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Title: Inaugural


1
INTERNATIONAL OPPORTUNITIES IN WATERINVESTMENT
IN INDIA
Inaugural Green India Summit Washington,
DC October 15, 2008 Mark J. Riedy, Esq. Andrews
Kurth LLP 1350 I Street, NW, Suite
1100 Washington, DC 20005 Tel (202)
662-2756 Cell (703) 201-6677E-Mail
markriedy_at_andrewskurth.com
2
WATER CRISISA Thirsty World
  • According to the World Health Organization, 1.1
    billion people around the world lack access to
    safe water sources.
  • 2.9 Billion have no access to sanitation.
  • A child dies every 8 seconds from drinking
    contaminated water.
  • 80 of all illness and death in the developing
    world is due to contaminated water.
  • By 2015, 40 of the worlds population, or about
    3 Billion people will live in countries where it
    is difficult or impossible to get enough water to
    satisfy basic needs.
  • Water development underpins food security,
    livelihoods, industrial growth and environmental
    sustainability.
  • UNDP Millennium Development Goal 7 To ensure
    environmental sustainability --
  • Improve access to water and
  • Reasonable access is defined as the availability
    of at least 20 liters per person per day from a
    source within one kilometer of the dwelling.

3
WATER CRISISWater Rich v. Water Poor Countries
4
INDIA GENERAL INFORMATION
  • 1947 India achieves independence from Britain
    embarks on socialist economic policies.
  • 1991 Foreign currency crisis, prompted by
    rising oil prices, forces India to open up to
    foreign trade investment.
  • 1998 India tests nuclear weapons U.S. and
    other nations introduce economic sanctions.
  • 2001 U.S. lifts economic sanctions.
  • 2004 Congress Party wins a surprise victory in
    national election.
  • 2005 U.S. and India sign framework agreement
    for civilian nuclear cooperation.
  • 2006 U.S. House and Senate pass civilian nuclear
    legislation by overwhelming margins and President
    Bush signed it into law in late 2006.
  • 2007 Text of bilateral pact unveiled
    simultaneously in India and U.S.
  • July, 2008 Indias left withdraws support for
    GOI, and calls for a vote of no confidence.
    India submits a draft nuclear safeguards accord
    to International Atomic Energy Agency (IAEA).
    Prime Minister Manmohan Singh calls for a vote of
    confidence for his government and wins.
  • August, 2008 IAEA approves Indias nuclear
    inspections plan.
  • September, 2008 45-Nation Nuclear Supplier
    Group approves nuclear deal. U.S. House of
    Representatives also approves nuclear deal.
  • October, 2008 U.S. Congress approves the
    nuclear deal with India, and President Bush
    enacts it into law.

5
INDIAS ECONOMY IN A NUTSHELL
  • A. Indian economy grew 9.4 in FY 2006-2007.
    However, GDP growth is expected to slow down to
    8.6 in FY 2007-2008. This slow down is due to
    rising interest rates and an appreciating Rupee
    (from nearly Rs 42.5/US1 to approximately Rs
    39.5/US1). This growth displays momentum on par
    with Chinas growth of 9.9 in 2005. Chinas
    economy has grown by 10.2, 9.8, 10.4 and 10.7
    in the first, second, third and fourth quarters
    of 2006. Chinas GDP growth is approximately 11
    for 2007.
  • B. Foreign Direct Investment into India is
    projected at nearly US20 Billion plus for 2008
    versus China which is at a projected US80
    Billion plus for the same period.
  • C. Indias foreign exchange reserves grow from
    US160.677 Billion since early 2006 to over
    US312 Billion today a tremendous near-term
    growth (versus China at more then US1 Trillion).
    These reserves comprise gold, overseas
    currencies and special drawing rights with the
    International Monetary Fund.
  • D. Sectors with least regulation have grown the
    fastest.
  • Film production (largest film industry in the
    world).
  • Cable TV distribution (over 70 Million homes with
    cable).
  • IT/ IT services (US17 Billion in exports in
    2005).
  • Pharmaceuticals (9th largest in the world).
  • Informal retail - Mom Pop Shops (informal
    retail accounts for 97 of retail sales).
  • E. India is trying to balance the desire to
    regulate the unregulated (e.g. Film, Cable TV,
    IT/IT Services, Pharmaceuticals, Information
    Retail) sectors, while de-regulating other
    sectors. India often defaults to creative
    taxation when it cannot regulate directly.

6
INDIAS ECONOMY IN A NUTSHELL (cont.)
  • India ranks as a top investment destination
  • Top destination for retailers in AT Kearneys
    Global Retail Development Strategy.
  • Second most attractive destination for
    manufacturing investors as per AT Kearneys
    latest FDI confidence ranking.
  • Leading destination for IT and IT enabled
    services with revenues of US28.2 Billion in
    2004-2005.
  • Attracted more than 3 times foreign investment at
    US7.96 Billion during the first half of FY
    2005-2006 compared to US2.38 Billion during
    corresponding period of FY 2004-2005. However,
    this FDI doubled to US15.7 Billion in FY
    2006-2007.
  • G. More than 60 of US Fortune 500 companies are
    outsourcing to India. Outsourcing in India is
    growing by more than 30 annually. Merrill Lynch
    claims that Indias outsourcing industry will
    create nearly 200,000 jobs per year in India, and
    require more than 15 million square feet of
    commercial space, alone, each year. Outsourcing
    in India in 2004 was a US15 Billion business.
    In early 2007, this business is providing nearly
    US47 Billion in annual revenues. In 2008, this
    business grew by 33 to US64 Billion.

