CHANAKYA NATIONAL LA W

UNIVERSITY

PATNA

PROJECT OF BUSINESS ENVIRONMENT

====================================================================

ASSESS THE RISK OF INVESTING IN INDIA AS AN

INVESTOR FROM UK
===================================================================
Submitted to :- Dr .Manoj Mishra (Faculty of Business Environment)
Submitted by :- Rahul Raj
Semester - IV
R.No. 1422

1
 ACKNOWLEDGEMENT

Writing a project is one of the most significant academic challenges, I have ever faced.
Though this project has been presented by me but there are many people who remained in
veil, who gave their all support and helped me to complete this project.

First of all I am very grateful to my subject teacher Mr. MANOJ MISHRA without the kind
support of whom and help the completion of the project was a herculean task for me. He
donated his valuable time from his busy schedule to help me to complete this project and
suggested me from where and how to collect data.

I am very thankful to the librarian who provided me several books on this topic which proved
beneficial in completing this project.

I acknowledge my friends who gave their valuable and meticulous advice which was very
useful and could not be ignored in writing the project.

Last but not the least, I am very much thankful to my parents and family, who always stand
aside me and helped me a lot in accessing political dignitaries and parties.

I thank all of them

RAHUL RAJ

Roll No: 1422

B.B.A LL.B (Hons)

4th Semester

2
 DECLARATION PAGE

I hereby declare that the project work entitled ASSESS THE RISK OF INVESTING IN INDIA AS AN
INVESTOR FROM UK submitted to CNLU Patna, is a record of an original work done by me under the
guidance of Mr. MANOJ MISHRA, Faculty of Business Environment and this project work is submitted
in the partial fulfilment of the requirements of the project work assigned to me. The results
embodied in this thesis have not been submitted to any other University or Institute.

RAHUL RAJ

B.B.A. LL.B (Hons.)

ROLL NO.-1422

3
 Contents
ACKNOWLEDGEMENT ...................................................................................................................... 2
DECLARATION PAGE ......................................................................................................................... 3
INTRODUCTION .................................................................................................................................. 5
AIM AND OBJECTIVE ..................................................................................................................... 6
HYPOTHESIS .................................................................................................................................... 6
SCOPE ................................................................................................................................................ 6
LIMITATION ..................................................................................................................................... 6
RESEARCH METHODOLOGY ........................................................................................................ 6
SOURCES OF DATA ........................................................................................................................ 7
TYPES OF INVESTMENT RISK .......................................................................................................... 8
Investment Risks in India...................................................................................................................... 10
Overseas Business Risk - India ............................................................................................................. 12
CONCLUSION ..................................................................................................................................... 22
BIBLIOGRAPHY ................................................................................................................................. 23

4
 INTRODUCTION

With a control free economy, supported by expert banking facilities, the capital market of
India offers a plethora of investment options. Foreign funds are flowing into India and also
into some of the other emerging market economies as they have been among the few star
performers when the global economy is struggling to emerge out of the meltdown. India has
in recent times, been rated as the third most preferred investment destination globally.
Liberalised reforms in foreign direct investment, both through direct automatic and approval
routes and release of the revised FDI policy have eased and expedited the investment process
in India. Other factors that work in favour of investment in India are its demographics, a
suitable business climate, lower costs in terms of labour and availability of high-grade talent
pool.

Investing in India is now one of the most acceptable norms all over the world with investors
from foreign venture capital funds to overseas individual investors taking interest in investing
in India. A recent report by a leading economist, Brent Ciliano, indicated that opportunities of
investment in India are aplenty and investors from the US and UK should adopt bold
investment strategies to invest in India by including the Indian market in their portfolios.

Opportunities of investing in India in healthcare, education, manufacturing, infrastructure and

services sectors are growing steadily. The services sector has in fact, been garnering
maximum FDI inflows consistently over past two years.1

1
http://www.investmentuk.net/india-investment.php accessed on April 20th 2017.

5
AIM AND OBJECTIVE

The main objective of the researcher and the study was to throw some light on the topic
Assess the risk of investing in India as an investor from UK. The researcher also aims to
know about the different types of risk involved in the Indian market.

HYPOTHESIS

The researcher presumed that there are different types of investment risk in India and the
major risk is political and market risk.

