Top Ten Mistakes Of U.S. Companies Heading Into India.
1. Top 10 Mistakes of U.S. Companies
Heading into India
November 12, 2012
Satya S. Narayan
SNarayan@rroyselaw.com
Harpreet S. Walia
HWalia@rroyselaw.com
3. 1. Leaping before you look; India’s FDI regulations
GOI’s 2012 Consolidated FDI Policy along with amending Press
Notes: http://www.dipp.gov.in/English/acts_rules/Press_Notes.aspx
Industry-wise sectoral caps and restrictions. Example:
Retail:
Single-Brand Retail: 100% FDI but 30% of goods must be
sourced from India
Multi-Brand Retail: 51% FDI but also subject to state
approval
Other restrictions: retail outlets only in cities with 1 million
population; 50% of FDI on backend infrastructure within 3
years
Automatic Route v. Government Route
Prohibited Sectors (e.g. Atomic Energy, Gambling and Betting,
Agriculture (with several exceptions))
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4. 2. Using your Liaison Office for commercial activities
Liaison office may only be used for promotional activities
If it earns revenue in India it will be in breach of its RBI
permission and the parent’s income attributable to Indian
activities may be taxed up to 42.23% (including surcharges)
(Note: Direct Taxes Code Bill, 2010, if enacted, will raise this
tax rate up to 45%)
Liaison office must file annual audited financial statements
with the RBI and the Registrar of Companies
Even though no tax is due, tax returns must be filed annually
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5. 3. Incorporating in India – things to keep in mind
If you are incorporating a Branch Office or Project Office, it
may perform commercial activities but no manufacturing/
processing activities
Wholly-owned subsidiary permitted only in sectors where
100% FDI is permitted
Indian subsidiary is fully subject to Indian laws; even contracts
it enters into with local entities will be subject to Indian law
Indian transfer pricing regulations will apply to technology
transfer from foreign parent to an Indian subsidiary
Indian subsidiary of a nonresident public company will be a
public limited company in India if nonresident public company
would be a public company under Indian law
Old minimum physical quorum rule for board meetings eased
with video conferencing alternative
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6. 4. U.S. treatment of Indian employees
Indian labor laws are very different from U.S. labor laws
More than 55 central labor laws and over 100 state labor laws
9 hour workday; 200 hours/ year overtime limit; 30 minutes/ 5 hour rest break;
etc.
Termination without cause may be subject to:
Last come first go
Compensation based on years of service
Sufficient notice
Companies employing more than 100 workers must obtain government
approval before they can fire employees or close down
Post-termination restrictive covenants are void (e.g., non-compete and non-
solicitation clauses)
Exception: Non-compete clauses in the context of a sale of business with
goodwill for consideration and even then restriction must be reasonable as to
time, geography and other limitations
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7. 5. Failing to protect your intellectual property early on
Register your key export-related intellectual property assets in India:
trademarks, utility patents, design patents, copyrights, geographical
indications
Tailor U.S. employee invention agreements to overcome
presumptions under Indian law
Require your Indian partners (including the joint venture company)
to agree to:
“no contest” terms
confidentiality obligations (note: no trade secret legislation in
India)
present assignment of derivative or new intellectual property
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8. 6. Using U.S. boilerplate contracts with Indian partners
Don’t rely on boilerplate U.S. contract terms
Provisions may be ineffective under Indian law (e.g. non-compete covenants)
Provisions may not override presumptions under Indian law (e.g., copyright)
Provisions must comply with Indian regulations (e.g., franchise royalties)
Need more provisions around relationship management, escalation, and
interim remedies
Exclude the application of the U.N. Convention on International Sales of Goods
At a minimum, contracts should include:
Commercial terms (e.g., payment and delivery terms)
Protections to address intellectual property and confidential information
Risk allocation (e.g., indemnification; warranties and disclaimers; limitations on
consequential and other damages; and require insurance)
Force majeure