7
INDIAS GDP GROWTH RATE 1998-2006
2006-2007
2005-2006
2004-2005
2003-2004
2002-2003
2001-2002
2000-2001
1999-2000
1998-1999
8
GROWTH OF U.S.-INDIA TRADE 2001-2006
9
WATER IN CHINA
  • China has 20 of the worlds population and 7 of
    the worlds water resources.
  • Groundwater usage has almost doubled since 1970.
  • Some city wells need to descend more than 600
    feet to reach clean water.
  • China is now reaching back to one of Maos
    unrealized plans
  • A US62 billion South-to-North Water Transfer
    Project to funnel more than 12 trillion gallons
    northward every year along three routes from the
    Yangtze River basin. If fully built, it would be
    completed in 2050.
  • However, roughly 41 of Chinas wastewater is
    dumped in the Yangtze river, raising the concern
    that siphoning away clean water to the north will
    intensify the pollution levels in the south.
  • In north China, pilot projects are underway to
    try and reduce water loss from winter wheat
    crops.
  • Some cities have raised the price of water to
    promote conservation. However, the price of
    water stays subsidized in most places.

10
WATER IN INDIA Fastest Growing Indian
Cities30 Million Person Cities/ Urban
Agglomerations
  • Category Number of Persons
  • 10 Million
  • 5-10 Million
  • 3-5 Million
  • 2-3 Million
  • 1-2 Million
  • Cities
  • Mumbai, Kolkata, Delhi
  • Chennai, Banglore, Hyderabad
  • Ahmedabad, Pune
  • Surat, Kanpur, Jaipur, Lucknow, Nagpur
  • Patna, Indore, Vadodara, Bhopal Coimbatore,
    Ludhiana, Kochi, Agra, Vishakapatnam, Agra,
    Varanasi, Madhurai, Meerut, Nashik, Jabalpur,
    Jamshedpur, Asanol, Dhanbad, Faridabad, Alahabad,
    Amritsar, Vijaywada, Rajkot

11
WATER IN INDIAImpact of Deficiencies
  • Potable Water is one of the greatest, if not the
    greatest, need in India.
  • Widespread water-borne diseases cholera,
    typhoid etc.
  • Annual loss of Rupees 3.660 Trillion (US91.5
    Billion) per year due to poor water quality and
    sanitation (as per World Bank estimates).
  • Annual Cost of Environmental Degradation
    approximately 4.5 of Indias GDP.
  • Water Pollution accounts for 60 of the economic
    cost of environmental degradation.

Every One Million Indian Rupees (US25,000) spent
on infrastructure now saves approximately Rupees
10 Million (US250,000) on cost escalation and
public health care due to deficient services
later!
12
WATER IN INDIA Water Industry Information
  • Industry estimates place the value of the current
    Indian water wastewater market to be
    approximately US1.24 billion.
  • India possesses 16 of the worlds population but
    just 4 of its water resources.
  • Approximately 75 of the rural and 85 of the
    urban population currently have access to public
    water supplies. These significant percentages do
    not necessarily equate to clean and healthy
    potable water. Further, drinking water supplies
    in many parts of India are intermittent and
    transmission and distribution networks for water
    are in need of urgent improvement.
  • The water consumption is expected to grow by
    20-40 over the next 20 years.
  • Compounding the water scarcity is wastage--- 213
    billion cubic meters out of 690 billion cubic
    meters of surface water is wasted each month. It
    is also estimated that water leakage, pilferage
    and wastage amounts to 50 of the total flow.
  • The Government of India (GOI), through its
    updated National Water Policy 2002, is
    encouraging Public-Private Partnerships in
    planning, development, investment/finance,
    construction, operations and management of water
    resources projects.
  • Several States have invited private sector
    participation in water projects on a BOT/BOOT
    basis. British companies have already
    predominantly participated in some of these
    projects
  • Water Utilities such as United Utilities in
    Tirupur (Tamil Nadu) and Thames Water in
    Bangalore (Karnataka).
  • UK construction companies, such as Halcrow, Mott
    McDonald and Babtie, and U.S. companies such as
    Black Veatch are also active in the market.
  • Another international major active in India is
    Bechtel from the U.S.
  • Opportunities in India are developing in the
    following areas desalination, wastewater
    recycling technologies, common effluent treatment
    plants, RO and ultra filtration technology, water
    quality improvement and monitoring systems,
    trenchless pipelaying technology, water leakage
    management, improvement and rehabilitation of
    water supply network, chemical (arsenic, ammonia,
    chromium, fluoride) removal systems, large
    municipal projects to provide continuous and safe
    water supply.