SCOPE

This research project is very helpful for the academic purpose of the researcher and also this
project would be helpful for the future accomplishment of the researcher.

LIMITATION

Time and territory being the restraint, the researcher has limited his research to books and
internet sources.

RESEARCH METHODOLOGY

The researcher had carried out and completed the entire project with the help of doctrinal
methodology.

6
SOURCES OF DATA

1. Books,
2. Journals,
3. Articles,
4. Websites.

7
 TYPES OF INVESTMENT RISK

Market risk. Market risk is the risk of losing money when the financial markets go down.
When investors think of losing money, they're thinking about volatility. Volatility can be
especially uncomfortable when prices fall steeply or remain down for a long time.
There are 3 strategies for combatting market risk: diversification, asset allocation and rupee-
cost averaging.

Inflation risk. Inflation is a loss in the value of what a rupee will buy. And the fact that you
can't see inflation eroding your principal makes it all the more dangerous.
For long-term goals such as retirement or your child's college education, your biggest risk
may be inflation. If your money doesn't grow enough, you wont be able to stay ahead of
inflation. If you are conservative and solely select investments whose primary objective is to
preserve rather than grow capital, you are especially at risk.

The main strategy for combatting inflation risk is to include stocks in your portfolio, which
means accepting some volatility. Growth and volatility go hand in handyou can't have one
without the other. Falling short of your target for a long-term goal can be worse than living
through market ups and downs.

Business risk. Anything that can harm a company's profitability, from poor management to
obsolete products, can be called a business risk.

Credit risk. When bond issuers fail to make their promised interest payments or don't repay
principal when it comes due, investors are experiencing credit risk.

Interest rate risk. Rising interest rates are bad news for fixed-income investments. Interest
rate risk measures how sensitive an investment's price is to interest rate fluctuations.

8
Currency risk. The possibility that international investments will suffer because the rupee
(or dollar depending on the fund) gains strength against the currencies of other countries is
known as currency risk.

Country risk. Political instability, financial woes and other problems that weaken a country's
economy can spell trouble for money managers who invest there.2

2
http://www.franklintempletonindia.com/en_IN/investor/investor-education/financial-basics/investment-
risks accessed on April 20th 2017.

9
 Investment Risks in India

Sovereign Risk

India is an effervescent parliamentary democracy since its political freedom from British rule
more than 50 years ago. The country does not face any real threat of a serious revolutionary
movement which might lead to a collapse of state machinery. Sovereign risk in India is hence
nil for both "foreign direct investment" and "foreign portfolio investment." Many Industrial
and Business houses have restrained themselves from investing in the North-Eastern part of
the country due to unstable conditions. Nonetheless investing in these parts is lucrative due to
the rich mineral reserves here and high level of literacy. Kashmir on the northern tip is a
militancy affected area and hence investment in the state of Kashmir are restricted by law.

Political Risk

India has enjoyed successive years of elected representative government at the Union as well
as federal level. India suffered political instability for a few years in the sense there was no
single party which won clear majority and hence it led to the formation of coalition
governments. However, political stability has firmly returned since the general elections in
1999, with strong and healthy coalition governments emerging. Nonetheless, political
instability did not change India's bright economic course though it delayed certain decisions
relating to the economy. Economic liberalization which mostly interested foreign investors
has been accepted as essential by all political parties including the Communist Party of India
(Marxist) which is dead against a free economic world.

Political instability in India, in terms of different ideologies of political parties hence posed
no investment risk to foreign investors as no policy framed by a past government has been
upturned by any successive government so far. Though there are bleak chances of political
instability in the future, even if such a situation arises the economic policy of India would
hardly be affected.. Being a strong democratic nation the chances of an army coup or foreign
dictatorship are minimal. Hence, political risk in India is practically absent.

10
Commercial Risk

Commercial risk exists in any business ventures of a country. Not each and every product or
service is profitably accepted in the market. Hence it is advisable to study the demand /
supply condition for a particular product or service before making any major investment. In
India one can avail the facilities of a large number of market research firms in exchange for a
professional fee to study the state of demand / supply for any product. As it is, entering the
consumer market involves some kind of gamble and hence involves commercial risk.

