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March 07
Critical State Election Results in India Put Premium on Greater Awareness of Indian Landscape For Business Leaders

​The last few weeks have seen a series of important state elections in India.  The results, announced yesterday, suggest that there is likely to be both promise and peril in the days to come in India. There is greater uncertainty because now the states of Uttar Pradesh (India's most populous state) and Punjab will be led by parties and coalitions that are not part of the Congress-party-led coalition, which reigns at the national level. This is likely to further exacerbate policy paralysis at the national level and thereby probably slow down much needed reforms in a variety of sectors. The perils here include greater potential uncertainty and delays about government and regulatory policy. However, we have also seen over the last few years that states in India are competing to attract business, and these election results may augur in new initiatives in this vein. This suggests considerable promise as the likely leaders of the new state government of Uttar Pradesh have already indicated that one of the areas they intend to pursue for reform is the power sector. This is a critical sector for infrastructure within U.P. as well as India and a sector where U.S. businesses could have both profitable and positive effects.

This is just one example of how the state election results could have an impact on business interests of U.S. companies in India. There are many others and as we come to grips with these results greater analyses and discussion of their implications will be essential to those pursuing business endeavors with, and in, India.

 

March 06
Entertainment Business Opportunities and the Chinese Market

It is old news that China's increasingly wealthy consumers are moving up the consumer's hierarchy of needs – demanding non-essential luxuries.  Entertainment is no exception. The new news is that it may be easier and more profitable than ever for foreign firms to access this market, thanks to reduced regulatory barriers and the shifting of consumer preferences in favor of authentic products and experiences.

A significant example of reduced regulatory barriers can be found in the loosening of restrictions on the showing of foreign films in China. Fourteen IMAX and 3D films will now be allowed, in addition to the 20 foreign film quota currently in place. The Chinese government also raised the limits on ticket revenue for foreign films from 13 percent to 25 percent. The Motion Picture Association of America as well as other media groups and firms warmly welcomed these changes.
 
The rapid rise in the number of movie theaters in China demonstrates a willingness on the part of consumers to pay premium prices (Chinese movie ticket prices are often higher than in the U.S.), in spite of the wide availability of cheap pirated dvds. According to Steven Irvine, editor of Week in China, three new cinema screens are built per day in China, and by 2040 China is expected to have as many screens as the U.S., at 40,000.
 
In light of these favorable trends, it should come as no surprise that DreamWorks just announced the launch of a joint venture to build a production studio in Shanghai. According to DreamWorks Animation's Chief Executive Jeffrey Katzenberg, "[O]ur goal is, for five or 10 years from now, to have the leading family-branded entertainment company in China. . . . It's a pretty significant opportunity for us."

 

March 02
The Grainger Investigation, Gift-Giving, and the FCPA

​WW Grainger Inc. is conducting an internal investigation into whether sales staff at their Chinese subsidiary violated the U.S. Foreign Corrupt Practices Act of 1977  by providing bribes in the form of gift cards to officials. According to their securities filing earlier this week, the Illinois-based industrial supply firm voluntarily disclosed to the Securities and Exchange Commission and the Department of Justice "that sales employees may have provided prepaid gift cards to certain customers." Voluntary self disclosures, strongly encouraged by government regulators, allow a firm to demonstrate good faith compliance efforts upon discovery of a potential violation, and in turn such disclosures should be rewarded with reduced enforcement penalties.

The FCPA, in part, prohibits the giving of anything of value to foreign officials. On its face, anything of value prohibits even a 1 RMB gift card (not to mention the exchange of hongbao, gifts of cash in red envelopes given for centuries throughout China). Is that a reasonable prohibition in China, where, as in many countries, basic gift giving protocols are expected? Thankfully, the FCPA indirectly permits the giving of token gifts by allowing gifts that are permissible under local law. In the case of China this includes gifts under the value of 200 RMB (approximately $30). The activity under investigation involves the giving of gift cards to certain customers, presumably foreign officials. The definition of foreign officials is broad enough to include employees of firms with partial government ownership or any firm operating under a government mandate. Given the involvement of the Chinese government in every facet of the economy many companies safely assume that everyone in the market place is an official for FCPA purposes. 
 