13
WATER IN INDIA Consumption Scenario
14
WATER IN INDIACURRENT SCENARIO
  • The GOI is unable to meet the increasing demand
    of infrastructure and services.
  • In view of physical and financial resource
    constraints and concerns of equitable
    distribution, the Indian water supply has not
    kept pace with demand.
  • Need for alternative models involving
  • Commercialization to ensure cost recovery
    sustainability.
  • Privatization to bring in finance, technology
    management capacity.
  • Public participation to ensure responsiveness and
    sense of ownership/involvement.
  • Regulatory authorities to ensure integration and
    co-ordination.

15
WATER IN INDIACURRENT SCENARIORoute for Private
Sector Participation
  • The concept of a public-private-partnership is
    generally seen as one of these models
  • Build-Operate-Transfer (BOT)
  • Build-Own-Operate-Transfer (BOOT)
  • Build-Operate-Lease-Transfer (BOLT)
  • Rehabilitate-Operate-Transfer (ROT)
  • Design-Build-Finance-Operate-Transfer (DBFOT)
  • India follows these models in structuring
    Projects.

16
WATER IN INDIACURRENT SCENARIOOptions for
Private Sector Participation
  • The available contractual options for increasing
    private participation in water supply
    sanitation projects being undertaken in India
    generally are
  • Service contracts
  • Management contracts
  • Leases
  • Concessions
  • Today, the contracts are implemented more
    frequently through larger infrastructure project
    structuring.

17
WATER IN INDIACURRENT PROJECTS
  • The World Bank, the Asian Development Bank and
    the U.K. Department For International Development
    (DFID) are supporting millions of dollars worth
    of water sector restructuring/improvement
    projects across India . Some of the World Bank
    supported Water Projects currently active in the
    market include
  • Active World Bank Supported Water Projects in
    India represent a Total Project Cost (US
    Million) as follows
  • Karnataka Municipal Reform Project US310
    Million
  • Hydrology Project Phase II US135.05 Million
  • Third Tamil Nadu Urban Development Project (TNUDP
    III) US435 Million
  • Punjab Rural Water Supply and Sanitation
    US261.4 Million
  • Madhya Pradesh District Poverty Initiatives
    Project US134.7 Million
  • Technical Assistance for Infrastructure PPPs
    US.45 Million
  • Kerala Rural Water Supply and Environmental
    Sanitation Project - US89.8 Million
  • Second Karnataka Rural Water Supply and
    Sanitation Project US193.44 Million
  • Karnataka Urban Water Sector Improvement Project
    US51.53 Million
  • Uttaranchal Rural Water Supply and Sanitation
    Project US224 Million
  • Maharashtra Rural Water Supply and Sanitation
    "Jalswarajya" Project US268.6 Million
  • India Emergency Tsunami Reconstruction Project
    US682.8 Million (Majority of investment to be
    applied towards housing and construction)

18
WATER IN INDIACURRENT PROJECTS (contd.)
  • New Tirupur Area Development Corporation Limited,
    a group of private and public entities
  • First public-private partnership in the water and
    sanitation sector in South Asia operating on a
    Build-Own-Operate-Transfer (BOOT) basis. 
  • Today, thanks to this initiative, Tirupur
    residents now receive water every day for 4-6
    hours, as opposed to receiving water only on
    alternate days, at the best of times, prior to
    the project.
  • Household water connections have increased by
    8,000 and local industry now has a reliable
    source of water.  One hundred percent of new
    domestic users have paid for the water
    connections to access high quality water - the
    fee covers the capital costs of each new
    connection.
  • The Tirupur project is a great example of how
    private sector involvement in public service
    delivery can dramatically improve access to water
    and sanitation.
  • The U.S. Government, through the Agency for
    International Development (USAID), assisted in
    underwriting the risk by providing a partial
    guarantee and technical assistance to this
    public-private partnership, an important first
    model in India to address the critical issue of
    water service delivery.
  • In the case of Tirupur, the private sector raised
    the financing - Rupees 1,023 crore (US227.3
    Million) - necessary to finish this
    capital-intensive project.  This public-private
    partnership also took responsibility for the
    development, design, construction, operations and
    maintenance of the project. 
  • Independent auditors and engineers have been
    engaged by the local government and project
    partners to oversee the project.

19
WATER IN INDIACURRENT PROJECTS (cont.)
  • Navi Mumbai (near Mumbai) has shown how to
    improve water and sanitation services by using
    performance-based contracts to manage its water
    distribution and transmission system. 
  • Revenues were increased by almost 45 the year
    following the introduction of the new contracts!
  • Hyderabad Metropolitan Water Supply Sewage
    Board Some of the salient features are
  • Drought innovation-multiple taps.
  • Surface water line-to avoid pollution.
  • Water Lok Adalat quasi judicial tribunal to
    resolve water disputes settlement of cases
    amount to nearly Rupees 525 Million (US13.1
    Million).
  • The Government of Tamil Nadu has made rain water
    harvesting mandatory for all public and private
    buildings in the State in 2003.
  • Revitalization of a city lake in Gujarat in 2002.
  • Revitalization of primary tank for storing water
    from the lake by the local municipality with
    involvement of a civic society by cleaning,
    dredging and lining the tank.
  • Project funded by the Life Insurance Corporation
    of India (LIC) and the Government of Gujarat.

