29 ASIAN LEGAL BUSINESS – APRIL 2024 WWW.LEGALBUSINESSONLINE.COM SPACE LAW 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.” 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. “While there have been initial rounds of venture capital and private equity investments in this sector, this sector is yet to see development of sectorspecific 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
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