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India - A new legal landscape unfolds

India - A new legal landscape unfolds
Article by Rahul Chadha

2013 was an interesting year in India. While the economy slowed down due to internal and external issues, inflation and interest rates remained high, and policy and political uncertainty led to foreign investors being cautious on investing in India, several legislative changes that will impact companies doing business in India were made.

The Companies Act, 2013 and new laws governing the prevention of sexual harassment of women in the workplace and land acquisition, all of which will have an impact on how business is conducted in the country, were enacted. Several new regulations were also introduced in areas such as transfer pricing and competition law and major announcements regarding FDI were made.
The Companies Act, 2013
After much debate and discussion, the long pending amendment to the Companies Act, 1956 was passed into law.  
Several important changes have been effected. From a compliance perspective, the long entrenched distinction between a public and a private company has been virtually eliminated. The new law also requires businesses above certain thresholds to undertake corporate social responsibility (CSR) and places additional administrative and financial burden on them including requirements such as appointment of an independent director by all eligible companies, whether public or private. The new law also appears to widen the scope of insider trading to potentially cover unlisted companies.

The Companies Act, 2013, is based on the presumption that shareholders are the best caretakers of a company. The Act has virtually eliminated the need for obtaining government approvals. It envisages a proactive role on the part of directors in balancing the ease of doing business whilst protecting the interest of minority shareholders. Some provisions that merit greater attention include composition of the board, board responsibilities relating to internal financial controls and compliance of applicable laws, CSR and related party transactions. These will require companies to make changes in their governance structures as well as reporting and review mechanisms. The Act may pose issues with regard to the appointment of directors, as it limits the number of companies in which an individual can be appointed as a director. Further, an individual cannot be a director in more than 10 public companies. The Act makes it mandatory for all companies to at least have one director who has stayed in India for not less than 182 days in the previous calendar year. Many wholly-owned subsidiaries of foreign companies would need to reconstitute their board to be in compliance with this requirement.

The various provisions of the Act are being gradually made effective.

Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013

The introduction of a new legislation against sexual harassment at workplace will require employers to introduce detailed policies, complaints committees and workshops for sensitizing employees on issues relating to sexual harassment of women in the workplace.

Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013

On the real estate front, the new legislation on land acquisition is likely to lead to longer processes and higher acquisition costs for businesses.

The Act stipulates mandatory consent of at least 70% of affected people for acquiring land for public-private partnership projects and 80% for acquiring land for private companies.

Under the new legislation, compensation for the owners of the acquired land will be four times the market value in rural areas and twice in urban areas. It also stipulates that the land cannot be vacated until the entire compensation is awarded to the affected parties.

The law has the provision that companies can lease the land instead of purchasing it. Besides, private companies will have to provide for rehabilitation and resettlement if land acquired through private negotiations is more than 50 acres and 100 acres in urban and rural areas respectively.

Competition law

The impact of competition law is most felt on mergers and acquisitions. Acquisition of shares above a specified threshold or acquisition of control may trigger pre-merger filing requirements forcing companies to postpone closing until approval of the Competition Commission of India (CCI) is obtained. In the absence of a precise definition of ‘control’, industry has to face uncertainty on meeting its legal obligation to seek a prior approval since determination of what leads to ‘control’ is decided on a case-to-case basis.

Another challenge is choosing the right forum for redressal of competition related grievances. Many sectors have regulators with powers to deal with anti-competitive conduct. The Delhi High Court has decided in favour of a sectorial regulator, but while they may have the power to deal with competition related issues, they do not possess sufficient punitive powers. Also, companies must consider having a competition law compliance manual and conducting competition law compliance programme for its key officials.

Transfer pricing

Transfer pricing regulations in India are more than a decade old, and have led to far-reaching transformations. A significant increase in legislative complexity and litigation on transfer pricing issues have made top level executives and tax directors of multinational corporations consider transfer pricing as an issue of high priority. Transfer pricing authorities continue to focus on issues such as share valuation, marketing intangibles, guarantee fees, location savings, management charges etc. Recently, the Advance Pricing Agreements and Safe Harbour Rules have been notified by the Government to provide opportunities for taxpayers to achieve upfront certainty on transfer pricing issues. Domestic transfer pricing requirements have also recently been made applicable.

2014 promises to be a watershed year in India. After the general elections that are scheduled to be held in April/ May, the expectation that the country will have a strong and stable government that will provide good governance for the next 5 years has made many investors turn bullish in India. Investments are expected to rise and GDP growth rates may go back to 8 – 10% per annum. It is, therefore, a good time for foreign investors interested in investing in India to understand Indian laws and regulations that will impact their India entry and subsequent operations and make their business plans accordingly.

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Rahul Chadha
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