Transcript Foreign Investment in India: The Legal Regime

Foreign Direct Investment in India:
Evolution & The Legal Regime
Rajiv K. Luthra
Managing Partner
Luthra and Luthra
Law Offices
Telephone: 91-11-2335 0633
Fax: 91 11 2372 3909
E-mail: [email protected]
Evolution of Economic
Liberalization
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Phases of Indian Economy
1947-1980
• Command and Control Economy
– Allocation of resources by the Government
(budgetary grants)
– Government took active part in setting priorities
for the economy
– Self-Reliance was the buzz word
– Nationalisation of Banks
– Limited scope for private participation
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Phases of Indian Economy
1991-2000
• Liberalization and Globalization of Indian
Economy
– Increased emphasis on private sector
participation
– Limited extent of FDI participation
– Gradual improvement in the enabling
environment
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Phases of Indian Economy
post 2000
• Political Coalitions have started providing
stable governments
• Government to get out of owning and
managing businesses: Disinvestment Policy
• Gradual relaxation in the FDI Policy
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Progressive Liberalisation
Pre-1991
FDI was allowed selectively up to 40% under FERA
This period was dominated by the Congress party
1991
35 high priority industry groups were placed on the Automatic Route for FDI up
to 51%
Minority Congress government: Initiated economic reforms in a big way
1997
Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/
51%/50%
United Front Government: Inclusive of ‘left parties’, was perceived as
traditionally opposed to FDI, but continued with the reforms.
2000
All sectors placed on the Automatic Route for FDI except for a small negative list
BJP coalition government:(coalition of Left and Right wing parties) was
traditionally seen as opposed to FDI, but continued with economic reforms.
Post 2000
Many new sectors opened to FDI; viz., insurance (26%), integrated townships
(100%), mass rapid transit systems (100%), defence industry (26%), tea
plantations (100%), print media (26%).
Sectoral caps in many other sectors relaxed;
BJP coalition government: pursued reforms vigorously and initiated second
generation reforms.
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Consensus on Economic Liberalisation
• Change in perception
– Indian Business Houses
– Government
– Legal Framework: shift from a Positive List to
a Negative List (FERA  FEMA)
• Gradually all sectors moving to ‘Choice’
and ‘Competition’ (Multiple Player Model)
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Present Picture
• India: Fourth largest economy in terms of
Purchasing Power Parity
• Tenth most industrialized economy
• GDP growth rate of 8.1% - Second highest in the
world.
• Considerable improvement in FDI inflows
• FII inflows:
– For the period, July 2003 – Jan 2004 FII inflow has
exceeded USD 7 bn, which is more than the cumulative
FII inflow in the last five years.
• Still a big gap between India and China
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Entry Process & Entry
Strategies
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The Industrial Policy
Industrial Licensing
• All Industrial undertakings exempt from obtaining an
industrial license to manufacture, except for:
– Industries reserved for the Public Sector
– Industries retained under compulsory licensing
– Items of manufacture reserved for the Small Scale
Sector
– If the proposal attracts locational restriction
• Industrial Entrepreneur Memorandum
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The Industrial Policy
• Industries reserved for the Public Sector: (1) Atomic
Energy and (2) Railway Transport
• Compulsory licensing needed in the following
industries:
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Distillation and brewing of alcoholic drinks
Cigars and cigarettes and manufactured tobacco substitutes
Electronic aerospace and defence equipment of all types
Industrial explosives including detonating fuses, safety fuses,
gun powder, nitrocellulose and matches
– Certain hazardous chemicals
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The Industrial Policy
Locational Policy
• Industrial undertakings are free to select the location
• Location to be 25 km away from any city with a
million strong population
– Exceptions:
• When located in an area designated as an
“Industrial Area” before the 25th July, 1991.
• Electronics, Computer Software and Printing (and
any other industry which may be notified in future
as ‘non polluting industry’).
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The Industrial Policy
Small Scale Industries
• Suitable for Foreign Investment?
– Cap on Investment in fixed assets (plant and machinery) is Rs.
10 million (approx. SGD 3,70,000)
– Not more than 24 per cent of total equity can be held by
any industrial undertaking either foreign or domestic
– Upon such equity exceeding 24% the SSI status is lost.
Carry-on-Business (COB) Licence required.
• Various items reserved exclusively for SSIs.
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.
