to pursue new, innovative but high-risk business ventures. Investors would be reluctant to own shares in parent companies where the government can arbitrarily declare that the insolvent subsidiary must be amalgamated into its parent company in "the public interest".

Modi's pledge to introduce a simple, business-friendly tax regime by 2017 has also been challenging, given that India already has one of the world's lowest collection rates as a proportion of the economy.

Further, the government has assured investors that it would not open up old cases to claim tax on a retroactive basis. However, there has been no move to repeal an earlier legislation that gave officials the powers to do so.

The government has also been trying to modify a land acquisition law to ease the way for much-needed infrastructure projects and manufacturing plants. But Modi's Bharatiya Janata Party has no majority in the upper house of parliament, and the amendment remains shrouded in uncertainty.

Added to all this are politics at the local state level, as well as a restrictive labour environment that makes it hard for businesses to hire and fire depending on their requirements.

Above all, to make India more investor-friendly, Modi needs to ensure predictability and continuity in industry and investor policies. Time and again businesses have said they do not want to be caught out with nasty surprises that some bureaucrat has dug up while reading the rule book.

Until that is achieved, the Asian elephant may just keep ambling along, failing to get any closer to a slowing dragon.

Lang Jia, who has a master of law degree from Sichuan University, is a business reporter in Singapore