20
WATER IN INDIACURRENT PROJECTS (cont.)
  • The State of Uttar Pradesh commissioned an
    Australian consulting firm for 2 water sector
    projects
  • US5 million contract for the preparation of a
    Decision Support System to guide future water
    allocation and investment decisions across the
    Gangetic Plains of Uttar Pradesh.
  • US3 million World Bank funded consulting
    contract to prepare an institutional
    strengthening and reform roadmap for the massive
    Uttar Pradesh Irrigation Department (UPID). The
    project aims to achieve structural, policy and
    capability reforms to enable the Department to
    deal with emerging water sector management
    challenges in Indias most populous State, and
    one of its poorest.
  • The State of Uttar Pradesh also plans to spend
    US636 million on basic facilities including
    potable water, sewers, drainage, sanitation, and
    electricity.
  • The International Finance Corporation (IFC)
    recently lent US15 million to the Indian
    Hydropower Development Company for construction
    and acquisition of six smaller hydroelectric
    generation facilities in the states of Himachal
    Pradesh, Maharashtra, and Madhya Pradesh.
  • IFC also entered into an agreement to purchase
    carbon credits worth more than US6 million from
    these hydropower facilities. This transaction on
    behalf of the Dutch Government will assist the
    Netherlands meet its commitments under the Kyoto
    Protocol.
  • The National Bank for Agriculture and Rural
    Development has approved approximately US4
    million for 24 water supply projects in the State
    of Himachal Pradesh.
  • The projects will provide drinking water to
    nearly 45,000 people.

21
WATER IN INDIACURRENT PROJECTS (cont.)
  • The Kolkata Municipal Corporation is planning to
    build a new US9 million pumping station with a
    15 million gallon per day.
  • The Tamil Nadu Electricity Board and Tamil Nadu
    Water Supply and Drainage Board have started a
    project to install separate power lines and
    transformers for pumping stations in the water
    supply system in Mettur.
  • The Delhi Water Supply Authority is in the
    process of finalizing plans to build a 50 million
    gallon per day water treatment plant.
  • Andrews Kurth has advised a California-based
    privately held petroleum and biofuels developer
    in its project involving the creation of
    self-sustaining, clean water systems using solar
    energy technology to install up to 5,125
    solar-water treatment units in remote areas of
    India that lack direct access to existing
    transmission grids and potable water.
  • The company has entered into a US100 million
    agreement with GE which will provide 200-Watt
    solar modules and 5,125 water filtration units
    that are capable of providing 7.57 cubic meters
    (2,000 U.S. gallons) of clean potable water, or
    enough water to meet the daily requirements for
    500 people. By utilizing GEs solar-energy and
    water filtration technologies, the Company will
    be able to reach many remote and rural areas
    throughout India, Bangladesh, Nepal, Malaysia and
    Africa.

22
WATER IN INDIA WATER PROJECTS - DESALINATION
  • GE Water Process Technologies, a unit of GE
    Infrastructure, has won its first sea water
    desalination plant project in India from Tata
    Chemicals Ltd.
  • The contract is valued at US6.5 million. GE will
    provide Tata Chemicals a Mobile Sea Water
    Desalination plant for 4 years of operation on a
    build-own-operate (BOO) basis.
  • GEs latest desalination technology is capable of
    producing up to 300,000 cubic meters/day of high
    quality potable water while also helping to
    minimize water shortages.
  • The IFC recently entered directly into the Indian
    water sector, with a US25 million financing for
    the Chennai Water Desalination Limited, the
    country's first private project to supply
    desalinated water.
  • UAE-based Tecton Engineering Construction LLC
    is looking to India to set up desalination plants
    and other water projects.
  • A low temperature thermal desalination plant has
    been developed by the Indian National Institute
    of Ocean Technology (NIOT), a unit of the Indian
    Department of Ocean Development (DOD) in
    Lakshadweep.
  • The plant will have a capacity to produce 100,000
    liters of water per day.

23
WATER IN INDIA WATER PROJECTS DESALINATION
(cont.)
  • The Nuclear Power Corporation of India has
    commissioned a seawater desalination plant to
    produce potable water of a capacity of 2.4
    million liters per day to cater to the
    requirement of an industrial colony in Kudankulam
    in a coastal area of the State of Tamil Nadu.
  • Tata Projects has designed, supplied, installed
    and commissioned the project on turnkey basis.
  • This project will be the first sea water
    desalination plant adopting multi-vapor
    compression (MVC) technology in India.
  • The contract value is over Rupees 1,000 million
    (US25 Million).
  • The Indian Bhabha Atomic Research Centre (BARC)
    is extensively engaged in RD for desalination.
  • BARC has discovered various methods of
    desalination, which include Reverse Osmosis (RO),
    Multistage Flash (MSF) and Low Temperature
    Evaporation (LTE)
  • BARC has established several small desalination
    plants in rural Rajasthan, Gujarat, Andhra
    Pradesh and Tamil Nadu that produce 30,000 liters
    per day of clean drinking water.

