Key developments in the Indian legal landscape in 2016

From the Startup India campaign launched in January 2016 to the coming into force of substantial provisions of the Insolvency and Bankruptcy Code in December 2016, the legal landscape in India has witnessed some crucial developments this past year. In this LawFlash, we describe briefly what we consider to be some of the key legal and regulatory developments in India in 2016.

Arbitration Act

The Arbitration and Conciliation (Amendment) Act, 2015, published in the official gazette on January 1, 2016, amended the Arbitration and Conciliation Act, 1996 to introduce substantial changes. The amendment provides clarity on the jurisdiction of Indian courts with respect to foreign seated international commercial arbitration and the enforcement of foreign arbitral awards. In respect of international commercial arbitrations seated in India and domestic arbitrations, the amendment provides for, among others, a fast-track procedure for resolution of the dispute in the case of a single arbitrator, specific time limits for conclusion of arbitration, and includes disclosure requirements for neutrality of the arbitrator. The amendment also narrows the scope of intervention by the Indian courts.

Startup India Campaign

To encourage Indian entrepreneurs to conduct business in India rather than move out, the government launched the Startup India Action Plan[1] in January 2016. The plan provides various incentives to startups, which include, (a) self-certification as to compliance with specified labor and environmental laws; (b) exemption from payment of income tax for three years, provided no dividend is distributed by the startup; (c) exemption from capital gains subject to certain conditions; (d) fast-track examination of patent applications; (e) setting up of a startup fund to provide funding support; and (f) industry-academia partnership and incubation for startups in India. The Startup India campaign is part of the bigger Make in India campaign launched by the government in 2014.

Competition Act – Merger Control Thresholds

In 2011, the government had exempted transactions from pre-merger approval from the Competition Commission of India if (a) the value of assets of the target entity in India was not more than INR 250 crores ($36.7 million); or (b) the turnover of the target entity in India was not more than INR 750 crores ($110.1 million). This exemption was valid for five years from March 4, 2011 to March 3, 2016.

On March 4, 2016, the government extended the exemption period for another five years and increased the monetary thresholds for the exemption. Based on the revised threshold, approval from the Competition Commission of India is not required if the target entity has (a) assets not more than INR 350 crores ($51.4 million); or (b) turnover of not more than INR 1000 crores ($146.9 million).[2] The thresholds for determining the Commission’s jurisdiction under section 5 of the Competition Act 2002 have also been increased by 100%.

Radical changes to foreign direct investment

From March to October 2016 foreign direct investment was liberalized in various sectors including insurance, single brand retail trading, defense, pharmaceutical, civil aviation, asset reconstruction companies, broadcasting carriage services and cable networks and food products.[3] Our earlier LawFlash on these changes can be accessed here. Liberalization of foreign direct investment in these sectors was undertaken either by relaxing the conditions for foreign investment or by increasing the sector caps on foreign investment. The Department of Industrial Policy and Promotion also issued a much awaited clarification in March 2016 on foreign direct investment in e-commerce, in which 100% foreign direct investment is permitted in the “marketplace based model of e-commerce” and foreign direct investment is not permitted in the “inventory based model of e-commerce”.[4] India has a thriving e-commerce sector.

