5 Major Legal Risks to Guard while Investing in India


Invest in India, five major legal risks must be guarded against

    The current level of economic and trade development between China and India is not high. In 2013, the bilateral trade volume between China and India reached 65.471 billion U.S. dollars.

From 2000 to 2014, China's total investment in India was only 400 million U.S. dollars, accounting for 0.18% of India's foreign direct investment.


   China’s investment in India has broad room for growth, and the economic structure between China and India is also highly complementary. China's manufacturing output value has ranked first in the world, and it has accumulated rich experience, technology and capital.

 In terms of large-scale infrastructure construction, China has an unparalleled advantage in other countries. India urgently needs to improve its manufacturing and infrastructure construction levels. 

According to the Indian Ambassador to China, India plans to increase the proportion of manufacturing in its economic structure from the current 16% to 25% by 2022.


Is India still Seeking Investment form China?

   On the other hand, due to India’s huge trade deficit with China, India is actively seeking to attract investment from China to fill the expanding trade deficit.

 It is said that China will establish two industrial parks in Ahmedabad and Pune, India, to introduce enterprises such as energy equipment and automobile manufacturing. It is time for Chinese companies to increase investment in India.


Investment related Legal Risks

   Although China's investment in India is in the ascendant, the legal risks in the investment process cannot be ignored. 

The legal environment in India and China is very different. Understanding the legal risks that may arise in investing in India and properly responding to them is necessary for Chinese companies to successfully explore the Indian market.


  Risk 1: Investment policy diversification

  India’s legislative and decision-making systems are relatively fragmented, and both central and local laws have important influence on foreign investment. India is a federal state, with 28 states and 7 joint territories. 

Except for the five joint territories, the other states and joint territories are all elected by local people to form legislative bodies and governments, and they have legislative powers over the internal affairs of the state.


   Foreign investment in India must not only comply with the foreign investment laws and policies promulgated by the Indian Federal Government, but also comply with the laws and regulations governing foreign investment in various states.

 Every investment requires government approval in terms of land use, environmental protection, water and electricity, etc. The legislative and approval powers in these areas belong to the internal affairs of each state and are controlled by the local government.


  The economic development level of various states in India is uneven, and the language and culture are different, which leads to many differences in laws between states. Therefore, companies intending to invest in India not only need to understand the legal system of the Indian Federal Government on foreign investment. But also need to carefully investigate the foreign investment legal environment where the investment destination is located in order to successfully pass the investment approval of the local government.


  Risk 2: Strict labor regulations

   Compared with other countries, India’s labor laws are strict and complicated in content. 

India's labor law is generally considered to be one of the most stringent and complex labor laws in the world, which limits the development of Indian manufacturing to a certain extent.


  The laws governing wages and remuneration at the federal level in India are the "Wage Payment Act 1936" and the "Minimum Wage Act 1947". Local governments also have different minimum wage regulations for industrial workers, ranging from US$3.5 to US$7 per day. 

Business closures and layoffs that affect the interests of workers are governed by the "Industry Dispute Act of 1947", which requires companies employing more than 100 employees to obtain government approval before layoffs or cessation of business.


   In addition, the issue of strikes is also a major concern for companies investing in India. According to statistics from the Ministry of Labor of India, in the first nine months of 2012, the labor time lost due to strikes amounted to 2 million working days (strike time × number of strikers), which is a significant increase compared with the 10 million working days lost in 2011 improve. 

Labour disputes in India are mostly triggered by workers' dissatisfaction with wages, working environment, and union representation qualifications. The strike-prone industries are mainly concentrated in the banking and automobile manufacturing sectors. 

The 2012 Suzuki Motor Strike in Japan caused Suzuki Motor India to suspend business for a month and lost 300 million US dollars. 

In order to promote a smoother settlement of labor disputes, the Indian Parliament passed the "Industrial Dispute Law Amendment" in 2010, which stipulates that workers can directly submit labor dispute arbitration to the court or arbitration tribunal, and provide more professional judges for labor dispute arbitration. Or arbitrator.


   Risk 3: More social responsibility

  According to India's 2013 Companies Act, companies investing in India will assume greater social responsibilities. Around the world, companies are encouraged to actively fulfill their social responsibilities. 

However, India's "Corporate Law Amendment" passed in 2013 changed corporate social responsibility from an encouraging nature to a mandatory requirement for the first time. 

India’s "Corporate Law Amendments" and "Corporate Social Responsibility Rules" that took effect on April 1, 2014 stipulate that as long as the company’s sales in any fiscal year exceed US$200 million, the company’s net assets exceed US$100 million, and the annual net profit exceeds $1 million, the company must assume social responsibility. Companies here include foreign companies and branches of foreign companies in India. 

The rules require the establishment of a corporate social responsibility committee within the company, which is responsible for supervising and implementing the company's social responsibility related activities. Companies must spend 2% of their average profits in the previous three years on fulfilling social responsibilities.

 The scope and content of social responsibility are mainly aimed at the national conditions of India, focusing on public policies such as reducing poverty, promoting gender equality, improving education and labor skills, and protecting the environment.


  Risk 4: Patent Compulsory License

  The “compulsory license” system in Indian Intellectual Property Law deserves special attention from enterprises.


   Compulsory license is an exception in the patent system, which refers to the government, out of public policy considerations, compulsorily license a patented product that is still in the protection period to a non-patent owner to produce it to meet social needs.

 Under the WTO’s Agreement on Trade-Related Intellectual Property Rights, the patent compulsory licensing system is mainly applicable to the field of public health.

 Generally, compulsory licensing of drugs can be permitted when the country with a major epidemic cannot afford the necessary therapeutic drugs. However, the scope of application of the compulsory licensing system stipulated in Article 84 of the Indian Patent Act 1970 is far greater than that of the public health field, and the threshold for implementation is relatively low.

 As long as the patented product does not meet the reasonable needs of the Indian public, the price of the product exceeds the reasonable affordability of the Indian public, or the patent is not implemented in India in any of the three conditions, the Indian government can enforce the patent. 

According to the Indian government's interpretation of "patents not implemented in India" in the 2012 Nexavar anticancer drug case, implementation is equivalent to production.

 Therefore, to avoid compulsory licensing of patents, patentees almost have to produce patented products in India. Some Indian lawyers suggested that Chinese companies license their patents to local Indian companies, who will be responsible for assembly and sales. 

For high-tech companies with independent intellectual property rights, it is very necessary to understand the Indian intellectual property legal environment in detail before investing in India.


  Risk 5: Inefficient judicial level

   India’s relatively inefficient judicial system may pose risks to the performance of contracts. Western investors often complain about India’s lack of respect for contracts. According to World Bank statistics, the efficiency of Indian courts in resolving disputes ranks sixth in the world. Most Indian courts have difficulty coping with a long backlog of cases due to insufficient staff and lack of technology.


  In order to improve the efficiency of commercial contract execution and attract foreign investment, the Indian government attaches great importance to the development of non-litigation dispute resolution methods.

 In 1996, India formulated the Indian Arbitration and Mediation Act based on the model arbitration law promulgated by the United Nations Commission on International Trade Law. The Indian Ministry of Justice has established an International Dispute Resolution Center to promote non-litigation methods to resolve domestic and international business disputes.

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