INDIA (DOMESTIC FIRMS): An Introduction

INDIA 2023 - OBHAN & ASSOCIATES 

The coming 12 months are a critical period for India, as internationally it dons the presidency of the G20, and domestically it prepares for general elections in 2024. Even as many countries are slowly emerging from the pandemic, and grappling with crises on multiple fronts, this is an opportunity for India to showcase its burgeoning and confident domestic market, its increasing regional influence, and a relatively stable and reliable political economy.

While traditional industries support the backbone of India’s success story, newer technology-driven industries are gaining momentum. India is home to 107 unicorns with a combined valuation of over US$ 340 billion, and one in every ten unicorns globally is birthed in India. This trend has driven the more important legislative and regulatory changes here, spanning crypto taxation, overseas investments, and data protection, besides new rules governing commercial litigation that will affect doing business.

In its latest annual budget, India announced new tax rules around “virtual digital assets” that include all cryptos (ie, currencies and non-fungible tokens). While the law is yet to be enacted, the government proposes to tax income from the transfer of virtual digital assets at 30% annually. These transfers are subject to stringent restrictions, such as no deductions (except the cost of acquisition); no setting off of losses; and gifting being taxable in the hands of the receiver. With the latest OECD framework on crypto taxation having recently gone live, and India being a global leader in crypto adoption, there will be considerable scrutiny on alignment with international taxation trends.

The Reserve Bank of India (RBI), India’s central bank, has overhauled and simplified the overseas investment framework. Now, investors can make non-controlling investments of less than 10% in foreign entities without these being qualified as Overseas Direct Investment (ODI). Persons resident in India can now also make financial commitments in a foreign entity with investments in India, if it does not result in more than two layers of subsidiaries. Previously, prior approval of the RBI was required for such investments. Similarly, an Indian entity not engaged in financial services in India can directly invest under the automatic route in a foreign entity engaged in financial services (except banking and insurance), subject to posting net profits in the preceding three financial years (2021-22 being exempted). Additionally, Indian unlisted companies may now undertake Overseas Portfolio Investments, from which they were previously excluded, through, among others, acquisition of equity capital, security swaps, and mergers. The rules also provide respite to foreign companies which had received investment from resident individuals and were struggling to incorporate Indian subsidiaries.

A major domestic legislative development is the August 2022 withdrawal of the Personal Data Protection Bill, floated in 2019, which sought to create a GDPR-like privacy regime here. At present, India has no independent data protection regulator, and individuals have limited enforceable rights, even though the right to privacy is judicially recognised as a fundamental right under the Indian Constitution. The Bill was withdrawn after objections were raised by the digital business community, civil society, and the parliamentary expert committee reviewing the law. Contentious issues range from restrictions on the use and export of data from India to heightened surveillance powers and waivers available to the government. It remains to be seen what new form the privacy bill will take, but it is acknowledged that data needs to be regulated, as it directly drives the growth of India’s digital economy.

The frenetic pace of domestic internet penetration invites a consideration of its effect on job creation, and by corollary, learning and education. Being home to one of the world’s largest higher education networks, combined with the demographic dividend of a young population, the Indian government’s vision for the future includes a multilingual digital university, an e-portal for upskilling, and virtual science and maths labs. However, the fast-growing edtech sector, home to more than one unicorn, remains unregulated, inviting government scrutiny on industry practices and business models. In response, the Indian Edtech Consortium (IEC), formed in early 2022, prepared a self-regulatory code of conduct, including a two-tier grievance redress mechanism, and guidelines on transparent and ethical practices in sales and advertising in the sector.

Robust economic growth inevitably tests other facets of the governance infrastructure, especially courts. The forum for adjudicating commercial suits in India is governed by the Commercial Courts Act, 2015, where jurisdiction depends on the valuation of the suits. As valuation is based on self-assessment of the party instituting the suit, without adequate regulation, this provision lends itself to manipulation. Parties may deliberately value their suits to indulge in ‘forum shopping’, ie, choose a court that is likely to provide the most favourable outcome. This provision has been particularly abused in intellectual property rights (IPR) suits. In response, the Delhi High Court has laid down directions on valuation, stating that the judicial principle of dominus litis, ie, that the plaintiff is ordinarily the ‘master of the suit’, cannot be stretched to justify undervaluation of IPR suits to indulge in forum shopping.

In relation, the Delhi High Court has notified new rules for IPR cases. With the abolition of the Intellectual Property Appellate Board (IPAB) in 2021, the middle tier in the IPR dispute resolution framework was removed, and IPR matters are now directly decided by the courts. Overnight, all cases pending with the IPAB were transferred to the judiciary, with the Delhi High Court alone being required to handle the bulk of such cases. To handle this sudden workload, an Intellectual Property Division (IP Division) was created in the court, and corresponding detailed rules of practice and procedure have been notified.

The relevance of IP in the larger scheme of India’s economic agenda has not gone unnoticed. An August 2022 working paper issued by the Prime Minister’s Economic Advisory Council recommended that India must invest in its patent ecosystem. A July 2021 Parliamentary Standing Committee report on the “Review of The Intellectual Property Rights Regime In India” found that an increase in IP protection results in an increase in foreign direct investment (FDI). Correspondingly, it urged the government to make the IP system more user-friendly, eg, through relaxing rigid procedural requirements, improving enforcement, and speeding up grants. This growing recognition of the contribution of IP to the country’s economic growth bodes well for the future of innovation and IPR protection overall.

Peripheral to IP rights, the Biodiversity Bill, 2021, recently obtained the approval of a Joint Parliamentary Committee. The Bill, expected to be tabled in Parliament soon, seeks to amend the Biological Diversity Act, 2002, and will decriminalise certain statutory hindrances, such as requiring Indian companies to obtain approvals from the regulatory body before accessing any biological material. The changes proposed will have a positive effect on the biotech sector here.

A great deal has been promised on the law and policy front, some of which is delivered already, while some is yet to be properly tested. Cumulatively, these developments will impact a variety of sectors, and are designed to position India firmly in this new decade of technology-driven development, stable (if relatively lower year-on-year) growth, and improving diplomatic presence and leadership.