India is the third largest source of FDI in the UK. The impact of Brexit will mean Indian businesses need to plan carefully for the legal challenges ahead. James Mullock, Partner at international law firm Bird & Bird, looks at the issues.
In March this year, the UK government served formal notice under Article 50 of The Treaty on European Union (‘EU’) to terminate the UK’s membership of the EU. This starts a two year notice period, which means the UK’s exit (or ‘Brexit’) will most take effect in March 2019. In the meantime, the UK will seek to negotiate the terms of exit and future trading relationships.
So what impact does the UK leaving the EU have on Indian businesses that have operations in the UK or EU, or do business with companies in those regions? Some of the immediate challenges for businesses will arise from the impact of Brexit on the free movement of goods, services and workers and a number of areas covered by the single market, including the protection of IP rights. Forward planning is, therefore, key.
UK as a gateway to Europe?
At present, Indian businesses that wish to trade or invest in the EU often establish operations in the UK as a stepping stone to trading with other EU countries. Will they still do so if the UK’s trade agreements with India and the EU are less enabling or in a state of flux?
UK Prime Minister Theresa May has indicated that the UK will be leaving the EU’s Single Market, and as such, will be open to establish new trade agreements with nations outside the EU free from the constraints placed by other EU countries. India was one of the first countries to which the UK sent a trade delegation following its service of Article 50 notice, so it is clearly evident that nourishing and growing existing trading links between India and the UK is high on the UK government’s priority list.
The Brexit vote has already caused a significant fall in the value of Sterling against certain key currencies, including the Indian Rupee. This has reduced the cost of UK business and property acquisitions by Indian companies and other overseas buyers. The fall in the value of Sterling may also impact on the number of UK visitors to India, with trips becoming more expensive for them.
Existing commercial contracts Indian companies have with UK parties may be affected by the terms of future trade agreements (including any new trade barriers or tariffs), continuing currency fluctuations and the ability of the UK nationals to work in the EU and of other EU nationals to work in the UK (see Employment implications below).
Whether Brexit provides grounds for termination of an existing contract to which Indian businesses may be a party will depend very much on the particular terms and specific facts. Parties could seek to rely on material adverse change or force majeure clauses as grounds for termination following Brexit but their success will come down to the interpretation of the particular clause and the particular facts of the case. Changes in a party’s economic circumstances have generally not been held to qualify as force majeure events under English law. It is also possible that parties could seek to argue that a contract has become frustrated as a result of Brexit but again, such an argument will depend on the facts of the particular case.
Existing disputes with UK/EU elements are unlikely to be affected in the short to medium term as existing EU laws will continue to apply. In the longer term, Brexit may affect claims based on EU laws and impact on the rules on service of legal process and the rights of enforcement of judgments between the UK and other EU Member States.
The drafting of new contracts is also likely to be affected by potential new terms of trade – for example, to confirm which party will be responsible for the payment of any additional duties or tariffs.
For Indian companies with nationals from other EU member states working in the UK, the rights of those individuals to continue to live and work in the UK following Brexit are unclear. The UK’s Prime Minister has said that she would like to guarantee the rights of the 3 million EU citizens settled in the UK before the referendum, including their right to remain in the UK. However, this is dependent on other EU nations agreeing an equivalent deal for British nationals living in other EU member states. As a result, the position remains one for negotiation, albeit as an “important priority” for the UK. Indian businesses which employ EU nationals in the UK and/or UK nationals in mainland Europe will need to monitor the Article 50 negotiations on this point.
Likewise, the end to the free movement of EU nationals to the UK, given as an objective in negotiations by the UK Prime Minister, may also make it more difficult for Indian companies with operations throughout the EU to relocate employees from other EU member states to the UK and vice versa.
We are recommending that clients undertake an audit of their current and projected 2019 workforce to help identify individuals who may be affected by post Brexit changes in immigration law, including those who may be able to apply for citizenship or permanent residence and to target communications to employees who may be most affected. The circumstances of the families of those Indian staff posted to Europe who may also be affected should also be considered. In short, plans for recruitment and secondment of staff may be impacted.
Other implications for Indian businesses will depend on the sector in which they operate and will remain uncertain until the UK’s trade negotiations with the EU and US are finally concluded.
Data Protection – the introduction of the GDPR
The European Union has had laws governing the processing of information about living individuals for more than 30 years. In May 2018, the General Data Protection Regulation (‘GDPR’) will come into effect, providing a significant refresh to these existing laws.
