India: Essential tips forsuccessful trading

Supplying goods and services to Indian customers is no differentfrom supplying customers elsewhere in the world but there aresome practical steps that can smooth the process and enable youto deal with some peculiarities of Indian law. Here are someessential tips that can help to make your trading relationship alasting and successful one.

Choose how and where to resolve disputesResolving a dispute successfully through the Indian courts can betime-consuming. To avoid this, it is advisable for the parties to acommercial transaction to agree on arbitration as the way toconclusively resolve disputes.

Indian arbitration legislation is based on the Model Law adoptedby the United Nations Commission on International Trade Law. Inthe case of foreign arbitral (i. e. arbitration) awards, while Indiafollows the New York Convention on the Recognition andEnforcement of Foreign Arbitral Awards, it recognises as reciprocalnations only a few of the 148 nations that have signed theConvention and publishes a list of those recognised territories inits Official Gazette.

When arbitration takes place in India or where certain parts ofIndian arbitration legislation are not specifically excluded it issusceptible to interference by Indian courts. While a recentpronouncement of the Supreme Court of India has limitedinterference by courts, parties should seek specialist advice onstructuring the dispute resolution framework in their contracts.

Broadly speaking, the foreign supplier and the Indian buyer havethe freedom to choose the law that they want to govern thesupply agreement. Although an Indian buyer is naturally likely toprefer Indian law, it is fairly common for supply agreementsbetween Indian buyers and foreign suppliers to have non-Indianlaw as the governing law, since a material part of such agreementsis to be performed by the supplier outside India. This is especiallytrue if the foreign supplier has an “upper hand” in the negotiations.

While choosing between Indian and foreign law for the contract,the foreign supplier should also remember that Indian lawgoverning the sale of goods is in several respects different fromthe United Nations Convention on Contracts for the InternationalSale of Goods which many European suppliers may be used to.

Even if Indian laws govern their agreement, the supplier and thebuyer may still opt to have their dispute resolution proceduregoverned by a different set of rules of arbitration. For instance, in asupply agreement governed by the laws of India, the parties mayagree that any dispute shall be settled by arbitration conductedunder the rules of the International Chamber of Commerce,London Court of International Arbitration or Singapore InternationalCentre of Arbitration, at any geographic location. So, in otherwords, the laws governing the agreement and the rules ofarbitration may be different.

Family comes firstThe family and family ties are important in the Indian businessenvironment. Most Indian businesses are owned by a “promoter”

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As the world’s largest democracy and second most populous country, India has anenormous domestic consumption base and a well-established legal system. Indian lawshares basic principles of commercial law with Britain and other common law systemsand all laws, superior court judgements and proceedings are in English.

India: Essential tips for successful trading

family which has a significant say in the governance of thecompany. This makes negotiating with a family-owned privatebusiness very different from the same discussion with a similarlysized western enterprise with its professional ownership andmanagement and widely dispersed shareholders. Businessdecisions can be influenced by considerations such as keepingcontrol within the family, a promoter’s personal legacy and jobs forfamily members. With no distinct separation between ownershipand management, the company is run very much in accordancewith the wishes of the promoters. This may also apply in the caseof publicly traded companies.

Put it in writing and check the buyer’s authorityThe Indian law on contract does not specifically prescribe the formof contract or the manner in which the contract must be executedfor it to be valid and enforceable. However, it is recommended thatsupply agreements be in writing and signed by the supplier andthe buyer. Certain contracts are required to be in writing byspecific statutory laws in India including those on the transfer ofproperty and on intellectual property. In addition, all supplyagreements must contain sufficient information about thespecification, quantity and quality of the products, the purchaseprice and payment provisions, and the specific terms and time ofthe supply, e. g. by using INCOTERMS.

Indian law recognises electronic transactions and will presumethat an electronic contract has been validly concluded by theparties concerned if it has been made with the digital signaturesof the parties.

For written contracts, all Indian states levy a stamp duty. Theamount of the stamp duty payable varies from state to state andmay, in some instances, be a percentage of the value of thetransaction. Non-payment or underpayment of stamp duty mayresult in the relevant document being inadmissible as evidence in a

court of law or even impounded. For that reason, it is important tocheck the amount of stamp duty payable before signing a supplyagreement. It is also helpful for foreign suppliers to be aware thatcertain types of contracts in India require compulsory registrationwith local authorities, including the transfer of immovable property.

Foreign suppliers can easily check whether their Indiancounterparty has valid authority to enter into the supplyagreement. All powers of operations and management of anIndian company are vested with its board of directors. The boardof directors must therefore enter into the supply agreement andauthorise an individual or individuals to sign the contract on behalfof the company. Typically, the board of directors would delegatesome of its powers to an executive of the company (the managingdirector or chief executive officer and/or, at the next level, perhapsa purchase officer) who would then act under such authorisation.It is therefore important to check the authority under which thesignatory acts: ideally by sight of the relevant extracts from theminutes of the meeting of the board of directors or a power ofattorney issued by the company authorising an individual to act onits behalf. Individuals, on the other hand, may act directly orthrough an agent who has a valid power of attorney.

