It is no secret that the Indian infrastructure holds
great potential, not least because of the dire need to bring Indian roads,
ports and airports up to world standards but also because of the keen national
interest in the sector. In order to increase the growth rate in infrastructure,
recent annual budgets of the Indian government supported by various state
governments further encourage investment in the sector. Private sector
participation is seen as key to the development and implementation of projects
across the country.
As per the national spending plan under the 11th
Five-Year Plan (2006-2007 to 2011-2012), a sum of $354 billion is required to
be spent on various infrastructure projects. Such projects are being
implemented under Public Private Partnership (PPP) and many projects will be
implemented through foreign investments. To achieve long-term growth, the
government of India has set an ambitious target of increasing total investment
in infrastructure from 5 percent of GDP in the base year of the Plan 2006-07 to
9 percent by the year 2011-2012.
Based on the plan, around 30 percent of the required
investment of around Rs.2,056,1500 million ($154 billion) is required to be
invested through private capital. Such capital is expected to be invested through
debt and equity by the private sector under PPP projects.
According to Finance Minister Pranab Mukherjee, India
needs to develop a rupee-denominated long-term bond market for funding the
infrastructure sector that requires an investment of around $459 billion to
$500 billion by 2012. The recent move by the government to issue tax-free
infrastructure bonds and $11 billion debt fund will help the government get
about $1 trillion target by 2017. Therefore, infrastructure investment in India
is expected to grow dramatically under the 12th Five-Year Plan (2012-2013 to
2016-2017).
As per public data, the cargo growth in India has been
increased to the extent of 5.5 percent as compared to the 2009 fiscal year. The
airports and roads sector have seen an increase in domestic air traffic to the
extent of 22 percent. India has also set a target of adding 78,000 megawatt
(mw) of power generation capacity over the five years ending March 2012. As on
June 2010, it has added only around 30,000 megawatts.
There is little doubt that, in the face of such demands
within the infrastructure sector, the government of India is very serious in
its commitment to implement infrastructure projects. A committee on
infrastructure was formed under the leadership of the prime minister to review
the development of such projects, namely power, road, ports, civil aviation and
railways and opportunities in such sectors on a quarterly basis.
While opportunities in the Indian infrastructure sector
abound, there is no doubt that interested investors must take heed of legal and
practical implications before venturing into this area.
Legal pitfalls/issues for consideration
First and foremost, regulatory issues must be considered.
India still has exchange controls and investments in this sector that are
regulated by the Reserve Bank of India and the Foreign Investment Promotion
Board. Whether an investment in the infrastructure sector qualifies for
approval under the so-called "direct" route or "approval"
route depends on the sector, for example, an investment in the road sector can
be up to 100 percent and in telecom it is capped at 74 percent. The sectoral
caps are determined by the Department of Industrial Policy and Promotion,
Ministry of Commerce.
Another important legal issue to consider is land
acquisition related matters as land is the most important component for any
infrastructure project. Presently there are many disputes/cases pending before
various courts relating to land acquisition. The good news is that the
government and courts are not averse to land acquisition per se, however given
the socio-economic nature of land disputes in India, delay in land acquisition
must be expected and factored into cost and time budgets. It should also be
mentioned that in many projects the government itself acquires land upfront and
bids the project out so that delays are avoided.
Regulatory issues play an important role for many
infrastructure related projects. Over the past decade the role of regulatory
authorities, government departments and judicial authorities have been well
defined and encroachments into each other's territories have been few and far
in between. For power, telecom airports, ports and roads, regulators are
delivering on expectations and are duly supported by respective government departments
and the planning commission. It is important to acquaint oneself with what role
each regulator is likely to play before launching into this sector.
Labor and industrial related laws play an important role
in labor-intensive infrastructure projects. Indian labor laws have not kept
pace with India's liberalization and privatization. Trade unionism is also on
the rise and thus issues must be approached in a culturally sensitive manner.
Tax issues must also be considered upfront. There is a
proposal to bring the direct tax code into operation in a couple of years. The
said code is more exhaustive and transparent in comparison to the extant
legislation, i.e, Income Tax Act, 1961. The said code has an enabling provision
whereby the government can enter into treaties with other countries for
granting relief in respect of (i) income on which income tax has been paid
under the said code and under the corresponding law in force in that country or
(ii) income tax chargeable under the said code and the corresponding law in
force in that country to promote mutual economic relations, trade and
investment. The good news however is that tax holidays are granted for many
infrastructure projects.
Another positive move has been legislation by state
governments that have been enacted specifically for infrastructure development
including providing relief and concessions in stamp duty etc. (e.g. Andhra
Pradesh Infrastructure Development Enabling Act, 2001 by the state of Andhra
Pradesh, Gujarat Infrastructure Development Board Act, 1999 by the state of
Gujarat and Industrial Policy 2005 by the state of Haryana, constitution of
Infrastructure Development Corporations in various other states).
Governments have been aiming to remove hurdles and
facilitate growth of infrastructure in India, especially in power, SEZs, roads,
airports, ports etc.
The Reserve Bank of India regulates foreign currency
inflow and outflow into and out of India with a well-defined legal framework
under Foreign Exchange Management Act, 1999 and other policy guidelines framed
from time to time. Thus any investment must be carefully considered bearing in
mind these exchange control regulations.
Judicial interference cannot be ruled out in policy
related matters or in decisions in award of projects made by the government as
the same are challenged by filing motivated public interest litigations or by
unsuccessful bidders. This has the potential to cause delay in project
execution as there are no special tribunals or courts to deal with
infrastructure projects.
Last but not least, choosing a suitable partner in India
has an important bearing on a successful partnership. The prospective partner
should be law compliant and resourceful.
Investment outlook
Outlook for investment in infrastructure in India is
positive. Infrastructure development boosts the economy on a macro level.
Industries like steel, cement, bitumen, commercial
vehicles (trucks) also grow due to investment in infrastructure apart from the
creation of employment for many. Sectors like roads, ports and rail infrastructure
are the ones which have huge potential and require massive capital over the
next decade or more.
Despite the minor pitfalls, investment in infrastructure
is bound to give expected returns. The banking sector in India is positive in
its approach for lending to the infrastructure sector backed by regulators.
Other sector regulators are tweaking their policies to cater to the needs of
entrepreneurs and to provide a level playing field which is an encouraging sign
for future investments.
- Ishtiaq Ali, partner, ALMT Legal, can be reached at
[email protected].