24
NAVIGATING INDIAS LEGAL SYSTEM
  • General
  • Based on English Common Law/Parliamentarian
    System of Government.
  • Unitary court system However substantial
    backlog/delays in cases If no new cases were
    filed, it would take approximately 350 years to
    clear current court case backlog (not including
    administrative judicial and quasi-judicial case
    backlogs).
  • Administrative judicial bodies.
  • Quasi-administrative/judicial bodies.
  • Income Tax Appellate Tribunal (ITAT) (tax appeal
    matters).
  • Advance Authority for Rulings (AAR) (advance
    clarifications on tax issues).
  • Dispute Resolution Tribunal (DResT) Central
    Appellate Authority (started 2005) (mediation
    is final and binding).
  • Debt Recovery Tribunal (DRT) (used primarily by
    banks/financial institutions to recover debt).

25
NAVIGATING INDIAS LEGAL SYSTEM (cont.)
  • With 26 equity, a minority shareholder receives
    negative veto rights (i.e., can advance a special
    resolution) while 76 equity provides a majority
    shareholder positive veto rights and complete
    control as the minority shareholder cannot block
    a special resolution.
  • India currently has no concept of preferred stock
    (but rather preference shares) or limited
    partnerships (only general partnerships are
    permitted) although a proposed amendment to the
    Companies Act would provide these mechanisms /
    entities.

26
NAVIGATING INDIAS LEGAL SYSTEM (cont.)
  • B. Tax Corporate Structuring Issues for
    Investors
  • 1. Double Taxation Avoidance Treaties (U.S.,
    Mauritius (best treaty for reducing taxes),
    Singapore (requires an operational company with
    US200,000 Singapore Dollars of expenses in
    the previous fiscal year), Cypress (better for
    debt than Mauritius, as it reduces interest
    income tax from 20 to 10), UAE).
  • 2. Reduction of tax and non-tax liabilities
    through limited liability vehicles/firewalls.
  • 3. Use of bilateral investment treaties/agreements
    .
  • 4. Treaties based on a combination of OECD and UN
    model conventions.
  • 5. No anti-treaty shopping provisions in most
    treaties makes for better investment structuring.

27
NAVIGATING INDIAS LEGAL SYSTEM (cont.)
  • Current Indian Tax Consideration After New India
    Budget Announcement of February 28, 2007
    (Education Cess Increased to 3 from 2).
  • Dividends Distribution Tax -- Increased from
    14.025 to 16.995.
  • Indian Domestic Company Corporate Tax --
    Increased from 33.66 to 33.99.
  • India Corporate Income Tax on Foreign
    Corporations -- Increased from 41.82 to 42.23.
  • Capital Gains Tax (may also be subject to the
    increase in the educational cess tax from 2 to
    3)
  • Long-term (gt1yr)
  • listed securities 0
  • non-listed stock/other assets 20
  • Short-term (lt 1 yr)
  • listed securities 10
  • nonlisted stock/other assets 33.6

28
NAVIGATING INDIAS LEGAL SYSTEM (cont.)
  • Fringe Benefits Tax -- Increased from 33.6 to
    33.99 on value of certain benefits (it also is
    now applied to employee stock options and it is
    not a deductible expense)
  • Transfer Pricing -- new regulations with up to
    300 penalties versus up to 40 penalties in the
    U.S.
  • g. Special Economic Zones (SEZs) have up to
    100 graded tax holidays and currently there are
    more than 396 SEZs with formal GOI approval,
    after the GOI lifted the 150 SEZ approval
    restriction. In addition, 149 SEZ applications
    have been notified and 180 have received In
    Principle Clearance. The GOI recently imposed a
    new SEZ cap, following the recent massacre at the
    SEZ near Kolkata. The new Budget did not extend
    the SEZ tax holiday.
  • The February 2007 Budget Announcement did not
    extend the IT tax holiday which expires on March
    31, 2009 however it did add a new 10 Minimum
    Alternative Tax for otherwise tax exempt Software
    Technology Parks and Export Oriented Units.
    With the 3 education cess, this tax becomes
    10.55 for domestic, and 11.33 for foreign, IT
    companies.

29
NAVIGATING INDIAS LEGAL SYSTEM (cont.)
  • Also, Venture Capital Funds (VCFs) registrations
    from SEBI, which previously were accorded a tax
    pass through status, only will receive this
    status if investing into nine (9) designated
    sectors This change only affects domestic, and
    not foreign, funds with a FVCI registration from
    SEBI.
  • Service Tax increased from 12.24 to 12.36 due
    to the 1 increase to 3 in the education cess.

30
WATER IN INDIARoadblocks in Water Infrastructure
Projects
  • Market Uncertainties
  • Varying Demand
  • Fluctuating Prices/Land Value
  • Production cost of water is the cost to collect
    the water from the river, treat it, pump it to
    the city, store it and distribute it to the
    consumer and finally bill it. According to the
    Indian Institute for Social and Economic Change,
    this figure is Rupees 23.13 (US0.57) a
    kilolitre.
  • Water tariffs in India are among the lowest. The
    average price of drinking water in the U.S. is
    US0.5 per cubic meter. This translates to Rupees
    3, as per purchasing power parity of Indians. The
    price in the Indias capital is 35 paisa (less
    than US0.01) per unit.
  • Procedural Hurdles
  • Land acquisition/transaction land titles are
    problematic and acquisition time frames vary from
    state-to-state.
  • Development permissions/Operational permits are
    time consuming to obtain and can vary
    substantially in number from state-to-state.
  • Inter-agency co-ordination (Local body v. Utility
    Agencies) causing bureaucratic delays.
  • Construction Risks
  • Price escalation cost over-runs.
  • Time over-runs.
  • Labor unrest.