Risk Due To Terrorism

In the recent past, India has witnessed several terrorist attacks on its soil which could have a
negative impact on investor confidence. Not only business environment and return on
investment, but also the overall security conditions in a nation have an effect on FDI's.
Though some of the financial experts think otherwise. They believe the negative impact of
terrorist attacks would be a short term phenomenon. In the long run, it is the micro and macro
economic conditions of the Indian economy that would decide the flow of Foreign investment
and in this regard India would continue to be a favorable investment destination.3

3
http://www.tradechakra.com/investment-risks-india.html accessed on April 20th 2017.

11
 Overseas Business Risk - India

1. Political

Prime Minister Narendra Modi assumed office on 26 May 2014. He is Indias first Prime
Minister to be born after independence. He is also the first sitting chief minister of a state
(Gujarat) to have run for (and won) the highest office.

Indias constitutional set-up is federal, with a high degree of devolution to the states,
including on key issues such as law & order, land acquisition and resource sharing. There are
29 States, one quasi state (Delhi) and 6 Union Territories (directly administered by the
Centre).

The Congress Party and Bharatiya Janata Party (BJP) are the two largest forces in the current
Indian political scene, and the only ones which can claim national reach. However, Indian
politics has become highly fragmented in the last two decades, with a range of smaller
regional and caste-based parties sharing power with national parties in Delhi.

That trend was reversed when the BJP led by Narendra Modi won an absolute majority (282
of 543 seats). This is the first time in 30 years a single party has won an outright majority.
More remarkably, the BJP became the first non-Congress party to achieve this feat.

The BJP governs with a coalition of twelve parties the National Democratic Alliance. The
NDA has a total of 336 members in Lok Sabha, or Lower House of Parliament, commanding
a simple majority. However, the BJP does not currently enjoy a majority in Rajya Sabha, the
Upper House. PM Modi needs to work with state parties to pursue his legislative agenda. He
has promised states a new model of cooperative federalism: he knows he needs buy-in from
states for his governance agenda.

2. International Relations

India has a troubled relationship with its neighbour Pakistan, leading to at least three wars
since the two countries achieved Independence in 1947.

Since 2004, India and Pakistan have had several rounds of negotiations and set up a
Composite Dialogue aimed at settling all bilateral issues, including Kashmir. The
Composite Dialogue remains suspended following terrorist attacks in Mumbai in November
2008. Bilateral talks resumed in February 2010 but have made little progress.

12
India also has a complex relationship with China, with whom it shares a long, contested
border. The two countries fought a short war in 1964 and have been unable to settle their
respective territorial claims since then.

3. Economic

India recovered well from the global crisis but faces a challenging task to sustain growth,
lower inflation, manage a wide current account deficit and pursue reforms to alleviate
structural bottlenecks. In line with many other emerging economies, it has seen slowing
growth. Even at the depth of the global crisis, Indias growth only fell to 6.7%, but in 2013-
14 growth slowed 4.7%. The slowdown has been especially sharp in industry with few signs
of a strong recovery.

The arrival of a new government under Prime Minister Modi has resulted in elevated
expectations, a return of business confidence and optimism about the future. The Modi
government has busied itself with incremental reforms. While some have complained of the
absence of big bang reform, others opine that Modi needs further time to build consensus.

The government has also put forward a number of big ideas such as Make in India,
creating 100 Smart Cities and Clean India. These feed into the long term aim of inclusive
prosperity, coming-of-age infrastructure and correcting Indias lopsided model of services-
driven growth to an export oriented manufacturing hub. Modi is also actively seeking to use
foreign policy to deliver his economic priorities as shown by his recent overtures to Japan,
US, China and the BRICS. However, the government faces huge challenges in reviving
growth.

Inflation remains a key concern. CPI Inflation had been ruling at 10% levels for most of
2013, although it has now moderated to 6-7% range. The Reserve Bank of India (RBI) has
since January 2014 shifted to targeting inflation and aims to get inflation down to 6% by

13
January 2016. Interest rates are at pre-crisis highs (8%), limiting the room for manoeuvre on
monetary policy, especially given sluggish growth.

