9 ASIAN LEGAL BUSINESS – INDIA E-MAGAZINE WWW.LEGALBUSINESSONLINE.COM (InvITs), which allow easy access and exits to investors in India’s infrastructure markets. “InvITs were a game-changer,” says Gandoak. Through these funds, “the government has monetised assets immediately and given them access to public markets. This has given a lot of impetus to some sectors such as roads and has also given an easy exit to investors.” And the market has taken to them. This year alone, KKR-backed Highways Infrastructure Trust acquired 12 road projects from PNC Infratech in $1.08 billion deal, one of the highest in the roads sector. Another InvIT, Brookfield-backed Data Infrastructure Trust acquired American Tower Corp’s India operations for $2.5 billion in January. National Highways Infra Trust completed a $740 million issuance of its units by way of private placement to domestic and global investors, including the Canada Pension Plan Investment Board, and the Ontario Teachers’ Pension Plan Board. Further, Bharat Highways InvIT became only the fourth publicly listed InvIT in the country after completing a successful $300 million initial public offering. But despite reforms, some investors say that may not be as loose-fisted with the purse without a Modi-led government, which has instilled faith that laws and reforms will remain businessfriendly and investor-friendly as long as it remains in power. “Commitment of foreign capital is more connected with growing faith in the Indian economy rather than any reform on the ground,” says Vishwang Desai, managing partner and head of corporate commercial practice at law firm Desai & Diwanji. As a weaker BJP-led National Democratic Alliance begins a the third term, investors remain concerned about whether the political stability over the last five years, which fostered an investor-friendly business environment, will remain. INVESTOR CONCERNS While it is yet to be seen whether the BJP’s aggressive infra-push can continue in its third term, certain long-term concerns need to be addressed to see more private investment in infrastructure. The largest being counterparty risk. Lawyers from India and abroad unanimously agree that the single biggest risk faced by foreign investors in India arises from their counterparty’s poor corporate governance and fraudulent practices. The consensus seems to be that promoters have very creative ways to ensure they control not only the finances, but also the way money is spent and allocated, and even how the shareholders make money from their investments. “The amount of disregard Indian promoters show foreign investors is huge,” a lawyer said on conditions of anonymity. Desai says he advises his clients to always investigate the past history and track record of promoters to identify instances of shoddy governance, miscommunication and misdirection, and denial of shareholder rights. Gandoak adds that having the right to appoint the chief financial officer, rigorous due diligence, and ensuring control over finances and related-party transactions is also crucial in reducing counterparty risk. This is key as most investors are not keen on moving courts to enforce contract terms or adjudicate disputes. Lawyers say this is for two reasons. First, the corporate resolution system in India is sub-par, with the National Company Law Tribunal ill-equipped to handle complex corporate issues. The timelines from arbitration to appeals in court is choking, particularly in the construction sector. Construction disputes in India can take up to five years, which is three years more than the legally mandated period under the Arbitration Act. India has 21 judges for every million people, one of the lowest judge-population ratios in the world. “Foreign investors have no appetite to get stuck in Indian courts,” Gandoak says. He recommends increasing funding for the judiciary and setting up specialised corporate tribunals to handle investor disputes expertly. Another reason to not go to court is to prevent a perception of being an aggressive investor. “If investors start going to court regularly to enforce contract terms against Indian promoters, the marketplace will see them as aggressive investors to be avoided in future deals,” Desai explains. Another big concern for foreign investors remains land acquisition. The process to acquire a parcel of land as an investment requires localised experts, knowledge of local language and dense bureaucratic negotiation. This has been eased, to some extent, explains Desai, by local authorities already acquiring land for any potential future projects. In such cases, a private party can take over the land from the local body on fulfilling the prescribed conditions, and not wait for the government to acquire the land. But in other cases, like bullet train projects, the path of the track is constantly being manoeuvred to fit evolving situations, and land acquisition is bound to take more time, explains Desai. Foreign investors are also staying away from public-private partnerships to avoid red tape, says Gandoak. “PPPs from a foreign investor perspective remain quite limited as perceptions regarding corruption and bureaucratic red tape still bother them,” he explains. “If investors start going to court regularly to enforce contract terms against Indian promoters, the marketplace will see them as aggressive investors to be avoided in future deals.” - Vishwang Desai, Desai & Diwanji
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