Public Procurement Regime in India and the Opportunities for Turkish Investors

Abstract

India, one of the fastest-growing economies of the World, has a serious potential that is still waiting to be explored. For the past several years, foreign investors are getting advantage of India’s market ever than before based on the great access that India presents. Even if its economic outlook deteriorates when looking for the last 12 months, The Consensus Forecast’s expectations are towards the GDP to grow despite a dire of 2020. This shows such fluctuation arises from COVID-19 will not stand forever. Based upon the opinion that Turkey may become a key actor and get a slice of the cake that India presents for the whole world; trade and investment relations between the two countries, the public procurement regime in India, and its advantages and disadvantages were discussed within the scope of this article.

Economic Relations Between Turkey and India

Currently, the projects undertaken by Turkish firms include subway and bridge construction, railway tunnels, and manufacturing of military ships as well. After the lately 2.3 billion USD amounted military ship tender that a Turkish consortium won, the total amount of the contracting projects of Turkish contractors in India became over 3 billion USD.

Concerning the current legislation between the two sides, there is an international agreement regarding mutual legal assistance and a double taxation agreement as well, but nonetheless each is not enough and propriate to recent conditions. It is known that a revision on the double taxation agreement and a brand new reciprocal promotion and protection of investments agreement are being considered nowadays.

General Information About the Public Procurement Process

There is no comprehensive legislation for public procurement in India. Instead, the system shapes within the administrative rules, Manuals, and provincial laws. Still, the process is transparent and most of the procurements are going through tenders. To improve transparency and reduce the scope for subjectivity, the Department of Expenditure had prepared a set of three Manuals on Policies and Procedures for the Procurement of Goods, Works and hiring Consultants. Of course, all three of these are prepared in conformity with the General Financial Rules (GFR), which forms the basis of the regime and was most recently revised in 2017.

The Public Procurement Bill, 2012, is another written document. The Bill derives its essence from the UNCITRAL Model Law of July 2011. The Bill covers the procurement of goods, services, works, procurements by public-private-partnership (PPP) and as well as special purpose vehicles (SPVs). The Bill seeks to ensure transparency and accountability in the public procurement process and fair and equitable treatment of all bidders.

FDI Policy

What needs to be considered in this regard is that India is gradually turning into an inward-oriented structure. Therefore, projects that do not require advanced knowledge and know-how are given to companies of Indian origin. But since projects which require engineering consultancy that Indian companies cannot handle are being tendered to foreigners, India holds the tremendous economic potential for the overseas contractors. So, even though India’s inward-looking scene, at the same time, the Government follows-up a policy of liberalization when it comes to FDI.

The brand-new initiatives such as “Make in India” or “Digital India” are basic examples of the Government’s modernizing plans. These plans are pushing the Parliament to ease the investment caps and open up the restricted sectors to overseas contractors as well. 

As for the sectoral distinction, except for a list of prohibited ones, a non-resident investor can invest in India subject to the Foreign Direct Investment Policy (“FDI Policy”) issued by the Department for Promotion of Industry and Internal Trade (erstwhile Department of Industrial Policy and Promotion) and the Foreign Exchange Management Act, 1999 and rules and regulations issued thereunder.

In the sectors/activities mentioned in Chapter 5 of the FDI Policy (“Listed Sectors”), foreign direct investment up to the limit indicated against each sector/activity is allowed, subject to applicable laws/regulations; security and other conditionalities mentioned therein.

In sectors/activities other than the Listed ones, foreign direct investment is permitted up to 100% under the automatic route, subject to applicable laws/regulations; security and other conditionalities.

Listed Sectors which are under the government route, approval of government would be required to acquire equity by way of transfer or subscription. Listed Sectors which are under the automatic route, no approval of government is required and investment can be made directly without any consent or approval, subject to the sector related conditionalities, if any, mentioned in the FDI Policy.

Advantages, Disadvantages, and Important Notes for Turkish Investors

• As mentioned above, India is an important market for Turkish contractors and engineering consultancy firms. India’s high growth rates allow large-scale infrastructure investments to be realized. Especially in the urban regions of India, large infrastructure projects are needed such as water treatment, environmentally friendly transportation, and construction, renewable energy, and environmental pollution control.

It has been announced by the Government of India that there is a serious need for infrastructure and superstructure investment whose sizes will most probably reach up to trillions of dollars. This includes extensive projects such as new highways, railways, ports, 100 smart cities, industrial corridors, and subways as well. It is also stated by the Government that 50 million houses will be built in India in the coming periods. In brief, the priority sectors that Turkish contractors might get benefits are as follow:

Infrastructure

There is a lot of focus by the Indian Government. For example, it has been announced in the recent budget that 100 new airports shall be developed under UDAN Scheme by 2024.

Manufacturing

There is a lot of focus also on manufacturing. The Government has also launched the ‘Make in India’ scheme to facilitate foreign companies to set up manufacturing plants in India. Affordable housing is another area where the Government has been laying a lot of stress on and this sector has also garnered a lot of interest from overseas contractors.

