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India in the spotlight - September 2019

Welcome to our latest quarterly update on developments and opportunities in India.

What are the new developments in the Indian market?

New budget and other measures

What is it?

The government has announced, via its July Budget and other announcements, a number of proposed economic reforms, including:

  • permitting more foreign direct investment (FDI) in the aviation, contract manufacturing, coal mining, media and insurance sectors;
  • easing the local-sourcing rules for single-brand retailers;
  • permitting online sales before the opening of brick-and-mortar stores;
  • reducing corporate tax rates for Indian companies;
  • introducing a significantly lower corporate tax rate of approximately 17 per cent for new manufacturing companies set up in India after 1 October 2019;
  • increasing the statutory limit for investments in a company by foreign portfolio investors (FPIs) from 24 per cent to the relevant sectoral limit;
  • permitting FPIs to buy listed debt securities issued by real estate investment trusts and infrastructure investment trusts;
  • establishing an ‘impact investment exchange’, an electronic platform regulated by the Securities and Exchange Board of India (SEBI), India’s stock market regulator, that will allow social enterprises and voluntary organisations to raise capital;
  • amending the Insolvency and Bankruptcy Code to introduce deadlines for completion of the resolution process; and
  • introducing ‘faceless assessments’ to help digitise tax assessments and reduce interventions by income tax officers.

The government also recently announced an economic stimulus package that includes a number of measures targeted at the Indian automobile industry, which has faced challenges in recent months.

What does this mean?

These reforms are very encouraging news for potential international investors in India, as well as international companies already operating in the country. Multinational companies wishing to engage in single brand retail trading will be particularly relieved with the relaxations to the sourcing norms and ability to start online sales before opening brick-and-mortar stores.

What are the opportunities for international companies?

With more of these kinds of regulatory reforms expected, international companies should be monitoring developments both in general and in their sectors to identify opportunities.

Changes to India’s arbitration law

What is it?

In August 2019, significant amendments were made to India’s Arbitration and Conciliation Act that affect both domestic and international arbitration proceedings.

The three biggest changes are:

  • establishing an Arbitration Council of India (ACI), which has the aim of developing institutional arbitration in India and the power to grade arbitral institutions on certain criteria;
  • restricting who can serve as an arbitrator in India-seated arbitrations, potentially excluding non-Indians; and
  • conferring powers of appointment on an arbitral institution in an attempt to prevent delays in arbitrator appointments. There are also provisions relating to confidentiality and arbitrator immunity.

The government has brought into force the provisions relating to confidentiality and arbitrator immunity, while the other changes listed above will come into force when formally notified by the government. That date remains unclear at this stage.

What are the challenges?

The government will appoint or nominate the ACI’s chairperson and members. It remains to be seen whether in practice this will be problematic.

It is also unclear to what extent the ACI will seek to regulate international arbitral institutions. For instance, does an arbitral institution have to be registered in India to be considered for grading? Will institutions that operate offices in India – SIAC and the ICC, for example – also be subject to grading?

A number of the changes, particularly the restriction on who can serve as an arbitrator, are cause for concern as they could make truly international arbitration seated in India an impossibility, limit the pool of available arbitrators and curtail party autonomy.

What does this mean for international companies?

Over recent years, India has become more arbitration-friendly, with the Indian courts stressing the importance of a ‘hands-off’ approach to international arbitration. This has been encouraging for international investors wary of the delays in the Indian court system.

However, a number of the proposed changes raise many questions and offer few answers. If considering Indian-seated arbitration as a potential option, international investors will need to watch this space carefully and be mindful of these changes. Until there is more clarity on these changes and their effects, cautious investors may continue to choose a seat outside India, such as Singapore or London.

Employment law reform

What is it?

India has more than 40 central laws and more than 100 state laws that relate to employment. The government has decided to consolidate a significant number of these into four codes covering wages; social security; occupational safety, health and welfare; and industrial relations.

The wages code was approved by parliament in August 2019 (though it is yet to be made effective) and the bill implementing the code on occupational safety, health and welfare was introduced in parliament in July.

The government wants to simplify the existing laws to promote, among other things, the ease of doing business. For example, the code on occupational safety, health and welfare will require an establishment to register only once instead of multiple separate registrations as at present.

What does this mean?