Comply with India’s foreign trade policy and take advantageof special schemesForeign trade in India is regulated by the Directorate General ofForeign Trade (DGFT) which, from time to time, announces andupdates the policies and procedures that have to be followed forexports from and imports to India. Foreign suppliers should makethemselves aware of these requirements and check that both theyand their Indian counterparty are compliant. For example, onerequirement is that all Indian importers and exporters need toregister with their regional licensing authority and obtain aregistration number before they can start trading, unlessspecifically exempt (such exemptions are, for instance, made for

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Indian central and state government departments importantprinciples and agencies). Exporters can also apply for status as anExport House; Star Export House; Trading House; Star TradingHouse; or Premier Trading House based on their exportperformance. A status holder enjoys certain privileges under theforeign trade policy, such as the issue of import and exportlicenses and customs clearances on a self-declaration basis andother privileges as mentioned in India’s foreign trade policy. Foreignsuppliers should also ensure that they stay up to date with theBureau of Indian Standards’ rulings on imported products.

India’s foreign trade policy also offers special import schemes thatmay be of benefit to suppliers: for instance, there are schemesunder which capital goods can be imported duty free or at aconcessional duty rate, subject to export obligations or wherecompanies are located in special economic zones. Enterprises inspecial economic zones can also import on a lease financing basisand may enjoy privileges such as waivers from certain governmentapprovals or a single window clearance process. There are alsospecial sectoral schemes such as those for diamonds, gems andjewellery. Special import schemes may also allow a relaxation offoreign exchange regulations, e. g. the setting up of foreigncurrency accounts in Indian banks.

Check what can – and cannot – be freely importedGoods can be freely exported from or imported to India, exceptwhen restricted by its foreign trade policy and applicable domesticlaws. Most goods can be imported freely without a special license.However, three categories of imports to India are subject to certainrestrictions. The first is prohibited imports, which includes ivoryand clothing made from wild animals. The second is that ofchannelled (canalised) items, i.e. those that can be imported onlythrough specified state agencies. For example, wheat can beimported only by Food Corporation of India. The third category isthat of restricted items which may be imported only under animport license or a public notice issued by the DGFT, unless it is

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acknowledged to be a commercial sample. These include certainconsumer goods, certain stones, some pesticides, drugs andmedicines, some electronic items and several items reserved forproduction by small businesses. Where restrictions apply, theconditions of the special license — on quantity, specifications orvalue of goods, minimum price or import by actual users must becomplied with to the letter by the importer. However, special statusholders (see above) have automatic license to import goods underthe restricted category.

The DGFT publishes the list of prohibited, restricted and canaliseditems periodically. Any foreign supplier intending to supply goodsto Indian customers should clarify which category its goods fallinto and if the requirements for that category are satisfied. If thegoods require an import license, the contract between the foreignsupplier and its Indian customer should provide what is to happenif the license is refused, cancelled or expires.

Watch out for competition law A new competition law regime has recently come into effect inIndia. Under the regime, agreements or practices that cause or arelikely to cause an appreciable adverse effect on competition inIndia are not valid. Horizontal agreements or practices, i.e. thosebetween parties engaged in identical or similar trade of provisionof goods or services, are presumed, by definition, to have anappreciable adverse effect. Vertical agreements or practices, i.e.those between parties engaged in different supply chain levels, areprohibited if they are found to be anti-competitive: for example ifthey fix prices, limit or control production or supply or allocatecustomers or territories.

Exclusivity obligations, tying and bundling offers, discount andincentive schemes and resale price maintenance in supplyagreements may also be deemed invalid.

Any supply agreement or practice that is found to beanticompetitive under this regime could lead to an order to

discontinue or modify the agreement or to the imposition of a heftyfinancial penalty.

Consult your banker in India for advice on foreignexchange ssuesThe Indian Rupee is not a fully convertible currency. Foreignexchange transactions are broadly classified into capital andcurrent account transactions. Capital account transactions, suchas investment in Indian securities and foreign currency borrowingsby Indian companies, are more heavily regulated.

Current account transactions, such as payments for the import ofgoods and services into India and exports out of India, arepermitted but subject to regulations regarding manner ofpayments.

