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 [phone]E-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).

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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