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

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".