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Top Ten Mistakes Of U.S. Companies Heading Into India.

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11.12.2012

11.12.2012

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  • 1. Top 10 Mistakes of U.S. CompaniesHeading into IndiaNovember 12, 2012Satya S. NarayanSNarayan@rroyselaw.comHarpreet S. WaliaHWalia@rroyselaw.com
  • 2. Royse Law Firm – India Practice 2
  • 3. 1. Leaping before you look; India’s FDI regulations  GOI’s 2012 Consolidated FDI Policy along with amending Press Notes: http://www.dipp.gov.in/English/acts_rules/Press_Notes.aspx  Industry-wise sectoral caps and restrictions. Example:  Retail:  Single-Brand Retail: 100% FDI but 30% of goods must be sourced from India  Multi-Brand Retail: 51% FDI but also subject to state approval  Other restrictions: retail outlets only in cities with 1 million population; 50% of FDI on backend infrastructure within 3 years  Automatic Route v. Government Route  Prohibited Sectors (e.g. Atomic Energy, Gambling and Betting, Agriculture (with several exceptions)) 3
  • 4. 2. Using your Liaison Office for commercial activities  Liaison office may only be used for promotional activities  If it earns revenue in India it will be in breach of its RBI permission and the parent’s income attributable to Indian activities may be taxed up to 42.23% (including surcharges) (Note: Direct Taxes Code Bill, 2010, if enacted, will raise this tax rate up to 45%)  Liaison office must file annual audited financial statements with the RBI and the Registrar of Companies  Even though no tax is due, tax returns must be filed annually 4
  • 5. 3. Incorporating in India – things to keep in mind  If you are incorporating a Branch Office or Project Office, it may perform commercial activities but no manufacturing/ processing activities  Wholly-owned subsidiary permitted only in sectors where 100% FDI is permitted  Indian subsidiary is fully subject to Indian laws; even contracts it enters into with local entities will be subject to Indian law  Indian transfer pricing regulations will apply to technology transfer from foreign parent to an Indian subsidiary  Indian subsidiary of a nonresident public company will be a public limited company in India if nonresident public company would be a public company under Indian law  Old minimum physical quorum rule for board meetings eased with video conferencing alternative 5
  • 6. 4. U.S. treatment of Indian employees  Indian labor laws are very different from U.S. labor laws  More than 55 central labor laws and over 100 state labor laws  9 hour workday; 200 hours/ year overtime limit; 30 minutes/ 5 hour rest break; etc.  Termination without cause may be subject to:  Last come first go  Compensation based on years of service  Sufficient notice  Companies employing more than 100 workers must obtain government approval before they can fire employees or close down  Post-termination restrictive covenants are void (e.g., non-compete and non- solicitation clauses)  Exception: Non-compete clauses in the context of a sale of business with goodwill for consideration and even then restriction must be reasonable as to time, geography and other limitations 6
  • 7. 5. Failing to protect your intellectual property early on  Register your key export-related intellectual property assets in India: trademarks, utility patents, design patents, copyrights, geographical indications  Tailor U.S. employee invention agreements to overcome presumptions under Indian law  Require your Indian partners (including the joint venture company) to agree to:  “no contest” terms  confidentiality obligations (note: no trade secret legislation in India)  present assignment of derivative or new intellectual property 7
  • 8. 6. Using U.S. boilerplate contracts with Indian partners  Don’t rely on boilerplate U.S. contract terms  Provisions may be ineffective under Indian law (e.g. non-compete covenants)  Provisions may not override presumptions under Indian law (e.g., copyright)  Provisions must comply with Indian regulations (e.g., franchise royalties)  Need more provisions around relationship management, escalation, and interim remedies  Exclude the application of the U.N. Convention on International Sales of Goods  At a minimum, contracts should include:  Commercial terms (e.g., payment and delivery terms)  Protections to address intellectual property and confidential information  Risk allocation (e.g., indemnification; warranties and disclaimers; limitations on consequential and other damages; and require insurance)  Force majeure  Termination  Dispute resolution  Governing law 8