Indias vulnerability is accentuated by its current account deficit. India has a trade deficit of
around 7% of GDP and is especially sensitive to oil prices, with energy related imports
accounting for 7.5% of GDP. Crude oil and gold account for around 40% of imports. India
has relied on service exports, remittances and foreign capital to plug the gap and build foreign
exchange reserves. However, recently increased import duties on gold, depreciation of the
rupee, and an improving global economy have helped ease concerns the current account
deficit fell from 4.7% of GDP in 2012-13 to 1.7% in 2013-14. Internationally, India has
diversified its export markets through regional Free Trade Agreements. There are ongoing
FTA negotiations with the European Union.

India will need to take further action to maximise its demographic dividend (half the
population is under 25 years). These include raising public and private investment in
infrastructure, and improving delivery of public services, including education, skills and
health. This also requires India to make itself more attractive to investment. It is 142 out of
183 in the World Banks Ease of Doing Business index. Issues around taxation, corruption,
infrastructure and bureaucracy are commonly raised by business.

The government has undertaken a number of reforms to further open up the economy through
higher FDI limits in areas like retail, aviation and broadcasting services. It has also taken
steps to speed clearances for stalled investment projects and increased retail prices of some
fuel products in order to cap the subsidy bill. Prime Minister Modi has said he wants India in
the top 50 in the world for Ease of Doing Business. This reform agenda should strengthen
Indias long term economic potential as well as easing a number of pressing economic
challenges.

4. Human Rights

India has a strong democratic framework, which guarantees human rights within its
constitution. India also has a robust parliamentary tradition, an independent judiciary,
professional and apolitical armed forces, a vibrant civil society, and a free and outspoken
media.

However, India also faces numerous challenges relating to its size, social and economic
development. The British Government is working with the Indian government to build

14
capacity and share expertise to tackle those challenges, including the promotion and
protection of human rights.

Business and Human Rights

Business and human rights is a key area of conflict in India. Land acquisition by companies
and state governments for mining and infrastructure projects has been a contentious issue in
several states, sparking frequent protests by indigenous groups and civil society actors.

In September 2013 the UK launched its action plan on business and human rights, becoming
the first country to set out guidance to companies on integrating human rights into their
operations.

Child labour

India is a member of the International Labour Organisation. An important recent

development for child rights has been the adoption of the 2009 Right to Education Act
guaranteeing free, compulsory and quality education for children aged 6-14 years which
came into effect on 1 April 2010. But implementation of legislation varies from state to state
and awareness of human rights issues is inconsistent. There continue to be reports of the use
of child labour, particularly in the textile industry.

The Department for International Development has a range of long term partnerships with
childrens NGOs, including Save the Children, which focus on ending child labour and
implementing Indias Right to Education Act. We note that the Indian government continues
to take steps to promote the rights of children and hope they will continue their efforts in this
regard.

Gender

Between 2011 and 2013, India improved its ranking from 113th to 101th in the World
Economic Forums Global Gender Gap Report. However, inequality, discrimination and
domestic violence are still pervasive, particularly in Indias poorest states.

LGBT persons

Indian Labour Law specifically protects Indian workers against discrimination on the basis of
ethnicity, gender or religion. There are no applicable provisions against discrimination on the
basis of sexuality or gender identity. On 11 December 2013, the Indian Supreme Court set

15
aside a 2009 ruling of the Delhi High Court that decriminalised homosexuality. Although
prosecutions of gay people are rare, conviction for engaging in a homosexual act could lead
to a prison sentence.

Rights of association (trade unions)

There are more than 14,000 registered trade unions in India. The steady growth of trade
unions in India is due to political consciousness among the laborers as well as governmental
measures to facilitate collective bargaining through appropriate legislation.

5. Bribery and Corruption

The UK Bribery Act

Bribery undermines democracy and the rule of law and poses very serious threats to sustained
economic progress in developing and emerging economies and to the proper operation of free
markets more generally. The United Kingdom Bribery Act 2010 was intended to respond to
these threats and to the extremely broad range of ways that bribery can be committed. The
Bribery Act applies to non-UK companies operating in the United Kingdom and to UK
companies working overseas. It created four prime offences:

two general offences covering the offering, promising or giving of an advantage, and
requesting, agreeing to receive or accepting of an advantage

an offence of bribery of a foreign public official and

a new offence of failure by a commercial organisation to prevent a bribe being paid to

obtain or retain business or a business advantage (should an offence be committed, it
will be a defence that the organisation has adequate procedures in place to prevent
bribery).

