How India is using its legal system to attract foreign investment

December 11, 2024

India is becoming an increasingly attractive target for international expansion by Scottish businesses as its economy continues to grow rapidly.

The world's most populous nation, India was also the fastest growing large economy in the world in 2024. Economists predict the country will become the third largest economy globally by 2030, behind China and the US, overtaking Germany and Japan by the end of this decade.

This market buoyancy presents a significant opportunity for Scottish businesses looking to expand into India.

In addition to its growth prospects, India also offers particular business benefits such as low operating costs, tax-free zones, a highly educated English-speaking workforce, a large retail investor base and an established market for large-scale business outsourcing.

Sectors in India that are likely to be particularly attractive to Scottish and other foreign investors include renewable energy, infrastructure, life sciences, business outsourcing, and food and beverage.

Using the law to attract investment

One of the core objectives of the incumbent Indian government is to encourage foreign direct investment (FDI) in India, to further internationalise its business community, sustain strong economic growth and satisfy consumer demand for foreign goods and services.

It is also hoped that Indian-owned start-ups that sought to establish themselves overseas to benefit from more favourable tax and listing regimes will also be incentivised to return to India.

As a result, several key elements of the country's legal and regulatory system which, despite early good intentions have become bogged down in bureaucracy, have been streamlined in recent years to the benefit of international businesses.

For example, when the Securities and Exchange Board of India (SEBI, India's stock market regulator) was formed in 1988, it was modelled on the US Securities and Exchange Commission (SEC), in the hope this would enable India to emulate the success of world-leading US stock markets, such as the New York Stock Exchange (NYSE) and the Dow Jones.

Earlier listings on India's main stock exchanges, such as the Mumbai-based National Stock Exchange of India Limited (NSE) and Bombay Stock Exchange Limited (BSE), took two to four years from intention to float to commencement of trading, and involved significant amounts of complicated paperwork.

With Indian markets booming and the rise of new companies accessing the stock market, since 2020 there have been various regulatory reforms, including changes to specifications in disclosure requirements, which have eased the process of market accessibility for companies, while continuing to protect retail investors.

Today, public listings in India are far more straightforward and accessible, enabling both domestic and international businesses to navigate the process more efficiently.

In another measure designed to make it easier for international businesses to enter India, since September 2024, foreign-based companies no longer require approval from India's National Company Law Tribunal for so-called "reverse flip" mergers with domestic subsidiaries.

The removal of this bureaucratic step effectively reduces the time the merger process takes to about three to four months from at least 12-18 months previously.

The poster child for India's overtures to the international business community is GIFT City, a global financial and IT services hub - the first of its kind in India - in Gandhinagar, Gujarat, which offers several key incentives for global firms, including exemptions from various Indian laws, simplified tax regimes and the ability to transact in multiple foreign currencies.

It even offers 100% tax exemption on business profits for any 10 consecutive years within a 15-year period to certain companies.

Overarching these changes has been a loosening of FDI rules which restricted foreign investment in certain sensitive and strategic sectors in India, such as gambling, public-owned areas like railways and atomic energy, and some areas of real estate and agriculture.

These legal reforms come on top of wider operational improvements to India's business administration, including the adoption of technology to speed up time-consuming manual document processing.

Tax reforms

To complement its raft of legal measures, the Indian government also unveiled a number of fiscal reforms and proposals in its July 2024 budget intended to remove disincentives for foreign investors in India.

These include the abolition of the country's "angel tax", levied on angel investors in start-ups whose investment exceeded the market value of the start-up's shares.

The government has also proposed to reduce the corporate tax applicable to foreign companies, from 40% to 35%, and has removed the "equalisation levy" - an additional charge of 2% that had been imposed on digital companies operating without a physical presence in India.

It has also proposed expanding the scope of safe harbour rules (setting fixed tax rates meant to simplify tax compliance) to make them more attractive to investors, as well as streamlining the transfer pricing assessment procedure.

A swathe of tariffs have also been slashed, in the hope this will give foreign investors confidence that they can import raw materials and export goods without incurring additional costs.

Local legal knowledge

While India is evidently open for business, its many advantages as an investment destination come with some potential pitfalls that international companies need to be aware of before committing to opening up shop in the country.

Its scale and diversity, of geography, climate, culture, laws and language make India a very different market to the comparatively homogenous Scottish business environment.

India consists of 28 states and eight union territories. It has 22 official languages, hundreds of unofficial languages or "mother tongues" and thousands of local dialects.

The legal system is made up of common law, statutory laws (at both central and state level) and codified personal laws governing specific religious communities in personal matters such as marriage and inheritance.

Businesses looking to expand in India are therefore advised to seek legal advice from lawyers with knowledge and experience of India's legal environment.

It is particularly important to understand the relevant dispute resolution and governing law clauses in contracts, and how to mitigate the risk of potential commercial disputes which could drag international businesses into the Indian court system.