The changes which are to be ushered in by the GDPR are substantial and ambitious. It is one of the most wide ranging pieces of legislation passed by the EU in recent years, and concepts to be introduced such as the ‘right to be forgotten’, data portability, data breach notification and accountability will take some getting used to. As will the maximum fines for failing to achieve compliance – the greater of 4% of world wide turnover or €20 million.
Indian companies who aren’t already aware of the GDPR should take note, as the regulation won’t just apply to companies incorporated within the EU, but also to any company that processes the data of EU citizens, as staff or customers. The UK government has also stated that the UK will retain the GDPR after it has exited the EU so Indian companies with UK operations will remain equally affected by the new laws’ provisions.
In a world that is so dependent on the internet, and so many companies relying on digital business, it’s going to have a very significant effect on operations from a range of sectors and industries. Everyone should be aware of the obligations that are coming, and the consequences of getting it wrong.
What is the GDPR?
The GDPR is EU law that will regulate the use of personal data by organisations of both their staff and their customers. Interestingly, a company’s staff are often the first to complain if data isn’t used correctly, in particular in countries such as Germany, Spain and France where expectations are highest given cultural attitudes to privacy and historical events.
There is a huge difference between the current data protection laws (which were written in 1995) and the latest refresh which will take effect in May 2018. There are similarities between the approach taken by the GDPR and the US Sarbanes-Oxley Act introduced in 2002 to regulate accounting practices following various corporate financial scandals in the late 1990s – in particular the introduction of provisions relating to internal governance controls, severe penalties for improper performance and a greater emphasis on internal auditing and reporting. Companies which operate in Europe or which process European citizen’s data will effectively have to implement new data governance measures. Fines will be greatest where little or no such accountability measures can be pointed to.
There are a number of challenges the law will introduce that Indian companies should be made aware of.
What are the main challenges?
1) Data breach notification: If an organisation suffers a cyber-attack or if an employee loses or misuses personal data, organisations must proactively confess details of the breach to regulatory bodies and possibly also to affected individuals. This could be extremely uncomfortable for a lot of companies, as they risk negative stories in the press and loss of trust in their brand. Increased notification and publication of data breaches will also likely lead to more data litigation. This obligation is much more onerous than those imposed currently by laws in India. Indian companies must therefore be more prepared and have good reporting structures in place in relation to their European operations if a data breach was to occur after May 2018.
2) Accountability: Similar to Sarbanes-Oxley, the new law requires companies to have implemented and to maintain new governance measures. This includes updating policies and procedures, introducing training and conducting privacy impact assessments (PIA’s). More budget and manpower for compliance initiatives will be necessary to upgrade processes.
3) Penalties: If a company fails to duly notify the regulators of a breach, they must pay a penalty of either €20 million or 4% of their worldwide turnover, whichever is higher. This would be quite a significant blow to any company.
Why does the GDPR matter to Indian companies?
Indian companies with operations in the UK or elsewhere in the EU will be affected by the new regulation. The GDPR’s many obligations will apply to organisations located anywhere in the world which process EU citizen’s personal data in connection with their offer of goods or services, or their “monitoring” activities (defined to pick up many online behavioural marketing activities).
Over 100 countries around the world now have data protection laws. Historically, a number of countries have replicated the data protection laws of the EU and developed their own domestic laws. It is possible the GDPR could be replicated in other such jurisdictions, for example Japan, Hong Kong, Israel, Singapore, Switzerland, Australia and Argentina and effect Indian companies with operations there.
Legal developments in all jurisdictions with data protection laws should be tracked as the legal landscape is not just changing in Europe. For instance, Australia will introduce a new data breach notification law with effect from February 2018. This legislation, like the GDPR, will not only affect companies in Australia but international companies with Australian operations. The law means that companies will need to investigate any data breach they have suffered within 30 days and if data was lost as a result of unauthorised access, the breach must be reported to the authorities and the affected individuals
Traditionally, the data protection laws in India have imposed lighter obligations than those implemented in the 100 world wide countries referenced above.
What should Indian companies do to prepare?
Well organised businesses would be looking to run a gap analysis now to work out where they need to concentrate their efforts and what to prioritise. It’s essential to have a good project plan of actions that are going to need to be taken. Where will policies need to be upgraded? Where will companies need to appoint a data protection officer? Where will new training programs need to be introduced? All those organisational changes that are going to be required in your company should be addressed. And secondly, who will you assign for responsibility for this area? For a lot of businesses this isn’t an area of compliance they’ve dealt with with just a single appointment. Who and what budget will be used are important parts of planning.
