Editor: Please tell us about your personal background and your practice area.
Wombolt: I am a member of Goodwin Procter's Securities Litigation Practice as well our firm's India practice group, which Yash heads. I have been doing work in India for about ten years, primarily in dealing with Foreign Corrupt Practices Act issues, but also in a number of private equity and corporate transactional matters.
Rana: I am a member of Goodwin Procter's Private Equity and M&A Group and head of the firm's India practice. I focus primarily on cross-border transactional work with a focus on India. Given my background - I was born and raised in Bombay, attended high school there, and have known most of the leading lawyers there for several years because my parents are both practicing lawyers in India - focusing on Indian transactions was a natural move for me.
Editor: What are the major challenges for U.S. companies moving into the Indian market?
Wombolt: One of the most significant challenges is India's infrastructure, or rather the lack of modern infrastructure. Generally speaking, the country lacks efficient power generation and distribution. The lack of modern roads and airports has also been a challenge for companies moving into the country. All of that being said, there is no question that the environment is improving dramatically. For example, there has been a clear focus on developing power generation, particularly in the area of nuclear energy development. Also, there are new airports in Bangalore and Hyderabad, and the country is in the process of completing the golden quadrilateral, a highway system running between New Delhi, Kolkata, Chennai and Mumbai.
There also can be challenges adapting to the different culture of the business environment in India. Historically, Indian business has been highly regulated and subject to high levels of corruption.
Rana: Kyle is correct that India has made great strides in addressing some of these challenges. Opening up India to foreign investment has helped significantly. For example, many large infrastructure projects are reliant on foreign financing sources. Also, on the corruption point, the fact that countries like the United States make it illegal for U.S. companies or their Indian subsidiaries to offer compensation to government representatives, coupled with a hard line against corruption taken by leading Indian businesses, has significantly reduced a practice that was once widespread.
Wombolt: That is true. You are also seeing stepped-up enforcement of local anti-corruption laws by the Indian authorities. Some of the U.S. companies that operate in India and have been charged by U.S. authorities for violating the FCPA are now being investigated by India's Central Bureau of Investigation.
Editor: One of the areas we touched upon a few months ago in this newspaper had to do with arbitration in India and how the court system is not to be trusted. What has your experience been?
Wombolt: Litigation in Indian courts can drag on and, at least historically, the courts have not been models of efficiency. Generally speaking, I encourage clients contracting in India to include an arbitration provision in their contracts. The provision generally provides for the arbitration to take place in a third country, usually Singapore or the United Kingdom, but to be decided under Indian law. An Indian court is more likely to enforce an arbitration ruling if Indian law was applied in the arbitration.
Rana: I would just add that knowing your way around the court system, including which lawyers may be more influential in moving things along, can be extremely helpful in expediting matters. In addition, a few weeks ago the Permanent Court of Arbitration in the Hague announced that they were opening a regional facility in India. If lawyers start using that facility as the seat of arbitration, one could expect to improve the quality of legal practice for arbitrators in India.
Editor: Given market events in the last year, especially in the last month, what do you see happening in the Indian economy?
Rana: Over the last year the Indian economy has slowed down from the nine plus percent annual growth over the prior three years to something closer to seven percent growth. While it is unclear how much the events of the last month are going to impact the Indian economy, India does seem to continue to be growing significantly faster than the western countries, mainly because of fundamental drivers. There is a large English-speaking, well-educated population and a middle class of well over 300 million who continue to have increasing amounts of disposable income.
Editor: What are the advantages of the Indian market that make it attractive to U.S. companies and investors compared to the other emerging economies?
Wombolt: A distinct advantage is the well-educated workforce. Having English as the primary language used in business, as well as in the court system, is also an advantage for U.S. companies. In addition, there is an extremely large middle class (one that exceeds the entire population of the U.S.), and a common law legal system that is based on the legal system in the United Kingdom. In all of these respects, India is similar to the U.S.
Editor: How has the regulatory environment in India changed over the last decade and how has it impacted investment in the country?
Wombolt: From independence until late '91 or early '92, there was a system in place called the license raj. The license raj was a strict regulatory scheme that required a license to operate in virtually any area of business. There were also very high barriers to entry for foreign investment. The effect of the license raj was to stifle economic growth and allow a few large companies to dominate the business environment.
In late '91, the Indian government began to dismantle the license raj. This deregulation has opened up the country to U.S. investors and has allowed many more U.S. companies to set up operations in India. This trend is likely to continue over the long-term, which should lead to continued economic expansion and development throughout the country.
Editor: Over the last decade, U.S. companies have significantly increased their operations in India. Will that trend continue?
Wombolt: If the regulatory environment remains the same and the overall economic environment remains stable, India will continue to be an attractive investment destination.
Editor: How will market and economic changes affect private equity and Foreign Direct Investment into India?
Rana: With the Sensex down approximately 50 percent from its 52-week high a year ago, we have seen a lowering of expectations as to valuations. That does create buying opportunities for private equity firms. Private equity investments in Indian companies are typically structured as minority deals without any leverage. Therefore, despite the difficult credit environment, private equity firms are still quite active in India.
Editor: Are there legal or economic barriers that discriminate against private equity from the U.S. or elsewhere?
Rana: One has to be careful when structuring entry into the Indian market in order to avoid opening up the entire firm to taxation in India. As long as you structure it properly by using off-shore vehicles through tax-favorable jurisdictions, there are not significant barriers to foreign private equity investors.
Editor: Over the last few years many PE firms established offices in India. Do you see that trend continuing?
Rana: Over the last few years just about every large private equity house from the U.S. and Europe has established offices there. Candover, a large European house, opened up an office in Hong Kong and one in Bombay. Goldman Sachs, Blackstone, Carlyle Group and Warburg Pincus are all present. On the venture capital side are Sequoia and a whole group of blue chip venture firms. We continue to assist clients looking to set up operations in India.
Editor: How will economic events in the U.S. impact the Indian market?
Wombolt: The impact over the short term is something that remains to be seen. Given the policies that have been put in place and given the advantages India has over other emerging growth economies, I think that, long term, India will remain a very attractive investment destination.
Editor: Is the third world being harder hit then even the U.S. because of volatility that takes place when there is a market downturn?
Rana: Emerging markets are by their nature more volatile than the U.S. As I mentioned earlier, the Sensex decline is more pronounced than that of the U.S. market. But in speaking of economic growth, remember that more than 65 percent of the Indian economy is agricultural and does not show measureable growth. That means the industrial and service sectors of the Indian economy are growing at twenty-plus percent in order for the whole economy to be growing at seven percent. While growth has slowed in these sectors, it is still quite significant.
Editor: What are the principal risks that could limit India's advancement into the top echelon of world economics?
Rana: We have touched on these risks and challenges - infrastructure, regulation, corruption and overpopulation as well. But as one looks at the steps the government and private sector have taken to address these challenges, one cannot help but be optimistic about the prospects for the Indian economy and markets. India offers a stable democracy, rule of law and a free society. That is a significant advantage over other investment destinations in Asia.
Published November 1, 2008.