The Entry Process
Investing in India
Automatic Route
Prior Permission
General rule
•Inform RBI within 30 days of
inflow/issue of shares
• Pricing: FEMA Regulations
•Unlisted – CCI
•Listed – SEBI
• Cap of Rs. 600 Crore
(approx SGD 222 million)
By exception
Approval of Foreign
Investment Promotion
Board needed.
Decision generally
within 4-6 weeks
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The Entry Process: Automatic Route
• All items/activities for FDI investment up to 100% fall
under the Automatic Route except the following:
– All proposals that require an Industrial Licence.
– All proposals in which the foreign collaborator has a
previous venture/ tie up in India.
– All proposals relating to acquisition of existing shares in
an existing Indian Company by a foreign investor.
– All proposals falling outside notified sectoral policy/
caps or under sectors in which FDI is not permitted.
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The Entry Process: Government
Approval
FIPB Approval
• For all activities, which are not covered
under the Automatic Route
• Composite approvals involving foreign
investment/ foreign technical collaboration
• Published Transparent Guidelines vs.
Earlier Case by Case Approach
• Downstream Investment
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Subsequent Investment in the same
or allied field
Press Note 18
• No Automatic Route for FDI and/or technology collaboration
for those who have or had any previous joint
venture/technology transfer/ trade mark agreement in the
same or allied field.
– Same field : Four digit NIC 1987 Code
– Allied field : Three digit NIC 1987 Code.
• IT Sector & International Financial Institutions exempted.
• New Trend: FIPB examines objections by the earlier
partner objectively.
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Acquisition of shares in a
Listed Company
Takeover Code
• Acquisition of more than specified equity stakes
would entail public offer
• Pricing: Average of 26 weeks or 2 weeks,
whichever is higher
• No takeover of management before completion of
Takeover Code formalities
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Other modes of Foreign Direct
Investment
GDR, ADR, FCCB
• Indian Companies allowed to raise equity
capital in the international market through
the issue of GDRs/ ADRs/FCCBs.
• No ceiling on investment
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Other modes of Foreign Direct
Investment
GDR, ADR, FCCB (Contd.)
• No end-use restrictions on GDR/ ADR/ FCCB issue
proceeds
– Except
• Investment in real estate
• Stock markets.
• Government clearance required when sectoral cap is
exceeded, or for a project not falling under Automatic
Route.
• 25% of the FCCB proceeds can be used for general
corporate restructuring.
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Foreign Technology Collaboration
• Foreign technology collaborations are permitted
either through the automatic route or by the
Government.
Policy for Automatic Approval
• To all industries for foreign technology collaboration
agreements, irrespective of the extent of foreign equity in the
shareholding, subject to:
– The lump sum payments not exceeding US $ 2 Million;
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Foreign Technology Collaboration
Policy for Automatic approval (contd.)
– Royalty payable being limited to 5 per cent for
domestic sales and 8 per cent for exports, subject to
a total payment of 8 per cent on sales
– No restriction on the duration of the royalty
payments
– The aforesaid royalty limits are net of taxes and are
calculated according to standard conditions.
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Foreign Technology Collaboration
Policy for Automatic approval (contd.)
– Payment of royalty up to 2% for exports and 1% for
domestic sales is allowed under automatic route on
use of trademarks and brand name of the foreign
collaborator without technology transfer.
– Registration of FC Agreement with RBI.
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The Entry Strategy
• Forms in which Business can be conducted in
India
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Wholly owned subsidiary
Joint Venture Company
Branch Office
Project Office
• India Presence: Liaison Office
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The Entry Strategy: Joint Venture
Company
• Advantages
– Limited liability
– Market Penetration
– Local Partner’s Expertise and Experience
• Vital Considerations
– Choice of Joint Venture Partner
– Due Diligence
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The Entry Strategy: Joint Venture
Company
• Vital Considerations (Contd.)
– Clearly defined agreement
– Terms of the Shareholders’ Agreement should be
reflected in the Articles of the Company.
– Share Transfer Restriction in a Public Limited
Company
– Disproportionate voting Rights: Veto
– Non-compete
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The Entry Strategy: Joint Venture
Company
• Vital Considerations (Contd.)