It is essential that transactions with Indian buyers are conductedthrough normal and proper banking channels, and failure to do sowill very likely result in a violation of the Indian foreign exchangelaws - and possibly constitute a violation of other laws as well.India’s central bank, the Reserve Bank of India (RBI), hasdelegated many of its functions connected to the implementationof foreign exchange laws, especially those related to flings andreporting, to banks that are specifically authorised to deal inforeign exchange. Foreign suppliers can and should get in touchwith one of these banks for advice on current foreign exchangeregulations, their impact on a planned transaction and theprocedural and reporting requirements that may have tobe completed.

Consider having a local presenceForeign suppliers should consider whether a local presence inIndia to market, distribute or package goods and expand ordiversify within the market would be a worthwhile move.

There are many ways in which a foreign supplier can establish alocal presence in India. These range from setting up a liaison

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office, with the RBI’s prior permission, to act solely as a channel ofcommunication between the foreign company and the Indiancustomers, to establishing a branch office, again with RBI’spermission, to manage the import and wholesale sale of goods.

More complex arrangements include:

(a) equity joint ventures with a local partner, in accordance withthe foreign direct investment policy for different sectors andnon-resident holding limits applicable to an Indian company, or

(b) the outright acquisition of the local business and a relativelymodest number of the so-called “PIPE” (private investment inpublic equity) transactions.

Foreign direct investment in Indian companies may be classifiedas either:

(a) completely prohibited (for instance, lottery and gambling),

(b) completely free (most manufacturing and services sectors), or

(c) restricted to a certain percentage of foreign holding or subjectto approval or certain investment conditions.

The last of these applies to insurance, telecommunications,broadcasting, print media, retail trading, banking, financingactivities, construction and real estate, defence, pharmaceuticals,civil aviation and certain other sectors considered sensitive fromthe perspective of foreign ownership.

Joint ventures may be a necessity for a foreigner seeking toinvest in a sector where foreign ownership is restricted to lessthan 100%. In any case, joint ventures are considered thepreferred entry route for foreign investors as it is expected thatthe Indian partner will help steer an easier route through theIndian market. Negotiating an Indian joint venture can besomewhat complicated and various legal and cultural issues must

be carefully considered, including the rights of shareholders, exitprovisions and taxation implications.

It is therefore important to obtain legal advice before investing inan Indian company or purchasing Indian securities.

Secure your paymentThere is no reason to be concerned about the risk of non-payment simply because the goods or services are being suppliedto India. Nevertheless, a supplier should take the same level ofcare as is taken in sales in their home market or to any otherforeign market. This means, checking the Indian buyer’screditworthiness. In addition, it is common practice for paymentsmade by Indian buyers to suppliers abroad to be secured. Themain types of security available in India are the same as those thatmost suppliers will be familiar with, including bank guarantees andletters of credit.

Whatever type of security the parties agree on, it is essential toclearly define the payment obligations in the underlying supplyagreement to ensure that the secured obligations are defined insufficiently specific terms. This is particularly important wherethe supply agreement takes the form of a framework agreementand deliveries and payments are made on the basis ofseparate orders.

Protect your credit salesAs is true with any sales contract made on credit terms and to anycountry, even if all the above rules are strictly complied with, thereis always a certain level of risk of non-payment andunpredictability. That risk can range from the buyer’s default onpayment or unexpected insolvency, to factors beyond eitherparty’s control, such as natural disasters that prevent completionof the sale, or changes to India’s foreign trade policy.

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Contacts

Rahul Guptan Partner, SingaporeT: +65 6410 2295E: rahul.guptan@

cliffordchance.com

Neeraj BudhwaniPartner, Hong KongT: +852 2826 2428 E: neeraj.budhwani@

cliffordchance.com

It is therefore advisable for the supplier to seek protection in theform of credit insurance to mitigate those potential risks that duediligence alone cannot avoid. Credit insurance provides not onlyprotection, but also reassurance about the identity andcreditworthiness of your potential customers. Moreover, theprotection afforded by credit insurance allows the supplier to offermore competitive terms of payment - often the deciding factor forthe potential customer.

Mark PoultonPartner, LondonT: +44 20 7006 1434 E: mark.poulton@

cliffordchance.com

Clifford Chance LLP is a limited liability partnership registered in England & Wales under number OC323571.

Registered office: 10 Upper Bank Street, London, E14 5JJ. We use the word ‘partner’ to refer to a member of

Clifford Chance LLP, or an employee or consultant with equivalent standing and qualifications.

Clifford Chance is not authorised to provide advice on the laws of India and would need to work alongsideIndian counsel on any transaction in India.This publication does not necessarily deal with every important topic or cover every aspect of the topics withwhich it deals. It is not designed to provide legal or other advice.We base our comments in this publication on our experience as international counsel representing clients intheir business activities in India. We are not permitted to advise on the laws of India and should such advice berequired we would work alongside local counsel. J201312160044371

www.cliffordchance.com

© Clifford Chance, January 2014

Clifford Chance LLP, 10 Upper Bank Street, London, E14 5JJ.

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