Whether India adopts laws similar to the GDPR is yet to be seen, but what is certain, is that any Indian business that has dealings with the EU or UK will be impacted by the GDPR. It’s important businesses prepare now to avoid non-compliance in future.
The relationship between India and the UK
The UK is the single largest G20 investor in India and has been since 2000. In fact, UK companies currently employ 788,000 people across India – representing one in 20 of private sector jobs in the country.
India’s investment in the UK is similarly significant, with India being the third-largest investor behind the US and France. Indian companies invest more in the UK than the rest of the EU combined. There are currently more than 800 Indian companies operating in the UK, employing over 110,000 people.
Economic sectors that see the greatest India-UK commercial activity:
- Technology & communications
- Life sciences
What are the current Indo-Anglo M&A trends?
There has been a lot of M&A activity in the last 12 months, especially in Britain as businesses plan for the uncertain times ahead post-Brexit. One of the main trends we have seen when advising our clients in India is the increase in financing of Indian companies outside of the UK.
The primary reason for this is India’s unique economy. Where countries like China and Russia rely heavily on a few key sectors like manufacturing or oil, the highly diversified Indian economy has both very strong service and manufacturing sectors – an unusual combination that makes for a resilient market.
The Rupee has been less volatile than most currencies in developed countries during the recent period of high volatility caused by political and economic pressures. The buoyant Indian economy compared to that of other jurisdictions means it is an interesting time for M&A by Indian companies. If Indian companies are able to raise finances, they can easily enter other, weaker jurisdictions and acquire assets.
Bird & Bird works for various Indian clients and advises them on their overseas corporate M&A acquisitions and financing advisory work. We’ve recently seen a lot of appetite for this type of work, particularly in the life sciences and renewable energy sectors.
By way of example, our corporate team recently completed a US acquisition by ERBA Diagnostics UK Ltd of Lumora Ltd, a Cambridge based diagnostics business. This transaction involved detailed advice around the availability of patent box tax regime and potential tax benefits of entering into such a tax regime. ERBA Diagnostics UK Ltd is a part of the ERBA Mannheim GmbH Group (Germany) which is a lead player in the In-vitro diagnostic segment. Transasia Bio-Medicals Ltd, which is the foundation of the ERBA Group, is one of India’s leading diagnostics companies.
Our corporate team also completed an acquisition of Western Thermal Limited by IGL Holdings Ltd (IGL). IGL is a member of the Mumbai based Indsur Group, which has operations in four countries with diverse interests, including iron and steel castings, auto gears, oil and gas pipe, steel products, thermal engineering and boutique investments. WTL is a leading UK company that provides end-to-end solution and is a one stop, multi-discipline solution provider and specializes in supplying, contracting, and manufacturing of insulation to a wide spectrum of industries that includes power plants, refineries and building services.
Common challenges in a cross-border Indo-Anglo deal
India and the UK have different legal frameworks and governing laws which causes some significant challenges with mergers and acquisitions: The differing regulations and approvals for both countries means there is restricted flexibility and often time delays. This also translates into issues involving the accounting and tax regimes.
Another challenge in a cross-border deal with the UK and India is the cultural differences, particularly the differing approaches to the M&A process. The Indian approach is very sophisticated which means that the process is generally very time consuming, particularly in the healthcare sector.
In terms of market practice, there is a divergence between international deals and the deals that happen in India. For instance, unlike the UK, India has inherited the buyer-friendly approach, common in US M&A transactions, where all warranties (contractual assurances displaying any liabilities within the business) are given on an indemnity basis. The UK practice is for sellers to only give indemnity for specifically identified risks. This not only causes more divergence between the two companies but it also means that the time to complete the approval process is doubled.
What should Indian companies do to avoid these challenges?
In essence, there is no one way of negating all complications, but there are certainly ways to alleviate the damage. Firstly, clients are persistently trying to be more cost effective so it helps if you have a strong local advisory team. It is also wise to shop around for the right advisory team in order to get an accurate overview of the marketplace.
Make sure a mutual business objective is established from the start. It’s key to have in-depth conversations from the outset and ensure there is an effective deal management process in place. Conversation and clarity are key players in this scenario so make sure these discussions take place well before the transaction kicks off.
Ensure the differing legal and regulatory requirements and issues are duly considered in advance. It’s important that everyone is aware of the time constraints and the potential issues that could arise.