A colourful partnership

India and Canada have embarked on a renewed drive to boost bilateral trade and investment. Rebecca Abraham reports

February was an important month for bilateral relations between India and Canada. On 22 February, the governor general of Canada, David Johnston, accompanied by around 20 leaders of Canadian businesses and universities, began a state visit to India. The theme of the visit was education, innovation and entrepreneurship.

First on the agenda was a visit to the Taj Mahal. But a day later when the governor general got down to business he and his delegation met with government representatives, innovators and CEOs, to whom he spoke of his government’s commitment to building a “more structured and productive strategic partnership” between India and Canada.

Thinking big

While both countries continue to hammer out a comprehensive economic partnership agreement (CEPA), talk of increasing bilateral trade to C$15 billion (US$13.6 billion) a year by 2015 continues.

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The current level of trade is around one-third of this amount, but the figure may actually be misleading. “A lot of trade is not accounted for as there is a lot of indirect trade,” says Peter Sutherland, the president and chief executive officer of the Canada-India Business Council, who was part of the governor general’s delegation.

Sutherland, who is also a senior business adviser at Canadian law firm Aird & Berlis, adds that trade and investment between Canada and India are “growing nicely”.

Indeed, as India continues its search for stable supplies of natural resources to satisfy its growing demand, Canada’s oil and gas sector is one area where such growth is particularly visible. In February Calgary-based Husky Energy said it had shipped 1 million barrels of crude oil to state-owned Indian Oil Corporation from its offshore fields in eastern Canada. This was reportedly the first time that Canadian oil had been shipped to India. Speaking to the Wall Street Journal, Husky Energy’s CEO, Asim Ghosh, said the deal opened up “a potentially very large market” for the company.

Also in February, the Indian cabinet cleared plans for Indian Oil to acquire a 10% stake in a Petronas shale gas and liquefied natural gas project in British Columbia. The deal is worth US$900 million.

Meanwhile, Mining Weekly reported that ONGC Videsh, the overseas arm of India’s Oil and Natural Gas Company, has set up an office in Calgary as part of its efforts to acquire oil sands assets in Canada.

While the lion’s share of bilateral investment is heading from India to Canada, investment flows in the opposite direction are gaining pace. Recent reports suggest that the Canada Pension Plan Investment Board (CPPIB) is preparing to invest ₹10 billion in L&T Infrastructure Development Projects, a subsidiary of Larsen & Toubro. CPPIB had earlier invested in India’s real estate market through a joint venture with Shapoorji Pallonji Group.

Catalysts for growth

A range of cooperation agreements have been signed between Canada and India over the past few years. The India-Canada nuclear cooperation agreement, signed in 2010, allowed for the export of nuclear equipment and fuel from Canada to India, while a memorandum of understanding signed in 2009 by the agriculture ministries of both countries paved the way for the establishment of knowledge sharing mechanisms in emerging technologies, agricultural marketing and animal development. As it stands, Canada’s chief exports to India come from the agri-food sector.

Growing demand from India and a desire by Canada to diversify its markets has led to an increase in activity on the oil and gas front. It also prompted the signing last year of a five-year memorandum of understanding by the two countries.

Raj Sahni, a Toronto-based partner at Bennett Jones, believes that the eight rounds of bilateral talks undertaken so far as part of the negotiations for the CEPA, have also have a positive effect on trade. “The fact that both governments have been negotiating the CEPA has created a much stronger trust factor between Indian and Canadian companies,” says Sahni, who is the chair of Bennett Jones’ India practice.

Hitting roadblocks

A bilateral investment promotion and protection agreement, which could provide another boost to bilateral trade, has been in the pipeline for some time now. However, it appears to be on hold, with India signalling that it is rethinking such agreements as a result of the ongoing tax dispute with Vodafone and an arbitral ruling two years ago in which India was ordered to pay more than US$4 million to Australian company White Industries for breaching its obligations under the India-Australia Bilateral Investment Treaty and infringing White Industries’ rights as an investor.

Several other companies, including Deutsche Telekom and Children’s Investment Fund, have also served notice on India, citing various bilateral investment promotion and protection treaties, after their investments in the country ran into trouble.

In the meantime, trade missions between India and Canada – such as that sent by the Federation of Indian Chambers of Commerce and Industry in November 2013 – continue apace. “The real work is now trade missions going both ways … this is where businesses meet with each other and start talking,” says Sunny Handa, a partner at Blake Cassels & Graydon (Blakes). Handa has been on several such missions and recently advised IFFCO, one of India’s largest fertilizer manufacturers and distributors, on a major investment in Quebec. He says that the bilateral negotiations for the CEPA and other agreements are “very nascent, high-level, early seeds of what could later become a more important free trade arrangement”.

An easy ride

Even in the absence of the CEPA, most observers agree that Indian investors face few obstacles when investing in Canada. Moreover, the Canadian government is normally very supportive of foreign investment.