This story highlights the importance of robust FCPA compliance programs. To avoid an FCPA violation, compliance programs must educate all employees and agents with country-specific guidance (e.g., to assume all customers are foreign officials, and to keep gifts under $200). An effective compliance program must also monitor regularly to ensure ongoing compliance by employees and agents. Grainger's International Business Conduct Guidelines note that, "[s]eemingly routine business transactions . . . can violate U.S. and foreign laws. These laws are numerous and complex." Well said. 

 

February 13
CEO Compensation in India:  Growing as India Becomes a Springboard to Other Markets

​According to a recent study conducted by the consulting firm Aon Hewitt, the median pay for a CEO in India on a purchasing power parity basis was at nearly $3.5 million in 2011 for companies with more than $2 billion in revenues.  While this number pales in comparison to the $6 million median pay in 2011 for CEOs in North America, Europe, and the Pacific in companies producing the same level of revenue, CEOs in India have seen a significant growth in their pay over the past few years.  According to the same Aon Hewitt study, CEO compensation in India has been growing by 15 percent to 18 percent in the past few years.  Also, CEO compensation in India grew at almost twice the rate of the country’s per capita income in 2011 according to data provided by India’s government and private sector. 

While many have attributed the growth of CEO compensation in India to performance-based incentives as an emerging trend, the data does not seem to bear this same conclusion.  In the United States, fixed pay is 20-25 percent of a CEO’s total pay, while in India fixed pay makes up 35-40 percent.  Indian compensation structures are more aligned with British and Pacific structures in regards to performance-based incentives.  Others have attributed the growth of CEO compensation in India to global recovery in sectors that are prevalent in India.  This theory seems to hold some weight as financial and information technology services tend to align the pay of CEOs in India with their global counterparts; however, in other sectors, such as telecom, there is more of a demand for unique talent that only India can provide. 

CEOs in India seem to be moving beyond the role of just managing operations in India.  They are also becoming responsible for expanding a company’s brand beyond the Indian market and leaving a global footprint.  With this greater responsibility for CEOs in India, companies are recognizing the need to have highly talented executives in charge of their operations.  This strong demand for unique talent is severely limiting the amount of suitable human capital and driving CEO compensation higher and higher.  With India’s unique role as a potential springboard to growth in similarly situated developing countries, it should not be long until CEOs in India are making almost the same as their American counterparts.

February 06
Criminal Charges Brought Against Wall Street Financiers

​For the first time, criminal charges have been successfully brought against Wall Street financiers in relation to the financial meltdown. The former Credit Suisse Group AG employees include two investment bankers and one broker, two of whom pled guilty to criminal charges of conspiracy. The men inflated values for mortgage bonds and hid losses from the portfolio in order to protect their bonuses. The government lost the previous high-profile case that it brought against two former employees of Bear Stearns in relation to the financial crisis in 2009 when both were acquitted of criminal charges.

The Wall Street Journal reports:

Few criminal cases relating to the financial meltdown have been brought, partly because the problems were so widespread, some lawyers and prosecutors said. "These cases are not easy to make," Mr. Bharara said. "Often such a criminal case can be made only with the help of cooperating witnesses on the inside…or incriminating recordings of misconduct." The guilty pleas of two of the three people charged remove the burden of a costly and difficult trial for the government if it was forced to take all the defendants to trial.

This creates the potential for more criminal charges to be brought against bankers and brokers in connection with the financial meltdown, although holding individuals personally accountable for potentially improper practices and valuations has so far been difficult.

February 06
Online Shopping- the Next Big Gig in India?