  • 9. 7. Your joint venture agreement may not bind the JVC  Joint venture agreements do not bind the joint venture company (JVC) unless key provisions of the agreement are included in the Articles of Association of the JVC  Some key provisions:  Distribution of revenue  Deadlock  Transfer of shares; right of first refusal; and change in control  IP ownership; IP licenses; no contest of JV partners’ IP; local prosecution and enforcement; confidentiality  Exit rights and effect 9
  • 10. 8. Failing to state the governing law in contracts with Indianpartners  Courts may determine that Indian law applies  Indian courts respect the parties’ choice of law for the contract  Choose U.S. federal/ state law or English law where possible  Caveats:  Certain U.S. or Indian laws may still apply (e.g. export laws, FCPA/ anti-corruptions laws, IP laws, antitrust/ competition laws)  Certain contracts will always be subject to Indian law:  Contracts between Indian parties (e.g. contracts between a U.S. company’s Indian subsidiary and its Indian partners)  Contracts with Indian governmental entities  Contracts with Indian consumers/ individuals 10
  • 11. 9. Not specifying a mechanism for dispute resolution  The Problem:  U.S. judgments are not automatically enforceable in India  Indian companies are not averse to litigation  Litigation experience can be frustrating: delays, uncertainty, and corruption  Arbitration is a better alternative; make it a requirement of the contract  India is a member of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958  Caveats:  Reserve court access for IPR and Confidential Information; Indian High Courts grant injunctive relief within 48 hours  Arbitration is not available against governmental entities 11
  • 12. 10. Not taking the FCPA seriously  Extraterritorial jurisdiction of the U.S. Foreign Corrupt Practices Act  U.S. companies liable for acts of Indian subsidiaries and potentially for the acts of its partners if it has knowledge  Comply with accounting and record-keeping provisions of FCPA  FCPA enforced by the SEC and DOJ. In 2010, the SEC’s Enforcement Division created a specialized unit to further enhance its enforcement of the FCPA.  India 95th out of 182 countries in Transparency International’s Corruption Perceptions Index  Anti-corruption best practices:  Due diligence on partners  Regular internal audit  Educate employees, partners and agents  Circulate anti-bribery policies to employees, partners and agents 12
  • 13. Watch for changes in Indian legislation In the works ….  Companies Bill, 2011 introduced to replace the Companies Act, 1956  Direct Taxes Code Bill, 2010 introduced to replace the Income Tax Act, 1961 Recent changes in legislation …  Competition Act, 2002 & Competition Rules, 2011  IT (Amendment) Act, 2008 & Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011  Amendments in 1999, 2002, 2005 and 2006 to the Indian Patent Act, 1970 & Patent Rules, 2003, amended in 2005 and 2006 13
  • 14. Resources U.S. Department of Commerce’ Doing Business in India: 2012 Country Commercial Guide for U.S. Companies  http://export.gov/india/build/groups/public/@eg_in/documents/webcontent/eg_in_049379.pdf Business Portal of India managed by the National Informatics Centre, Government of India  http://business.gov.in/default.php GOI’s 2012 Consolidated FDI Policy along with amending Press Notes  http://www.dipp.gov.in/English/acts_rules/Press_Notes.aspx Reserve Bank of India’s Master Circular on Import of Goods and Services  http://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=7315#B1 GOI’s Directorate General of Foreign Trade’s  http://www.dgft.gov.in/ Indian Employment Visas for Foreign Nationals  http://mha.nic.in/ForeigDiv/foreigners_division.htm Office of the Controller General of Patents, Designs and Trademarks  http://www.ipindia.nic.in/ Case Status (Status of Pending and Disposed by the Supreme Court and High Courts of India  www.courtnic.nic.in/ Franchising Association of India  http://www.fai.co.in/ 14
  • 15. Questions? Satya S. Narayan E-mail: SNarayan@rroyselaw.com Phone: 650.521.5745 PALO ALTO LOS ANGELES SAN FRANCISCO1717 Embarcadero Road 11150 Santa Monica Blvd., 135 Main Street, Palo Alto, CA 94303 Suite 1200 12th Floor Los Angeles, CA 90025 San Francisco, CA 94105 15

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