The Act recognises that no bribery prevention regime will be capable of preventing bribery at
all times. A company will have a full defence if it can show that despite a particular case of
bribery it nevertheless had adequate procedures in place to prevent persons associated with it
from bribing. Companies must therefore make sure that they have strong, up-to-date and

16
effective anti-bribery policies and systems in place to prevent bribery by persons associated
with them.

Bribery and Corruption in India

Corruption is well entrenched in India and pervades many aspects of daily life. Corruption is
often cited as a barrier to the effective development of the private sector and poses business
risks that require pro-active management in the form of regular due diligence exercises and
up-to-date risk strategies. Procurement practices often lack transparency and are usually
coupled with a significant bureaucratic burden. These risks require careful management.

Politicians, bureaucrats and law enforcement officials often wield significant discretionary
power and notable abuses have been brought to light. Several high-profile prosecutions in
recent years have helped highlight that the legal framework for fighting corruption exists
although enforcement is often weak and responses vary from State to State.

Public activism on corruption has spiked with the large scandals that were unearthed under
the previous governments watch.

The Indian Government regularly blacklists companies known to offer bribes from bidding
for defence contracts. Many established companies in India aim to have robust checks and
balances in their systems to ensure transparent dealings. A number of government
departments and procurement teams of public sector companies are now migrating to online
platforms to reduce the scope of corruption.

India has a number of robust laws to deal with corruption the most publicised one being the
Right to Information Act (RTI), which enables citizens the right to seek information from any
government agency. Although the RTI has over the years ensured some degree of public
probity, other anti-corruption laws have remained strong in theory but weak in
implementation and practice.

In 2014, India was ranked 85 of 175 countries in Transparency Internationals Corruption

Perceptions Index.

17
6. Terrorism threat

The threat posed by numerous domestic and international terrorist groups in India is
substantial. Coordinated terrorist attacks in locations frequented by foreigners and expatriates
in Mumbai in November 2008 highlighted the risk of collateral damage in India. Attack
locations across major cities in India have included hotels, railway systems, hospitals,
markets, cinemas, restaurants, mosques and other open public areas. It is possible that future
attacks could target Western iconic locations and those places frequented by foreigners and
expatriates.

There are a number of terrorist groups active and operational in India, with a substantial
threat posed by Islamist extremist groups such as Lashkar-e-Tayyiba (LeT) and Jaish-e-
Mohammed (JeM). Radical left-wing and Maoist groups such as the Naxalites originating in
West Bengal also threaten the operation of business in India. These loosely united groups are
engaged in what is described as the Naxalite-Maoist insurgency across numerous states of
south, east and south-east India, and involving anywhere up to 20,000 individuals. Attacks
have targeted India and Western commercial interests, and have disrupted business operations
in affected regions.

Communal violence takes place in India but has tended to affect small businesses in
residential areas rather than be targeted specifically at foreigners or foreign owned
businesses.

7. Protective Security Advice

British companies, whatever their size, may be subject to cyber attacks. This can impact on
the bottom line thefts of money, customer data or IP - and associated damage to your
reputation. As a deterrent we advise companies to get their cyber security right. This is a
board-level issue that all businesses need to deal with, and the 10 Steps to Cyber Security
guidance provides Government advice on how to protect your business.

Smaller firms starting out with implementing cyber security measures may find the
related Cyber Security: what small businesses need to know guidance more useful, as well
as visiting the Governments advisory website Cyber Streetwise.

18
Businesses wishing to implement the most important technical controls, and demonstrate that
they take cyber security seriously can apply to be assessed under the Cyber Essentials
Scheme, leading to the Cyber Essentials or Cyber Essentials PLUS badge. Companies may
also wish to consider joining the Cyber Information Sharing Partnership, which shares real-
time cyber threat information on cyber threats.

8. Intellectual Property

If you plan to do business in India, or if you are already trading there, it is essential to know
how to use, guard and enforce the rights you have over the intellectual property (IP) that you
or your business own.