​Just recently, online retailing powerhouse Amazon decided to enter the rapidly growing Indian e-commerce market through its launch of the shopping website junglee.com.  Amazon seems to have timed its entry perfectly. The number of people in India with access to the Internet is constantly rising, as is the average per capita income. While those in India are already shopping through popular outlets such as the bookstore giant Flipcart or the Nasdaq-listed travel portal MakeMyTrip, the market is far from being saturated. Data shows that only about 120 million people in a country of more than 1.2 billion are using the Internet with only a small percentage of those using it for online shopping. Estimates are that by 2020, the number of users (and potential shoppers) in India could be as high as 1 billion, given that accessibility continues to grow at its current rate.

Because of the unique market conditions in developing economies such as India, the potential for online shopping success could be even greater than in the Western world. Unlike U.S. customers, the huge majority of Indians has not (yet) become accustomed to doing their shopping in big chain stores like Wal-Mart. In a country where the rate of car ownership is still very low and where real estate prices in and around major cities have skyrocketed over the last few years, one cannot be sure that a full-range suburban superstore will reach the same level of success it had in the United States and other Western countries. Still, the demand for consumer goods remains, and it appears that online shopping is an attractive option to meet it in a cost-effective way.
 
However, trade restrictions are one factor that makes it harder for foreign companies to compete in the e-commerce sector of India. Last December, India suspended its decision to allow retail companies from overseas to sell more than one brand in India. Amazon found a way around this problem by setting up its website to serve mainly as an intermediary between the customer and partner retailers. This means that customers can compare products and prices on Junglee, but purchases must be made through a network of third-party suppliers. Obviously, this is not an ideal situation for Amazon, but the current setup allows Amazon to learn about customer behavior and the logistical challenges that India provides. Amazon is placing a bet that eventually, India will remove trade restrictions on overseas retailers. It is a bet that Amazon is likely to win because of the inevitable pressures of market forces, and if it does, Amazon will have a first-mover advantage that will make it difficult for others to compete going forward.

 

February 06
Accessing the Indian Market- Political & Economic Risks

​India is a fast-growing economy with many opportunities for growth, however uncertainty over policy and legal requirements have been raising concerns for U.S. businesses as they interact with India.  In the last few years there have been a number of events underscoring both the importance of patience, but also of how a deft touch is needed when working with regulatory policy in India. 

For example, there have been time-consuming, opaque and often politicized examples of challenges.  This includes Vedanta’s attempts to bid for Cairn’s oilfields in Rajasthan, Vodafone’s tax troubles with its acquisition of Hutchinson’s Indian assets, and quite recently the volte face on whether Foreign Direct Investment of 51 percent would be permitted in multi-brand retail. 

All of these instances, and many others, underscore the importance of regulatory and administrative policy in India and the difficulty foreign firms face.  India has suffered a drop in foreign investment in the last 18 months, undoubtedly due to some of these kinds of concerns.  However, even with these concerns businesses are keen to interact with India.  With one of the largest and youngest populations in the world, the Indian market cannot be ignored (estimates suggest about 700 million plus people below the age of 40 and getting younger).  Success in the Indian market requires experience, patience and a deft touch in understanding both what announced regulations are likely to entail and how enforcement will likely proceed.

February 06
Complicated Regulation Makes Investing in China Difficult

​The growth of China has been phenomenal over the last three decades, but even experienced and highly respected investment advisors have often faced choppy waters in China.  Anthony Bolton – one of the world’s most successful fund managers – recently relocated to Hong Kong to start a new fund investing in Chinese Companies.  However, his fund’s price has dropped by over 30 percent since then, as have a number of other China funds.  Mr. Bolton said that “actually doing it day in day out, [the problems] were more acute than I thought..'can you believe what you’re told’ and ‘are the figures real figures’…I had wrongly thought because these were U.S.-listed, the standards…would be high.”  He stated that he now does “far more due diligence on certain companies”.  Nonetheless, he is still very optimistic on China and its continuing growth prospects.