31
WATER IN INDIARoadblocks in Water Infrastructure
Projects (cont.)
  • Operational Risks--
  • Tariff realization.
  • Cost recovery.
  • Political Risks--
  • Frequent policy changes.
  • Conflicting political interests.
  • Judicial Interventions--
  • Court orders/directives can take long time
    periods to obtain.
  • Regulatory authority is not always clear.

32
LEGAL ISSUES PROTECTING YOUR INVESTMENT
  • General
  • Engage Qualified Counsel, Accountants and
    Consultants at the Outset.
  • Need for Upfront Well-Considered Tax and
    Corporate Structuring.
  • Due Diligence is Key.
  • Ensure that your partner is trustworthy and has
    the financial ability to implement the
    investment.
  • Enshrine IP protection in all contracts.
  • Contracts Require Certain Protective Clauses.
  • Neutral-country arbitration is a must (I have
    worked on two India-based arbitrations (i) 14
    years on one and (ii) 8 years on the other won
    each of them).
  • e.g., London venue with ICC, UNCITRAL, London
    Court of International Arbitration Procedural
    Rules.
  • If pressed into arbitration in India, bifurcate
    the arbitration clause so smaller disputes are
    arbitrated in India and larger ones are
    arbitrated in a neutral country.
  • Andrews Kurth recently won a significant
    arbitration in India after 8 years of proceedings
    under the Indian Arbitration and Conciliation Act
    of 1996 and India Procedural Arbitration Rules.

33
LEGAL ISSUES PROTECTING YOUR INVESTMENT (cont.)
  • General Contracts to Have Certain Protective
    Clauses cont.
  • A forward waiver provision requiring Indian
    joint venture partners to provide No Objection
    Certificates (NOCs) upon request of the U.S.
    partner to avoid future problems in entering into
    similar industry ventures with other parties.
    The foreign party in such circumstances must
    demonstrate that the new investment would not
    adversely impact the existing joint venture
    Press Note No. 1 (2005 series) versus Press Note
    No. 18 (1998 Series). Indian companies had been
    holding foreign companies hostage, requiring
    payments for NOCs.
  • (i) You must be very careful when investing into
    an existing joint venture established before, and
    in certain circumstances where the joint venture
    was formed after, the issuance of Press Note 1
    (2005 Series), as you may step inadvertently
    into a trap and be subject to the strictures of
    Press Note 18 (1998 Series)
  • (ii) Press Note 1 (2005 Series) is not
    retroactive.
  • Strong indemnification clauses.
  • Force majeure this provision permits suspension
    of contractual obligations under certain
    circumstances. Be certain to protect against
    terrorism and unusual situations such as the
    India-Pakistan border standoff several years ago.
  • Compliance with U.S. Foreign Corrupt Practices
    Act (FCPA) and Indian anti-bribery laws
    accusations particularly can adversely affect
    public company stock. I have obtained Justice
    Department Opinions on India and have set up
    compliance programs to comply with the FCPA.
  • Need for insurance requirements to protect
    transactions, such as political risk insurance
    against expropriation , and arbitration award
    enforcement insurance both from the U.S.
    Overseas Private Investment Corporation (OPIC).

34
LEGAL ISSUES PROTECTING YOUR INVESTMENT (cont.)
  • Need for transfer pricing protective provisions
    particularly in related party (parent-subsidiary)
    transactions (e.g. outsourcing).
  • The GOI is aggressive on transfer pricing
    requiring mandatory tax audits, if the annual
    aggregated contract amounts between related
    parties exceed a very low US3.3 Million
    threshold (Rs. 15 Crore) which previously was
    US1.1 Million (Rs. 5 Crore).
  • As mentioned, the GOI imposes the largest
    transfer pricing penalties in the world ranging
    between 100-300 and without any benchmarks on
    applying this range. The similar top penalty in
    the U.S. is at 40.

35
LEGAL ISSUES PROTECTING YOUR INVESTMENT (cont.)
  • Investment Risks
  • Taxation issues (Here is where the GOI can
    severely tie you up and substantially, adversely
    affect your investments.)
  • India dramatically changes core tax rules
    regularly- usually not to the benefit of foreign
    investors.
  • GOI virtual permanent establishment (PE) cases
    (100 penalties and interest, plus an additional
    8 (originally 18) annual compounded interest if
    payments are not made to the GOI before
    contesting the assessment). The GOI attempts to
    assert tax jurisdiction over income, where the
    assessee does not have a demonstrated physical
    presence in India. (Permanent Establishment
    generally requires (1) physical presence, (2)
    equipment, and/or (3) employees on the ground for
    specific periods of time. The GOI imposed a
    virtual permanent establishment on (1) credit
    card companies and (2) airline ticketers.
  • GOIs new set of PE cases markedly have increased
    recently a US37 Million tax charge was imposed
    on one company for one assessment year (5 years
    ago) plus 100 penalties and interest measured
    from 5 years back. The GOI is pursuing the
    companys worldwide income. It also could be hit
    in each of the next 4 assessment years since the
    original charge in a similar fashion. The total
    sum could be staggering and will require years of
    litigation to resolve.

