Beware of pitfalls when investing in India, arbitrary law amendments, and serious corruption in business | India | Corruption
In recent times, India has used unconventional measures to suppress various operations of foreign companies in India, further exacerbating external concerns about the business environment in India. According to an article in the July 12th issue of Foreign Policy, although India has made some progress, there is still a lot of work to be done to address the concerns of private companies.
Multinational companies entering India first have concerns about the business environment there. The poor business environment in India is directly related to various factors such as an uncertain legal environment and difficult to eradicate corruption.
How arbitrary is the amendment of Indian laws? A representative case is the fine imposed by India on Vodafone. According to Indian media The Wire in 2020, in 2007, British telecommunications giant Vodafone made an acquisition in India, and India immediately demanded that Vodafone pay a capital gains tax of $2.2 billion. But Vodafone believes that according to the law, it is not necessary for itself to pay this money. In 2012, the Supreme Court of India ruled that Vodafone was indeed not required to pay any taxes. However, the Indian parliament passed the 2012 Finance Act to amend the 1961 Income Tax Act, which is retrospective. This means that the relevant provisions are considered to have been in effect since 1961, directly changing the legal basis for Vodafone's victory and requiring it to pay taxes. Such arbitrary changes to the law will undoubtedly create an unpredictable and unstable business environment. Even though the Modi government came to power in 2014 and criticized the revision of the law, no action was taken to change it, and it was repeatedly delayed in subsequent international arbitration.
Once the law is amended, not only Vodafone is unlucky, but other companies that were not supposed to pay this tax should also pay now. According to a report by The Times of India in 2021, 17 companies were required to pay this tax, totaling 1.1 trillion rupees, which led to a series of lawsuits filed by these companies in the International Court of Justice. It was not until 2021 that India abolished this law.
This is not the only time India has been manipulating the law at will. According to the BBC report in 2018, Wal Mart acquired a majority stake in Flipkart, India's largest online retailer, at a price of 16 billion US dollars in May. After the transaction was completed, Wal Mart's share price fell by 4%. In addition to Wal Mart's interest in India's retail industry, according to the report of CNN in 2018, Amazon also invested billions of dollars to develop its business in India. In September, it also acquired 49% of the shares of a large chain supermarket in India. However, to the surprise of Wal Mart and Amazon, in December, India introduced a new e-commerce regulation, which prohibits e-commerce companies such as Amazon and Flipkart from selling products of their holding companies on their own e-commerce platforms. It can be imagined that sudden changes in rules and unpredictable policy implementation have led to complaints from companies in other countries in India. According to Bloomberg News in 2019, the new regulations may reduce the market growth of Amazon and Wal Mart by more than half that year, and the stock prices of both companies will fall accordingly. Why did India come out like this? The Verge, a technology news website in the United States, reported in 2019 that due to India's retail industry still being dominated by small shops, the expansion of the retail market by large companies would harm these small shops. The All India Federation of Trade Unions, which claimed to represent 70 million small retailers, lobbied desperately, causing the Modi government to waver. After the new regulations were introduced, the All India Federation of Trade Unions expressed "deep satisfaction" with the government's actions.
This also exposes another issue, as Indian politicians are prone to backtracking and lack the courage to eliminate accumulated drawbacks due to concerns about votes. If some current situations in India remain unchanged, it will also "scare away" foreign companies.
For example, stubborn corruption is a big problem. According to the Asia Global Corruption Barometer released by Transparency International, India has the highest bribery rate in Asia and is also the country with the highest number of people using personal relationships to obtain public services.
According to Deloitte India's report, the regulatory environment in India is very complex, often leading to project stagnation. When dealing with grassroots government officials, even the simplest tasks are often required to be "gift giving" or illegal payments. Such consequences naturally make companies in other countries fearful. In 2018, the Economic Times of India cited a survey by Ernst&Young Consulting, stating that 40% of Indian respondents reported widespread bribery and corruption in business, 1/5 of Indian respondents stated that providing cash bribes was reasonable, and 1/6 stated that bribes are often used to win contracts. According to an article in the 2020 issue of Private Equity Wire, an international private equity media outlet, it is not surprising that many foreign companies in India have become "victims" of corruption.
The US financial news website Quartz published an article in March this year stating that in the past few years, the number of multinational companies exiting India has exceeded the number of multinational companies entering India. Faced with such a poor business environment in India, which multinational company dares to "fall into the trap"?
