In order to address the pressing matter of climate change and its repercussions, countries have adopted policies to grapple with climatic challenges, and India is no exception to this. One of the industries which has received significant boost by the Indian Government, considering its ability to reduce climate vulnerability, is the automotive industry. The Government has set up several initiatives to provide incentives to manufacturers and customers alike, and to encourage manufacturing and faster adoption of electric and hybrid vehicles, such as the FAME India Scheme and other tax incentives in the working. It may however be noted that the Government has extended FAME scheme only until March 2024 and it is not clear how EV manufacturers will be subsidised going forward.
Like any sunrise sector, the EV industry has also opened investment opportunities for venture capital and private equity investors. An investor looking to make an investment in an EV manufacturing company, is likely to undertake a legal due diligence of the company prior to the investment and seek appropriate representations from the target in the investment agreement. The company looking for investments should therefore ensure compliance with applicable laws. This article lists the key compliances for EV manufacturing entities.
A. Regulatory Compliance
One of the salient regulatory checks that forms part of a diligence is review of the applicable licenses and permissions obtained by the target. Investors will seek documentary proof from the target of the licenses obtained by it. The key certificates that an EV manufacturer should possess is the ‘type approval certificate’ from an authorised testing agency like ICAT or ARAI, and certificates of ‘conformity of production’, as required under the extant motor vehicles regulatory framework. In addition to these certificates, the diligence will also entail review of other generally applicable licenses such as environmental clearances and factory licence.
Further, if the target manufactures EV batteries, it should have registered itself as a ‘producer’ under the Battery Waste Management Rules, 2022. This registration is necessary to record and report the target’s obligation of ‘extended producer responsibility’ of recycling and/or refurbishing batteries.
An additional compliance proof that a target may be required to provide is satisfaction of the conditions under the FAME scheme such as the sourcing requirements, if the target has availed subsidies under the scheme. In case of non-compliance with the FAME scheme, the Government is entitled to not only recover the subsidies granted to the target but to also levy penalties.
B. Intellectual Property
In case the target has developed any new technology for its products, steps should be taken to protect the invention under the Patents Act, 1970. As per the Patents Act, a patentable invention is ‘a new product or process involving an inventive step and capable of industrial application’. This will ensure that the target can exploit the technology to its benefit and exclude third persons from creating, using and monetizing the same.
It is equally important for the target to assess and be certain that its invention is not violative or infringing of any third party’s intellectual property rights. Investors are likely to obtain necessary confirmations from the target on the same in the investment agreement and any misrepresentation in this regard could lead to adverse consequences for the target.
Further, if the target has entered into a technology collaboration agreement or a technology transfer agreement, it should pay closer attention to its rights under such agreement, particularly in relation to the background and foreground intellectual properties, and any extenuating circumstances under which the agreement could be terminated. Any provisions in such agreements which could result in business disruption for the target, will be viewed unfavourably by investors.
The target should also have robust intellectual property provisions in the employment agreements executed with its R&D team. Any inventions by an employee should be considered as ‘work for hire’ and the intellectual property in the work product of such employee should vest with the target as the employer.
C. Anti-Trust Issues
The Competition Act, 2002 prohibits any person from entering into anti-competitive arrangements or agreements which could have ‘appreciable adverse effect’ on competition, such as exclusive supply or distribution agreements. The Competition Commission of India has imposed penalties, under the Competition Act, on various automobile manufacturers, for thwarting competition by engaging in practices such as restricting access to their brand of spare parts or restricting access to the diagnostic tools or manuals for repair of their vehicles by independent service providers.
The contractual arrangements entered into by EV manufacturers with its stakeholders such as its suppliers, should be carefully drafted, to ensure that such arrangements are not viewed as being anti-competitive or which could potentially result in investigations by the Competition Commission of India. This is especially important as investors will obtain representations from the target in the investment agreement that it is compliant with applicable laws.
The upward trajectory of the EV industry means that investors will continue to take a keener interest in this sector in the years to come, and in view of this and for the larger public good, it is important for EV manufacturers to expend time and resources to ensure they are legally compliant.
