CHALLENGES OF

DOING BUSINESS IN INDIA

Talat Ansari

Kelley Drye & Warren LLP

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Introduction

India is one of the fastest growing economies in the world. India’s positive economic outlook
and regulatory reforms have made it an attractive market for foreign investors. While many
barriers to foreign investment have been removed, there still remain formidable challenges for a
foreign investor doing business in India. Understanding and preparing for these challenges is the
key to success in India. We discuss some of the key challenges in the paragraphs that follow.

Foreign investment

 Foreign investors can now invest directly in most sectors in India without obtaining the
prior approval of the Indian government. However, there are still several sectors where a
foreign investor cannot directly invest or must first obtain the approval of the Indian
government.

 Convincing the government about the viability and usefulness of a project may prove to
be a challenge for foreign investors.

 Prior approval of the Indian government is also required in cases where a foreign investor
plans to start a new venture which is in the “same” field as an existing joint-venture. The
Indian government will grant approval only if both the foreign investor and its existing
Indian joint-venture partner is able to convince the government that the new venture that
the foreign investor proposes to commence will not jeopardise the interests of existing
Indian joint-venture partner and other stakeholders of the existing venture.

Real estate

 Foreign companies investing in real estate in India should be aware of the following
restrictions:

 The minimum capitalization requirement, in case the investment is routed through

a wholly-owned subsidiary of a foreign company, is US$10 million, and US$5
million, when the investment is routed through a joint-venture established with an
Indian joint-venture partner.

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  Money invested in real estate in India cannot be repatriated for a period of three
years without first obtaining the approval of the Indian government.

 Investors have to comply with certain minimum land development requirements.

For instance, in the case of construction projects, an investor has to develop a
minimum built-up area of 50,000 square meters.

 At least 50 per cent of the project has to be developed within a period of five
years from the date of obtaining the necessary statutory approvals.

 Investors are prohibited from selling undeveloped land.

Labour & employment

 Negative covenants in employment contracts in the form of non-compete clauses are

unenforceable beyond the term of the contract.

 While terminating employment contracts, investors should be careful to comply with

relevant laws such as Industrial Disputes Act, Shops and Establishments Act and State
specific employment orders. These laws lay down specific rules for employment and
termination.

Intellectual property

 India still lags behind many developed nations in its implementation and enforcement of
intellectual property laws. Foreign investors must take adequate measures to protect their
intellectual property rights from infringement and misappropriation.

 Indian patent law requires the owner of a patent to obtain the consent of the joint-owner
of the patent before such person or entity licenses assigns or sells the invention covered
under the patent.

 In an action where an owner of a patent seeks to enjoin a third-party from infringing the
patent involving a life saving drug, Indian courts have often balanced the public good
involved in making the drug freely available to the public with that of the rights of the

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 patent holder. Often times, courts in India have given preference to the public good in
making the drug covered under the patent available to the public, either freely or at
minimal cost, over the commercial interest of the patent holder.

 Care should be taken while drafting contracts that involve the assignment of copyrights.
For instance, if the term of the assignment is not specified in the contract, Indian
copyright law will restrict the term of assignment to five years. Also, if the territory is
not mentioned, the territory is deemed limited to India. Furthermore, the assignee must
exercise his rights within one year of the assignment. Otherwise, the assigned rights will
revert to the assignor after the said period.

Delays in courts

 One of the biggest challenges that foreign companies face while litigating in India is the
problem of delay, with cases sometimes taking several years to be resolved.

 While alternative forms of dispute resolution such as arbitration are available, they are
yet to gain complete acceptance.

 Arbitrating a dispute within India may also contain a considerable risk of delay at the first
level of dispute resolution.

Corruption

 Corruption is a big hurdle when doing business in India. As per the Transparency
International's Corruption Perception Index, in 2005, India ranked 92nd out of 159
countries in a study measuring perceptions about corruption. Foreign investors should
avoid violating local and foreign anti-corruption laws.

 Political and regulatory risks can also pose a major challenge. Investment in sectors
which require continuous interface with various regulatory authorities expose the investor
to delays in implementing the project thus affecting their profitability.

 Foreign investors also face the challenge of dealing with rampant bureaucracy at various
levels of federal, state and local governments.

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Inadequate infrastructure

 India’s weak infrastructure manifested by its poor energy supply, unpaved roads,
ineffective airports and ports pose a major challenge to foreign investors.

 Infrastructure inefficiencies like inadequate power generation add a significant cost factor
for manufacturing companies in the country.

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This article was originally published in the May 2009 issue of The American Lawyer.

About the author:

Talat Ansari is a partner in the New York office of Kelley Drye & Warren LLP
and the chair of the India practice group. Mr Ansari handles corporate and
commercial transactions, infrastructure projects, international litigation and
arbitration. He has 35 years of experience representing India-based industrial,
servicing and trading companies. He also advises US industrial and financial
clients on the laws of India. Mr Ansari can be reached at (212) 808-7605 or
tansari@kelleydrye.com.

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