Government-led efforts to improve regulatory and financial barriers in India's space sector are rapidly creating an important new market for the country's law firms, which are looking at increased work for their M&A, private capital investment, project finance, intellectual property and technology lawyers.
The Indian government's conscious push towards a self-sustaining economy is centred on a focus on identifying key global growth markets in the next decade and building manufacturing, know-how and technology capabilities to bring them to its shores.
Satellites and space, an otherwise languishing sector, fell perfectly in the cross-section of all these requirements. As the private space sector begins to take shape, the legal market is grappling with new regulations, investment risk mitigation strategies, and technology and intellectual property laws to attract India's space startups and foreign investors as they build out space law practice groups.
The Modi-led central government has put in place a roadmap to put India on the path to space superiority. In 2020, the Indian National Space Promotion and Authorisation Centre (IN-SPACe) was established to handhold startups in the sector and serve as a single-window clearance agency to authorise space activities undertaken by the government and private players. The Indian Space Policy, approved in 2023, aims to provide regulatory clarity for promoters and investors.
This was supported by India's premier space agency, the Indian Space Research Organisation's (ISRO) drive to build homegrown space technology. In August 2023, the Chandrayaan-3 lunar mission made India only the fourth space-faring nation to land a spacecraft on the moon, and the first to do it on its unchartered South Pole. The recently launched solar mission Aditya L1 is also a first of its kind and has put India in a league of its own when it comes to space-faring nations.
In the last four years, the number of domestic startups has increased from 10 to around 200 and has received funding of around $250 million, valuing India's space economy at around $8.4 billion. While this growth is significant, it is mere 2 percent of the global market. IN-SPACe aims to bring this to $44 billion by 2033.
The largest barrier to growth today is a lack of private funding stemming due to small domestic funding markets and global caution from foreign investment barriers. To address this problem, the government announced up of the space sector, to 100 percent in some cases, inviting the world's top space-tech companies and investors to build Indian portfolios and fuel growth in the market.
The policy ensures 100 percent FDI in the manufacturing of components and systems or sub-systems for satellites, ground segments, and user segments. Secondly, 74 percent has been permitted for satellite manufacturing and operation, satellite data products, and ground segments and user segments.
The policy also allows 49 percent FDI for the development of launch vehicles and associated systems, and the creation of spaceports for launching and receiving spacecraft.
PREPARING FOR INVESTORS
The liberalisation of the market is bringing more opportunities for law firms as they gain regulatory clarity and prepare a nascent domestic market for foreign investment.
Bir Bahadur Sachar, a J Sagar Associates partner focused on space law, explains that there is a growing market for law firms in the space sector, including working with the government on regulations and building M&A, private equity and project finance capabilities arising from long investment gestation periods, typical to the space economy.
"With the development and increase of interest in the space sector and the recent interest demonstrated by the government with respect to private sector participation, there is a huge opportunity for law firms for assisting the government and INSPACe in putting together a regulatory framework that one hand takes care of issues of national importance such as security and defence aspects of this sector and on the other hand provides clarity to the investors; advising their clients appropriately, as investment in this sector may have long gestation before the investors could see possible exits or returns; and assisting investee companies in putting together a compliance and governance framework including ESG framework that complies with global norms," says Sachar.
At the outset, selecting the right category for investment may present legal challenges, explains Sachar. "A challenge that law firms advising on transactions in this sector may face is to determine the applicability of the relevant sub-sector where the entity receiving foreign investment is involved in."
He explains with an example: "While the ground segment and user segment fall within the sub-category in which FDI is permitted up to 74 percent under the automatic route, manufacturing of components and systems/sub-systems with respect to ground segment and user segment falls within the sub-category in which 100 percent FDI is permitted under the automatic route."
"While there have been initial rounds of venture capital and private equity investments in this sector, this sector is yet to see development of sector-specific market framework. Further, as there have been no demonstrable exits with respect to investments made in this sector, the exit-related challenges that investors may face are yet to be tested."
- Bir Bahadur Sachar, J Sagar Associates
Further, while the space sector has seen some funding come in locally, preparing foreign investors in a niche and sophisticated category like space presents its own challenges in the Indian market.
"While there have been initial rounds of venture capital and private equity investments in this sector, this sector is yet to see development of sector-specific market framework. Further, as there have been no demonstrable exits with respect to investments made in this sector, the exit-related challenges that investors may face are yet to be tested," Sachar explains.
Indian space-tech startups, which remain nascent and unexposed to global capital, will require careful handholding by legal experts, says Rajesh Vellakkat, a partner at Fox Mandal & Associates.
"The challenges may lie in the level of maturity of Indian startups to engage with overseas partners. Currently, many players in the Indian space sector are primarily early-stage companies with limited experience in collaborations. If Indian law firms are representing these enterprises, negotiating appropriate contractual clauses to balance the interests of foreign investors without compromising operational autonomy would pose a challenge. Conversely, if the law firms are representing foreign investors, convincing their Indian counterparts may prove to be another challenge," says Vellakkat.
"Now, a foreign investor is allowed to take control of existing Indian companies in this sector. So, shareholders agreement/ JV agreements will have restrictive covenants and other control measures to control the promoter behaviour, requiring elaborate negotiation," he adds.
TECHNOLOGY SHARING AND IP
Investors will also be cautious about sharing technology with Indian counterparts, and lawyers will play a vital role in shaping technology transfer agreements within larger investment negotiations.
"There are global restrictions on cross-border technology transfer, particularly in relation to space technology. Therefore, Indian domestic startups and companies seeking partnerships with foreign counterparts should be mindful that despite India permitting foreign investment, these foreign entities may face restrictions on technology transfers to India due to regulations imposed by their home country. Hence, in all collaborations where investment and technology are the primary motives, it is essential to double-check whether such technology transfers to India are genuinely permitted," Fox Mandal's Vellakkat explains.
Sachar adds that investors and domestic companies will also have to continuously liaise with the government on regulations, particularly as the sector could be one that could be tagged as vital to national security.
"While advising domestic startups and companies seeking partnerships with global space entities, legal professionals should anticipate concerns around protection of technology and possibility of government intervention (as this sector could assume national and defence importance)," says Sachar.
"With the development of integrated platforms for satellite launches and technology development in this sector, one may see further changes in laws pertaining to intellectual property, particularly in this sector, as developments in this sector could also impact the defence sector as well as the national space programme. Similarly, transfer of technology and licensing agreements, specifically those pertaining to satellite and launch vehicle development, could involve government's supervision and scrutiny, possibly through IN-SPACe," he adds.