Information Technologies and Digitalization

In September 2018, the Government released the National Digital Communications Policy, which envisages increasing FDI inflows in the telecommunications sector to 100 billion USD by 2022.

Defense Systems

Defense is another sector which has been recently liberalised under the present regime with the intent to make India a defence manufacturing hub.

• Since there is no uniform and comprehensive legislation in force, this may cause the preparation of different contracts and different practises might be seen as well. In case of violation of the contract that might arise from this complicated structure, there is a serious legal risk for foreign contractors of being blacklisted for 3 years.
• It may be necessary to establish an incorporated local subsidiary or an SPV of an overseas vendor due to the provisions in the tender specifications, financial and tax requirements, employment or due to any other factors. This is a common occurrence. In this case, procurer may request a guarantee from the Parent Company in the name of the local partner, which may bring some financial and legal risks.

Banking operations are closely supervised by the Central Bank of India (RBI). Therefore, problems such as bureaucracy and long procedures can be encountered in this regard. Since the solution of the problems can be quite difficult or long, the contractors should be cautious about these issues and should not hesitate to get consultancy from the experts to make the transactions smoothly.

There were some serious difficulties regarding bank guarantees and finding a corresponding bank because of the lack of cooperation in the banking system between the two countries. This was tremendously increasing the costs of banking transactions, so, it prevented Turkish companies from entering the market. Regarding the issue, this problem was largely resolved thanks to the MoU signed between Emirates NBD Bank – which bought 99.85 per cent of Sberbank and Denizbank in April 2020 – and Turkey India Business Council of Foreign Economic Relations Board of Turkey (DEİK).

• Sometimes to avoid establishing an incorporated local subsidiary or sometimes just because of sectoral restrictions, it is seen that the tender is undertaken jointly with an Indian company. In this case, since the prime contractor will be the Indian one, it is important to make an inter se between the sub-contractor and the prime contractor regarding the responsibility of the sub.
  
  It is possible to enter the tenders alone, as a JV or as a consortium, but consortiums in India are not a method preferred by the Government. In this respect, with a partnership opportunity, it seems more possible for Turkish firms to operate within a JV structure in a way that all parties will be responsible for the project together.
   
• In the recent years, many Indian contracting and engineering consultancy firms started to visit Turkey’s Offices of the Commercial Counsellors in India, by asking for their desire to meet and establish a JV relationship with Turkish firms. This assistance and partnership request of Indian companies should be taken into consideration eventfully. Because in this way, companionship with a partner who has the market domination in India and who knows the internal procedure well, will provide many benefits in terms of increasing the awareness and business capacity of Turkish companies in the market. At this point, we would like to remind the requirements of entering a tender with a local partner which we mentioned above.
   
• Care should be taken about Transfer of Technology (ToT) as well. Tender documents and sector-specific guidelines should be examined exhaustively and in detailed. Usually, clauses regarding IP rights are contractually mandated. Besides, procurer’s request for a key technology blueprint and too much authority and access on the IP rights are usually seen in practice as well. Since the consequences of intellectual property infringement in India can be more expensive and extremely difficult than expected, it is necessary not to hesitate to get high-quality experts’ consultancy.

Is it Possible to Use Local Currency?

Since there is no SWAP Agreement between the two countries, neither side has reserves of mutual currencies in their central banks and neither side’s banks have significant activities in other one’s soils, unfortunately, it is not possible to use Turkish Lira for Turkish investors during foreign investments in India. Besides, when considering most of the projects are being funded by western banks; Euro, USD and Rupi are being used for funding almost all of the projects.

Conclusion

Some Turkish companies have started to take subcontracted works in infrastructure and superstructure projects, and some of them are handling with much bigger ones. The number of manufacturing investments that are being made by the Turkish companies are increasing as well. But unfortunately, the presence of Turkish companies in India is still far below the desired level.

It is expected that there will be large-scale investments regarding infrastructure projects in a short period. Especially with the completion of the railway transportation projects that will connect the metropolises of Delhi, Mumbai, Chennai and Howrah, there will be very fast transportation between the west and the east sides of the country. Besides, new modern cities will be built on this line. It is useful to follow up the infrastructure tenders nowadays by Turkish contractors.

Delegation visits, B2B meetings, and any kind of organizations – even the online ones – to be arranged mutually to develop the commercial ties between Turkey and India will be very beneficial to get a share from the opportunities in the market and it will initiate the cooperation opportunities of both sides as well. The potential which is still waiting to be explored in India is ready for the Turkish investors.

Once for all, I would like to extend my gratitude to my dear colleagues Mr. Rajesh Gupta and  Mr. Amit Aggarwal from SNG & Partners, to Mr. Hüseyin Aydın, Republic of Turkey’s Commercial Attache in Mumbai and to Mrs. Aysun Timur, Republic of Turkey’s Commercial Counsellor in Delhi, for their precious assistance in preparing such study.