Dee Rajpal, a Toronto-based partner at Stikeman Elliott and co-leader of the firm’s India practice, points out that since the Investment Canada Act came into force nearly 30 years ago, “over 99% of reviewable transactions have been approved”.

“The level of scrutiny is going to depend on the type of investment and the industry,” says Rajpal, adding that most transactions get approved in a period of 30 days “unless a specific national security concern or Canadian cultural concern” exists. Stikeman Elliott was Canadian counsel to the Jindal Group in its C$116 million acquisition of CIC Energy Corp, a Toronto Stock Exchange-listed company which has coal mines in Botswana.

“Canada has very light regulation in most sectors so while nuclear and defence would be difficult, most other sectors would not be a problem,” says Handa at Blakes.

According to the Investment Canada Act, all foreign investors looking to “acquire control of an existing Canadian business or to establish a new unrelated Canadian business,” must submit either a notification or an application for review. A net benefit test is applied while evaluating each application.

All acquisitions are also subject to Canada’s stringent antitrust laws. The country’s competition regime, which unlike India’s competition law contains both civil and criminal provisions for preventing anti-competitive practices, establishes a requirement for the pre-merger notification of acquisitions of businesses operating in Canada. However, as Pat Koval, a partner at Torys in Toronto, suggests, the competition regime doesn’t present a real concern for investors.

“I have never seen a transaction by an Indian client shut down either by Investment Canada or under the Competition Act,” says Koval, who co-heads the firm’s India practice. Torys has several Indian clients, including the Adity Birla Group, for which Koval reports she has acted on “virtually all” of its projects in Canada.

In addition to the Investment Canada Act and the Competition Act, investors need to take account of Canada’s provincial laws and regulations. However, these are not typically problematic.

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Proceed with care

Despite Canada’s seemingly uncomplicated investment regime, legal advisers are quick to suggest that it is critical to engage counsel early on.

“We have seen things go wrong where the foreign investor has not properly engaged with the local community or with the local authorities,” says Pascal de Guise, a Montreal-based partner at Borden Ladner Gervais, who was Canadian legal counsel to Bangalore-based Strides Arcolab when it recently sold its injectibles business to Mylan.

“My first advice to an Indian acquirer that wants to acquire a business that is significant for a community is to engage early on with that community.”

Visa woes

Another challenge is visa and immigration issues. “One concern that comes up for us all the time in deals between the two countries is the very real barriers posed by the visa systems … we don’t have enough flexibility on people movement right now,” says Koval at Torys. “It is not easy for Indian business people to come to Canada at the drop of a hat, nor is it easy for Canadians to get to India quickly.”

Indian companies that have assets and operations in Canada and require longer term visas for their executives are particularly concerned. Alan Diner, a Toronto-based partner at Baker & McKenzie who heads the firm’s global immigration and mobility practice group in Canada, says policy for bringing in workers in the information technology (IT) sector “is very unclear today”. Diner says the IT sector in Canada employs the largest number of foreign workers from India and that the process by which IT workers are brought into Canada – the local market opinion (LMO) process – has ground to a halt.

This was triggered in part by an April 2013 news report by the Canadian Broadcasting Corporation that IT workers brought into Canada by outsourcing company iGate were replacing workers at Royal Bank of Canada. Canada allows skilled workers to be brought into the country only after it can be ascertained that nobody within Canada is qualified to do the same job.

“The biggest regulatory hurdle [to movement of skilled workers] is the LMO in outsourcing situations,” says Diner.

Unfulfilled potential

While business ties between India and Canada may be on a secure footing and progress on a range of bilateral cooperation agreements has boosted confidence and fostered greater trust on both sides, the fact remains that the level of trade and investment between the two countries is falling well short of its potential.

“Despite the historical links between the two countries, the amount of trade is actually quite small all said and done, compared to other countries where Canadian and Indian businesses do business,” says Vivek Bakshi, a Toronto-based partner at Dentons. “There is definitely an intention on the part of both governments that there should be increased investment.”

“Many Canadian companies have sent people to India, but in a number of cases they found it is still a bit early,” says Handa at Blakes. He suggests that despite having recognized the potential in the Indian market, Canadian investors are waiting and watching for now.

Indian investors, it seems, are also holding back, with the economic slowdown and uncertain political situation at home dampening their appetite for acquisitions abroad. “Indian companies, particularly over the last year, have been less inclined to make major investments as they are attending to their own affairs at home,” remarks Koval at Torys.

Hopes are high that the present inertia may come to an end after India’s general elections in April and May. If this is the case, newly emboldened investors are likely to find much to attract them to Canada, not least the country’s stability and relatively straightforward regulatory environment.

“As the global credit crisis has shown, Canada is rock solid both politically and economically, and supported by a world class banking system,” says Mandeep Dhaliwal, a Vancouver-based partner at Lawson Lundell, who advises banks and private lenders on financing transactions. For Indian investors who are craving the stability and certainty that currently eludes them at home, this could be an attractive scenario.

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