This article first appeared in The Edge Malaysia Weekly on June 11, 2018 - June 17, 2018

WITH a market of 1.2 billion people and a growing middle class, it is hard for anyone to ignore the economic potential of India. Malaysian companies too have been looking at the country to expand their markets.

However, many have come back with horrifying subcontinent stories, a great number finding India too confusing to understand, especially its laws and bureaucratic system.

So what exactly are the issues and challenges when it comes to investing or accepting contracts there?

“It’s India!” jokes Brahmal Vasudevan, founder and CEO of Creador. “It is easier when you play by the rules but the rules are too complicated to be understood, and there are so many levels of government and authorities for you to get approvals from.”

Which could mean this — go to India, try to follow the rules but expect to get entangled in a lot of red tape anyway because more often than not, the regulatory environment is so opaque, nobody really knows what to do.

Because doing business in India is not easy, TMF Group director Jatin Mehta advises foreign companies to engage knowledgeable locals to guide them through the regulatory, financial, bureaucratic and cultural complexities.

In an article published on TMF Group’s website, Jatin says, “[To start a business in India] it can take between one and four months to complete all the required procedures, with fees and add-on costs dependent on the size and type of business being registered.”

TMF Group is a global corporate consultancy services company that has a presence in over 80 countries and six Indian cities.

But for foreign companies used to much shorter waits, one to four months to register a business is too long. In Malaysia, for instance, it only takes an hour to register a business for a sole proprietorship and partnership, and a day for limited liability companies.

Jatin says the long process in India is due to the stringent provisions imposed by the Companies Act 2013, which was introduced by Indian lawmakers with the intention to create a modular law for the economy.

“Post-implementation, dozens of amendments, circulars and notifications were issued by the Ministry [of Corporate Affairs] to mend loopholes in the provisions of the Act. The increase in the compliance burden has, to a great extent, curbed the incorporation of companies in India,” he adds.

Being the largest democracy in the world also brings about various difficulties when it comes to dealing with the different levels of government, which could comprise different political parties and coalitions.

According to a senior executive of an infrastructure company that has had projects in India, the different levels of government in India mean laws and regulations are also different, resulting in a lot of confusion.

“The laws of the state and central governments are two different sets. And then, after you have cleared all the regulations at the state and central governments, and you want to get permits and approvals to start the project, you have to deal with the local government.

“These local governments are elected representatives, so they are also politicians. They will have their own agenda even if you have been awarded a contract by either the state or central government,” explains the senior executive.

He says it takes 9 to 12 months to get an infrastructure project off the ground in India due to the complexities in obtaining construction permits. Interpretation of laws and regulations also often differs from one officer to another in a different government department.

Another executive who used to work with Mudajaya Group Bhd says when it comes to land acquisition, it is a nightmare. Mudajaya owns a 26% stake in RKM Powergen Pvt Ltd, which owns and runs a 4 x 360mw coal-fired power plant in Chattisgarh, India.

The project was delayed for several years because of the long lag in regulatory approvals for RKM Powergen to source coal and for the completion of the power purchasing agreement. In addition, there were other regulatory issues.

“A number of projects that involve private land acquisition for mega projects have been delayed or cancelled because of objections from villagers and landowners … they also expect higher prices from foreigners,” says the executive.

He highlights other regulatory issues, including the import of duty-free items, laws governing foreign workers in India as well as banking and foreign exchange control regulations.

Malaysian companies or investors who have had their fingers burnt in India include a number of big names such as the country’s second wealthiest businessman T Ananda Krishnan (Aircel Ltd) and Axiata Group Bhd (Idea Cellular Ltd).

Ananda is at risk of losing the entire US$7 billion (about RM27.8 billion) he invested in Aircel over the past 12 years because of bankruptcy proceedings commenced by Aircel in March.

Adding to the misery, the tycoon and his former right-hand man Ralph Marshall are being investigated by India’s Central Bureau of Investigation in a 2G spectrum allocation scandal that rocked the country.

The Indian landscape has also been tough for Malaysia’s state-owned Axiata, which saw its profit after tax in the first quarter ended March 31 impacted by a share of business losses from Idea of RM124.3 million, owing to a devastating price war among Indian telecommunications companies.

Moreover, the pan-Asian telco is girding itself for a technical impairment of RM2 billion to RM3 billion when the merger between Idea and Vodafone India takes place in the third quarter of the year.

Another company bogged down in India is Scomi Engineering Bhd, which is ensnared in an arbitration process with the Mumbai Metropolitan Region Development Authority over cost escalations in the Mumbai Monorail project, despite a partnership with Indian construction giant Larsen & Toubro.

The difficulties in conducting business in India aside, there are still roles for foreign companies to play that could result in a win-win situation, the former Mudajaya executive remarks.

“Joint-venture partners are generally looking for Malaysian contractors with healthy balance sheets, good track records and cheaper funding options as the financing cost in India is very high,” he says.

Creador’s Brahmal says as opposed to investing in Malaysian companies with Indian ventures or contracts, he prefers to invest directly in local Indian companies as they have a deeper understanding of the market.

“This strategy has been highly successful for us and we have made 10 investments in Indian companies. Gross returns have exceeded 30% per annum, with investment in Cholamandalam Investment and Finance Co Ltd generating 5.1 times returns,” the fund manager adds. 
 

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