Termination
Dispute resolution
Governing law
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9. 7. Your joint venture agreement may not bind the JVC
Joint venture agreements do not bind the joint venture company (JVC)
unless key provisions of the agreement are included in the Articles of
Association of the JVC
Some key provisions:
Distribution of revenue
Deadlock
Transfer of shares; right of first refusal; and change in control
IP ownership; IP licenses; no contest of JV partners’ IP; local
prosecution and enforcement; confidentiality
Exit rights and effect
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10. 8. Failing to state the governing law in contracts with Indian
partners
Courts may determine that Indian law applies
Indian courts respect the parties’ choice of law for the contract
Choose U.S. federal/ state law or English law where possible
Caveats:
Certain U.S. or Indian laws may still apply (e.g. export laws, FCPA/
anti-corruptions laws, IP laws, antitrust/ competition laws)
Certain contracts will always be subject to Indian law:
Contracts between Indian parties (e.g. contracts between a
U.S. company’s Indian subsidiary and its Indian partners)
Contracts with Indian governmental entities
Contracts with Indian consumers/ individuals
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11. 9. Not specifying a mechanism for dispute resolution
The Problem:
U.S. judgments are not automatically enforceable in India
Indian companies are not averse to litigation
Litigation experience can be frustrating: delays, uncertainty, and
corruption
Arbitration is a better alternative; make it a requirement of the contract
India is a member of the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards, 1958
Caveats:
Reserve court access for IPR and Confidential Information; Indian
High Courts grant injunctive relief within 48 hours
Arbitration is not available against governmental entities
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12. 10. Not taking the FCPA seriously
Extraterritorial jurisdiction of the U.S. Foreign Corrupt Practices Act
U.S. companies liable for acts of Indian subsidiaries and potentially for
the acts of its partners if it has knowledge
Comply with accounting and record-keeping provisions of FCPA
FCPA enforced by the SEC and DOJ. In 2010, the SEC’s Enforcement Division
created a specialized unit to further enhance its enforcement of the FCPA.
India 95th out of 182 countries in Transparency International’s Corruption
Perceptions Index
Anti-corruption best practices:
Due diligence on partners
Regular internal audit
Educate employees, partners and agents
Circulate anti-bribery policies to employees, partners and agents
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13. Watch for changes in Indian legislation
In the works ….
Companies Bill, 2011 introduced to replace the Companies Act, 1956
Direct Taxes Code Bill, 2010 introduced to replace the Income Tax Act, 1961
Recent changes in legislation …
Competition Act, 2002 & Competition Rules, 2011
IT (Amendment) Act, 2008 & Information Technology (Reasonable Security
Practices and Procedures and Sensitive Personal Data or Information) Rules,
2011
Amendments in 1999, 2002, 2005 and 2006 to the Indian Patent Act, 1970
& Patent Rules, 2003, amended in 2005 and 2006
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14. Resources
U.S. Department of Commerce’ Doing Business in India: 2012 Country Commercial Guide for U.S. Companies
http://export.gov/india/build/groups/public/@eg_in/documents/webcontent/eg_in_049379.pdf
Business Portal of India managed by the National Informatics Centre, Government of India
http://business.gov.in/default.php
GOI’s 2012 Consolidated FDI Policy along with amending Press Notes
http://www.dipp.gov.in/English/acts_rules/Press_Notes.aspx
Reserve Bank of India’s Master Circular on Import of Goods and Services
http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=7315#B1
GOI’s Directorate General of Foreign Trade’s
http://www.dgft.gov.in/
Indian Employment Visas for Foreign Nationals
http://mha.nic.in/ForeigDiv/foreigners_division.htm
Office of the Controller General of Patents, Designs and Trademarks
http://www.ipindia.nic.in/
Case Status (Status of Pending and Disposed by the Supreme Court and High Courts of India
www.courtnic.nic.in/
Franchising Association of India
http://www.fai.co.in/
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15. Questions?
Satya S. Narayan
E-mail: SNarayan@rroyselaw.com
Phone: 650.521.5745
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