Intellectual property (IP) is a term referring to a brand, invention, design or other kind of
creation, which a person or business has legal rights over. Almost all businesses own some
form of IP, which could be a business asset. The WTO requires all member nations to include
some standard IP protection in their national laws. These standards have been incorporated in
Indian IP law, which means there should be few major differences between Indias laws and
those of other developed countries.

Common types of IP protected in India include:

Copyright - this protects written or published works such as books, songs, films, web
content and artistic works;

Patents - this protects commercial inventions, eg a new business product or process;

Designs - this protects designs, such as drawings or computer models;

Trade marks - this protects signs, symbols, logos, words or sounds that distinguish
your products and services from those of your competitors.

The regulations relating to all forms of IP have been amended or reissued in recent years,
mainly in response to Indias accession to the World Trade Organisation in 1995.

Although Indian IP law is thorough and generally comparable with European IP laws, there
are still significant concerns over IP enforcement. A major cause for concern in enforcement
is bureaucratic delay, with a backlog of cases at both the civil and criminal courts. This
means that cases can run for five years or more. There is also a lack of transparency,
particularly at a local level.

19
An advantage for UK businesses operating in India is that the legal system is based on
common law, as in the UK, so the fundamental processes are familiar.

IP protection is jurisdiction-specific, which means all IP rights (including copyright)

must be registered in India for the owner to be able enforce them in India. You can
visit the patent office, trade marks office, designs office or copyright office websites
for more information.

IP fact sheets for India are now available online. There are four web pages covering
the protection of patents, trademarks, designs, and copyright.

registration of IP could take several months or years in India owing to considerable

backlogs and bureaucratic delays at the IP offices, so businesses should plan their
registration well ahead.

if faced with infringement or piracy, businesses should appoint a good legal

practitioner who understands the local context and has the necessary experience to
initiate civil or criminal proceedings.

9. Organised Crime

A number of British companies have been attracted by potentially lucrative business offers in
India but there have been examples of fraud carried out using private data subsequently
shared between the British and Indian companies.

There have also been some specific examples of rogue Call Centres in India inappropriately
using financial data acquired legitimately from their UK business partner. We therefore
always recommend you research the market as best you can to understand any differences to
the business environment in the UK and conduct basic due diligence before making any
financial commitments (eg. checking that your Indian counterpart is a properly registered
business and has a good reputation).

20
When considering doing business with Indian firms unfamiliar to you, it is worth bearing in
mind the following:

an offer too good to be true may, in fact, be just that.

verify the data of your business partner, make appropriate due diligence checks.

increase your vigilance when using e-commerce.

when making purchases, use secure payment instruments. When selling, secure the
payment before delivery of the products.4

4
https://www.gov.uk/government/publications/overseas-business-risk-india/overseas-business-risk-india
accessed on April 20th 2017.

21
 CONCLUSION

The UK remains the largest job creator in India via foreign direct investment, seeing off
tough competition from Japan, creating one in 10 jobs between April 2000 and September
2016, says a report. However, British investors are eyeing further progress to secure investor
protection under the model Bilateral Investment Treaty, greater momentum in reducing
corporate tax rates and further improvements in the ease of doing business, according to the
Confederation of British Industry's second Sterling Assets India report, supported by
PricewaterhouseCoopers and the UK India Business Council. Between 2000 and 2016,
British FDI created 371,000 jobs - 10 per cent of all jobs created by FDI. The total number of
people employed by British companies in India currently stands at 788,000 - representing 5.3
per cent, or one in twenty, of private sector jobs," according to the report.
Moreover, the UK is the single largest G20 investor in India, and supports close to 800,000
jobs. Between 2000 and 2016, the UK invested $24.07 billion in India - increasing its
investment by $1.87 billion between 2015 and 2016 - representing 8 per cent of all FDI into
the country. 5

5
http://www.ndtv.com accessed on April 20th 2017.

22
 BIBLIOGRAPHY

BOOKS

GHOSH, B.N., Oxford publication, Business Environment.

PAUL. JUSTIN, Himalaya Publishing, Business Environment, Text and Cases.

K.ASWATHAPPA, 13TH Edition, Essentials of Business Environment

WEBSITES

http://www.livemint.com
https://www.gov.uk
http://www.investmentuk.net

23