Similar promises and perils are seen in the Chinese initial public offering market.  Recently, A Societe Generale Chinese venture is saying it would stay away from mainland China IPOs because their quality is too difficult to assess.  Goldman Sach is also staying away from the mainland IPO market because it views the legal and reputational risks to be larger than the likely fees from underwriting.  Indeed, it appears that the biggest challenges have been assessing firm quality, potential accounting fraud, and conducting due diligence.  Moreover, the truly large IPOs have been difficult for foreign banks to access due to complex regulation.

February 06
U.S. Businesses Facing Intense Scrutiny under Foreign Corrupt Practices Act

​As U.S. businesses increasingly access global markets and expand their global operations they are facing more intense scrutiny under the Foreign Corrupt Practices Act 1977. In 2011, the Department of Justice and the Securities and Exchange Commission tried more FCPA-related cases than in any other year – and this continues a trend of increased enforcement since the early 2000s.  In addition to the increase in cases, there is also a greater focus on targeting individual defendants and also examining cross border acquisitions of firms as the Armor Holdings settlement with the SEC last year indicated.  Thus, if a U.S. company intends to acquire a foreign company then it needs to be aware that it should quickly ensure compliance with the FCPA or risk enforcement proceedings.

These risks are quite prominent when accessing the largest markets in Asia – China and India – where issues about the norms of business and government interaction are such that U.S. businesses will need to be cognizant and informed about potential FCPA liability risks both for their firms and for the key individuals within the firms.  Indeed, it appears the number of people in jail for FCPA violations – often involving not understanding the FCPA – has been and continues to increase.

 

February 03
Foreign Corrupt Practices Act Mistrial Challenges Department of Justice Sting Tactics

​Foreign Corrupt Practices Act enforcement in 2012 is not off to a great start for the Department of Justice.  Most recently, U.S. District Judge Richard Leon declared a mistrial Tuesday in an FCPA case that the DOJ trumpeted as a "turning point" in their attack on foreign corruption. Judge Leon and the jurors in the "Gabon Sting" case dealt a blow to the efforts of the DOJ to expand their aggressive prosecution of FCPA cases through elaborate undercover investigations. The three-month-long trial ended with acquittal for defendants Patrick Caldwell and John Godsey on Monday, and mistrial on Tuesday after the jury was unable to reach a verdict following 10 days of deliberations regarding the other remaining defendants.

The trial was the culmination of an extensive multi-year undercover sting operation by the FBI. Bureau agents, posing as representatives from the government of Gabon in Africa, allegedly received $1.5 million in bribes or bribery offers from the 22 defendants in exchange for sale of $15 million worth of weapons and other military equipment. Of the 22 defendants, three pled guilty, while the remaining defendants have all either been acquitted or had their case declared a mistrial.
 
The FCPA has been on the books since 1977, but the Securities and Exchange Commission and DOJ enforcement of the statute greatly increased in volume, scope, and aggressiveness over the last five years. While the SEC and DOJ can be expected to continue aggressive enforcement of the FCPA, this case signals a limitation on at least one aspect of aggressive enforcement procedures. In short, the government may be forced to reconsider their use of sting operations in FCPA enforcement – presumably not the "turning point" they hoped this case would represent.
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Global Business & Law will examine recent developments and important issues in the realm of – what else – global business and law, especially as they relate to U.S. firms doing business overseas. I will share thoughts and ideas about why these issues are important and how they can impact the way companies do business worldwide.Global Business & Law examines recent developments and important issues in the realm of – what else – global business and law, especially as they relate to U.S. firms doing business overseas. Professor Vic Khanna of the University of Michigan Law School is known worldwide as a leading expert on corporate and securities law, corporate crime, law in India, corporate governance in emerging markets, and law and economics. He is a term member of the Council on Foreign Relations and regularly speaks to national and international audiences. Professor Khanna earned his SJD at Harvard Law School.

 

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