36
LEGAL ISSUES PROTECTING YOUR INVESTMENT (cont.)
  • GOI is increasingly becoming more aggressive in
    transfer pricing cases. The Delhi Branch of the
    GOI Tax Department recently required more than
    450 foreign subsidiaries to come in to prove they
    are not under invoicing but are transacting with
    arms length contracts even if they did not
    qualify for a mandatory tax audit. The GOI has
    been targeting private insurance companies with
    foreign partners, telecom operators and service
    providers. The GOIs seizure of documents in
    these cases can cause data privacy concerns, due
    to Government corruption.
  • U.S.-India Competent Authority Proceedings
    Generally these proceedings offer a mechanism to
    suspend India-based tax litigation and place
    contested amounts outside of India through bank
    guarantees. However, the Indian Competent
    Authority is afraid of his shadow,
    particularly where large sums are contested.
    Litigants, thus, likely may face a stalemate,
    because the Indian Competent Authority may not
    decide (notwithstanding clear-cut legal support)
    and, therefore, force litigants back into the
    turgid Indian legal system.
  • (i) Be certain that you have filed any required
    appeals in India before filing with the US-Indian
    Competent Authorities. Otherwise, if you
    encounter a frequent stalemate (as the Indian
    Competent Authority will note rule) and have not
    filed your appeals, you likely will be barred by
    the Statute of Limitations.
  • (ii) Similarly, file for a permanent injunction
    in India when you file with the US-India
    Competent Authorities to block later GOI Tax
    Department attempts to encash your bank guarantee
    in the event of a stalemate.
  • Andrews Kurth recently won the largest tax award
    case in Indian history at the Income Tax
    Appellate Tribunal level. Wins at this level
    virtually never happen. It took 9 years to reach
    this victory. We also won a large arbitration
    award which took more than 8 years to win.

37
LEGAL ISSUES PROTECTING YOUR INVESTMENT (cont.)
  • Investment Risks cont.
  • India only has 16 years experience in opening
    markets. The regulatory environment still
    evolving rapidly- expect change.
  • Corruption is still rampant in India- not so much
    top-level corruption (e.g. receipt of project
    permits as permit requirements are reduced), but
    frictional corruption across the lower levels -
    inspectors, meter readers, etc. However, you
    will find significant corruption in the Tax
    Department/ITAT.
  • Choose your states wisely. Each has different
    level of development and different levels of
    market-friendliness.
  • Relations with key neighbors- China Pakistan-
    as good as ever, but a positive course not set in
    stone.
  • Potential for radicalization of Indias
    government exists should economic reform program
    backfire. I think this risk is very low.
  • India has a growing Maoist movement- Naxalites-
    along eastern part of country. Appears to be
    growing.
  • State elections rarely are good for the
    incumbents. Expect political instability every 5
    years, particularly at the state government
    level.
  • India still has antiquated labor laws, making it
    difficult to hire short-term workers or to lay
    off employees.
  • Contract sanctity remains a major stumbling
    block.

38
LEGAL ISSUES PROTECTING YOUR INVESTMENT (cont.)
  • Mitigating Investment Risks
  • Use Indias tax treaty country partners as
    pass-through (Mauritius Singapore).
  • Encourage corporate culture of saying no to
    corruption. Once a company is recognized as
    clean, attempts to collect payoffs will drop. Do
    not work under the facilitating payments
    exception of the FCPA, because Indias
    anti-bribery laws will trip you up.
  • Join trade associations/ find sources of
    information to learn about and influence
    potential regulatory changes.
  • Do not dip your toe in the water. If you
    decide to enter India, it requires attention and
    commitment. In nearly every industry, foreign
    companies compete effectively and profitably.
  • Obtain political risk and arbitration award
    insurance policies from U.S. OPIC a must for
    infrastructure projects.

39
PROBLEM AREAS FOR INVESTORS
  • A. Restricted sectors or Low FDI caps -
    multi-brand retail trade (banned), insurance
    (26), print news media (26).
  • B. Power investments
  • 1. Lack of contract sanctity (Dabhol Power
    Project/Tamil Nadu tariffs).
  • 2. Failure of states to uniformly apply the 2003
    Electricity Act with respect to 3rd party sales.
  • C. Purchase Preference Policy- gives state and
    GOI-owned companies a 10 bid amount preference
    in government contracts. The GOI Secretary of
    Commerce and Industry, Ajay Shankar, recently
    stated that the GOI intends to phase out this
    preference in 2008.
  • D. Television carriage regulations favor
    distributors (i.e., cable companies), not content
    providers (i.e., companies that provide the
    channels).
  • 1. Content providers are required to provide
    content to all distributors irrespective of
    price.
  • 2. TRAI, the telecom regulator, has frozen cable
    TV, retail and wholesale rates at 2003 levels.