At a general level, this simplification of Indian employment law is long overdue. The challenge will be in the details of the proposed changes and the implementation of the new requirements. Ultimately, the success of the reforms and their impact on business will depend on how they are enforced and interpreted.

Although several Indian trade unions were consulted by the government, they could still oppose the reforms. While some unions have seemingly supported the wages code, which introduces several ‘floor’ rates instead of one and proposes different minimum wages across different regions and sectors, a number of unions have resisted the other three codes. In particular, the unions have objected to the industrial relations code because they believe that it makes it easier to hire and fire workers, and restricts key employment rights such as the right to strike and the right to work in a safe environment.

What do international companies need to do?

Given the extensive nature of the changes, companies operating in India need to assess the reforms’ financial impact, such as on wage costs in different regions and sectors.

With the wages code approved by parliament and likely to be made effective in the near future, employers should also ensure that their payment systems and processes are reviewed to ensure compliance.

In relation to the other three codes, companies should continue monitoring developments and start making preparations to comply.

Corporate and banking reforms

What is it?

Following the debt default of Infrastructure Leasing & Financial Services, one of India‘s largest non-bank lenders, and the approximately $2bn fraud at Punjab National Bank, there has been increasing regulatory scrutiny on both the traditional and ‘shadow’ banking sectors (including non-bank lending).

The government, the Reserve Bank of India (RBI), India’s central bank, and SEBI are considering measures to address certain identified weaknesses in the financial system and help stabilise the markets. The RBI has already reduced interest rates four times this year and signalled plans to tighten liquidity requirements.

The Budget also proposed reforms to strengthen governance at public sector banks and increase the RBI’s regulatory authority over non-bank lenders.

The government has also announced another ‘mega-bank merger’ of public sector banks that will result in 10 public sector banks being merged into four, along with an upfront capital infusion plan.

What are the challenges?

Non-bank lending has accounted for nearly a third of all new credit over the past three years, and recently multiple lenders have had their credit ratings significantly lowered.

Any actions to make shadow banking more difficult or increase the regulatory burden on traditional banks could further reduce access to credit. This could, in turn, exacerbate the current liquidity crunch and adversely impact related consumer spending and business investment.

What does this mean for international companies?

On the whole, such measures ought to help strengthen the banking system and overall economy in the longer term and so benefit international investors as well.

Any specific impact on international companies will need to be assessed once the nature of any proposed changes is clearer.

Key investment focus of the new government

What are they?

We expect the following to be key areas for investment in India:


High priority areas are likely to include roads (both highways and rural roads), railways, airports and ports. The government wants to double the number of ports and functional airports in the next five years. Renewable energy sources are also expected to be key target areas for investment, with solar energy being the primary driver, as efforts are made to reduce air pollution.

The Budget has already allocated spending on improving railways, waterways and roads along with proposals for public–private partnerships in the railways sector, and contemplates the establishment of a national highway network.


We anticipate a greater emphasis on digitisation and that the government will continue to encourage tech businesses. For instance, the Budget requires businesses with a specified minimum annual turnover to offer low-cost digital payment methods for their customers. It also proposes investment-linked income tax exemptions and indirect tax benefits for global companies that set up manufacturing plants for semiconductors, solar photovoltaic cells, lithium storage batteries, computer servers and laptops.


The government intends to divest a number of state assets in order to invest more in India’s public services and infrastructure.

What does this mean for international companies?

There could be a number of investment opportunties for international companies in a range of sectors and funds looking to invest in emerging markets. The government is expected to make announcements with further details of sectors and companies where divestments will occur, and, for now, this remains one of the key areas to watch.

It is already rumoured that a number of oil and gas, cement and steel assets are on the government’s radar.

A top destination for German listed companies

In a Freshfields survey of German M&A activity over the past 10 years, India was the most popular target emerging economy for Germany’s 90 largest listed companies (ie the constituents of the DAX and MDAX stock indices).

In total, DAX and MDAX companies undertook 58 transactions in India between 2009 and 2018 totalling approximately $4bn. The full report is available on our website.


This material is for general information purposes only and is not intended to constitute legal or other advice. Regulation prohibits foreign law firms from practising Indian law or from having their own offices in India. The contents of this publication do not constitute any opinion or determination of Indian law by us. Any comments in this publication are based on our experience as international counsel representing our clients in their deals and disputes which may have a connection with India. Where Indian law advice is needed, we work alongside leading Indian counsel.