Revisions to Tax Treaties with Mauritius, Cyprus and Singapore

The May 2016 amendment of the India-Mauritius tax treaty established a landmark shift in the taxation regime between the two countries, from resident-based to source-based taxation.[5] Under the amendment, India has the right to tax capital gains arising from the alienation of shares acquired by a Mauritian tax resident in Indian companies on or after April 1, 2017. The amendment is seen as a step to avoid treaty abuse and to conform to the OECD’s base erosion and profit shifting plan. Our earlier LawFlash on the amendment to the tax treaty can be accessed here and here. In November 2016 India and Cyprus signed a revised agreement for the avoidance of double taxation and prevention of fiscal evasion which will replace the existing double taxation avoidance treaty between the two countries.[6] The revised tax treaty is in line with the amendments to the India-Mauritius tax treaty with respect to a shift from source-based taxation. Furthermore, Cyprus was declassified as a non-cooperative jurisdiction with retrospective effect.[7] The declassification notification issued by the government on December 14, 2016 provided for the declassification to have prospective effect from the date of the declassification notification. However, by way of a corrigendum issued on December 16, 2016 the declassification of Cyprus as a non-cooperative jurisdiction was given retrospective effect from 1 November 2013 (i.e. the date of the notification classifying Cyprus as a non-cooperative jurisdiction). Our earlier LawFlash on the revised tax treaty can be accessed here. On December 30, 2016 India and Singapore entered into a new protocol to amend the existing tax treaty between the two countries. The amendment provides for, among others, source based taxation for shares acquired on or after April 1, 2017, grandfathering of shares acquired prior to April 1, 2017 and a transition period of two years from April 1, 2017 to March 31, 2019 during which the capital gains from shares acquired during this period will be taxed at 50% of India’s domestic tax rate subject to fulfilment of certain conditions. The amendments are similar to the amendments made to the India-Mauritius tax treaty. However, unlike the amendment to the India-Mauritius tax treaty, the new protocol does not contain details of a reduction in the rate of tax on interest income arising from debt investments. India is expected to revise its tax treaty with the Netherlands on similar lines as the treaties with Mauritius, Cyprus and Singapore.

India’s first National IPR Policy

The National Intellectual Property Rights Policy[8] published in May 2016 is the first of its kind in India and recognizes the importance of intellectual property rights as an asset and an economic tool. The policy seeks to establish a conducive ecosystem for innovation and creativity, and its objectives include: creating public awareness, stimulating the generation of IPRs, creating effective IPR laws, commercialization of IPR and strengthening the enforcement and adjudicatory systems. Following the publication of the policy, India entered into three memorandums of understanding with Singapore on skill development and intellectual property. Our earlier LawFlash on the three MoUs can be accessed here and here.

Insolvency and Bankruptcy Code

The Insolvency and Bankruptcy Code, 2016 enacted in May 2016, consolidated the previously fragmented laws on the insolvency and bankruptcy regime in India. The Code is a landmark legislation and provides a robust framework for the time-bound resolution of insolvency and bankruptcy. Given the number of bad loans that the domestic banks are faced with, the Code has come at an opportune time. Since its enactment, certain provisions of the Code have been notified and brought into force in a phased manner. Recently, certain substantive provisions of the Code relating to the corporate insolvency resolution process have been made effective as of December 1, 2016.[9] This is the first major step in putting the Code into operation.

Company Law

In June 2016, the National Company Law Tribunal and its appellate authority, the National Company Law Appellate Tribunal, were set up under the Companies Act, 2013 (2013 Act).[10] With the constitution of the two tribunals, the Company Law Board which was set up under the Companies Act, 1956 is dissolved and pending matters are to be transferred to the National Company Law Tribunal.[11] Furthermore, provisions on winding up, compromise, arrangements and amalgamation under the 2013 Act were notified and brought into effect as of December 15, 2016.[12] Our LawFlash on this matter can be accessed here.

Goods and Service Tax

The 122nd Constitutional Amendment Bill for goods and service tax was enacted by both houses of Parliament and was approved by the president. The goods and service tax regime is the biggest reform in the indirect tax space in India since the liberalization of the Indian economy. Goods and service tax aims to create a common Indian market and will subsume taxes currently levied by both the state and central governments, thereby eliminating the cascading effect of taxes. It is also expected to make the movement of goods simpler and seamless in one of the largest consumer markets in the world. The goods and service tax regime is expected to be implemented by April 2017.

Demonetization

In a drastic move to wipe out black money in the economy and stop counterfeiting (one of the political campaign promises of the government), the government demonetized currency notes of INR 500 and INR 1000 in November 2016 and introduced new currency notes of INR 500 and INR 2000. Demonetization has received mixed responses in India and the effects are expected to be felt well into 2017. This is not the first time in India’s history that such a step has been taken, India having seen two earlier demonetizations in 1946 and 1978. Countries such as Nigeria and Ghana have also in the past demonetized their currency.

Corporate Governance

While not strictly a legal matter, the highly publicized boardroom issues faced by a leading Indian conglomerate has brought to the fore various corporate governance issues such as the role, independence and removal of executive and independent directors. When the dust settles, clarity on corporate governance aspects and the role of independent directors in India is expected in the coming months.

The year 2016 has been an action packed year for India and 2017 is expected to be no less.