40
PROBLEM AREAS FOR INVESTORS (cont.)
  • E. Foreign investors cannot invest in existing
    real estate assets, but can invest in undeveloped
    real estate. However, FIIs are being permitted to
    do so by formal waiver.
  • 1. Need for an independent real estate regulatory
    body (like TRAI Telecom, IRDA Insurance, SEBI
    Capital Markets) is important.
  • 2. Single window clearance should be introduced
    for central, state and local government
    permitting.
  • 3. The Reserve Bank of India (RBI) is holding
    up the issuance by the GOI Securities Exchange
    Board of India (SEBI) of the required Foreign
    Venture Capital Investor Registrations (FVCIs)
    necessary for FDI real estate investments from
    foreign funds. Such Foreign Investment Promotion
    Board (FIPB) approval is markedly-less
    beneficial for foreigner investors, as those
    investors will encounter onerous GOI share
    pricing compliance and other problems at
    investment exit. Hopefully this problem will be
    cleared up shortly.
  • F. Need for independent regulator for oil gas
    distribution.
  • 1. Administrative Price Mechanism presently
    distorts the market and makes private
    distribution uneconomical.
  • G. Increase the default limit for Foreign
    Institutional Investor (FII) investments - 24
    equity now seek to be in-line with sector FDI
    caps.
  • 1. An FII can only invest up to 24 in an Indian
    company, except with special approval from the
    FIPB to go higher.

41
PROBLEM AREAS FOR INVESTORS (cont.)
  • H. Need to stabilize tax environment- tax
    regulations change frequently, with tax
    incentives regularly added and dropped.
    Recently, the GOI Finance Ministry eliminated the
    100 tax exemption on income earned by investors
    (ROI) and lenders (interest) for investments
    and loans into infrastructure projects. The
    removal of this important incentive will increase
    the costs of developing infrastructure projects.
    Notwithstanding, the GOI has preserved several
    other 10-year infrastructure-related tax
    holidays.
  • I. Heavy regulation of labor- difficult to scale
    down jobs during economically-depressed times.
    Like the power sector, the labor sector is
    subject to concurrent jurisdiction, meaning
    that the central and state governments each may
    adopt regulations. This approach
    overly-complicates the area.
  • 1. Difficult to attract contract labor for
    short-term projects.
  • 2. If more than 100 employees, then one needs
    express approval from GOI Ministry of Labor and
    state labor agencies (due to concurrent
    jurisdiction in labor sector) to eliminate
    jobs/employees or generally downsize to
    restructure. (You must create a structure to
    provide employees officer and other titles, so
    they are not held to be low-level employees
    and, thus, the company may skirt this restriction
    accordingly.)
  • 3. Concerns exist over proposed reservations,
    i.e., Indias version of affirmative action being
    applied to the private sector.

42
PROBLEM AREAS FOR INVESTORS (cont.)
  • J. Requirement for No Objection Certificate
    (NOC) from a previous JV partner where
    subsequent investment is in the same field
    potential for abuse. While Press Note 1 (2005
    Series) is an improvement over Press Note 18
    (1998 Series), it still leaves uncertainty for
    foreign investors.
  • K. Poor Infrastructure acts as deterrent to
    foreign investment in manufacturing sector must
    privatize government-owned enterprises to attract
    substantial necessary foreign capital.
  • L. High Tariffs must lower tariffs on raw
    materials imported goods, move IT telecom
    products into zero duty schemes India continues
    to have the highest customs duty rates in Asia,
    if not the world. The 2007 Budget did lower the
    peak rates of basic duties for non-agriculture
    products from 12.5 to 10, and the effective
    overall duty rates from 36.74 to 34.13.
  • M. Must rationalize complex transfer pricing
    rules reduce penalties (100-300) increase
    the low US3.3 Million level of permitted
    transfer pricing before a mandatory audit is
    initiated.

43
PROBLEM AREAS FOR INVESTORS (cont.)
  • N. Expiration of the Software Technology Park
    10-year tax exemption in 2009, unless extended.
    Moving the existing, or creating new, IT
    companies (to get around the expiration of the
    tax exemption) at the end of the tax holiday into
    a Special Economic Zone (SEZ) to obtain the
    benefit of the SEZ 10-year holiday is not
    achievable under the current SEZ statute.
  • O. Must rationalize GOI procurement processes and
    licenses ending the 10 state and GOI-owned
    company purchase preference agreement and adopt
    international best practices.
  • P. Foreign Banks must be allowed greater market
    participation to augment the development of the
    banking market and introduction of new products
    and services.
  • Q. Unregulated IT/BPO sector.
  • 1. additional training for criminal
    investigators, judges and lawyers.
  • 2. improvement in tax environment.
  • 3. inflexible labor regulations must be made
    flexible.
  • R. Must permit greater FDI in the agro- and food
    processing areas, as the agricultural value-chain
    in these areas are substantially restricted.

44
WATER IN INDIACONCLUSION
  • In nearly every sector of the economy, there are
    examples of foreign investors who have had
    success in India.
  • Dont be deterred by initial problems. Plan your
    investment well. Remain committed. And be
    prepared for an exciting time.

45
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