– Agreement for future issue of share capital
– Dispute Resolution
– Non-disclosure of confidential information post
termination
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The Entry Strategy: Branch Office
• Purpose/Viability of a Branch Office
– Represent the business interest of foreign company
– For the purpose of execution of the Project
• Project Office is in the nature of a Branch
Office set up for a particular project.
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The Entry Strategy: Branch Office
• Permissible activities for a Branch
Office
– Export/Import of goods
– Professional or Consultancy Services
– Carrying out research work in which the parent
company is engaged
– Promoting
technical
or
financial
collaborations between Indian Companies and
parent or overseas group companies
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The Entry Strategy: Branch Office
• Permissible activities (Contd.)
– Representing the parent company in India and
acting as Buying and Selling Agent
– Rendering Technical Support to the products
supplied by parent/group companies.
– Foreign Airlines/ Shipping Companies
• Issue: Project/ Branch Office – Permanent
Establishment
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The Entry Strategy: Liaison Office
• Liaison office for
– Promotion of business interest; spreading
awareness of company’s products; explore
opportunities; work as channel of communication
etc.
– Cannot carry on any commercial, trading or
industrial activity or earn any income in India
– Is required to maintain itself out of inward
remittances received from abroad through normal
banking channels.
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The Entry Strategy
• Branch Office/Liaison Office can be set up
only with prior RBI approval
• Profit of the Branch or Surplus of the project
after completion can be remitted, after
payment of all applicable taxes in India
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Exit Issues
• Transfer of shares from non-resident to non-resident
does not require RBI approval for pricing
• Transfer of shares from non-resident to resident does
not require any FIPB Approval, though RBI approval is
required for pricing
– Pricing as per FEMA – listed and unlisted securities
– RBI permission not required if sale through Stock Exchange
• Mauritius Route: Capital Gain Advantage
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Legal Structures
facilitating FDI
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Facilitating FDI in India
Emergence of Independent Regulators:
Electricity, Telecom, Insurance, Capital
Market and Competition Law
• Ensuring level playing field vis-à-vis
Government Corporations and inter se private
players
• Expertise in the subject matter involved
• Expeditious resolution of dispute
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Facilitating FDI in India
Emergence of Independent Regulators (Contd.)
• Regulators under consideration: Petroleum,
Railways, Information and Broadcasting
• Regulator to curb Anti-Competitive Practices
• Government Directives
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Facilitating FDI in India
Labour laws – a more contractual approach.
• Move towards: hire and fire
• Progressive use of discretionary executive powers
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Permissions granted for closure of unviable units
Inspections only upon workers’ grievances
Voluntary Retirement Schemes
EPZs, SEZs etc may be exempted from application of certain
labour laws
– Amendment to Industrial Disputes Act under consideration
– Amendment to Contract Labour (Regulation & Abolition) Act,
1970 under consideration.
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Investment Incentives
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Incentives for investment in Telecom
Sector
• Movement towards technology neutral Unified Licensing
Regime
• Permission for Inter-Circle & Intra-Circle Mergers
• Exemplary growth in teledensity, subscriber base etc.
• Companies commencing operations before 31st March,
2004, would enjoy tax benefits:
– 100% deduction for first five years
– 30% deduction for next five years
• Exemption from tax on interest income and long term
capital gains in certain cases
• Import duty rates have been reduced for various telecom
equipment
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Investment Incentive for
IT Industry
• Software companies have a ten year tax holiday
on their export income
• In 1998 the Government set up a new Ministry of
Information Technology
• The Information Technology Act, 2000 was
passed to tackle cyber crimes and facilitate ecommerce
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Incentives for Investment in
Power Sector
• New Legal Regime: Electricity Act, 2003
• The Act provides for: Multiple Buyer Model,
Independent Regulatory Body, Open Access,
Power Trading as an independent business,
delicensing of generation
• 100% FDI Automatic Route in:
– Hydro-electric power plants;
– Coal/lignite based thermal power plants;
– Oil/gas based thermal power plants.
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Incentives for Investment in
Power Sector
• Other investment incentives:
– New Power Projects eligible for 100% tax holiday
in any block of ten years, within first fifteen years
of operation.
– The Deadline for income tax exemption for new
power projects extended from 2006 to 2012.
– Various indirect tax incentives:
• Concessional rate of import duties
• Special project import scheme
• Deemed export benefit for certain categories of power
projects.
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Reforms in Financial Sector
• FIIs allowed in Capital Market, can invest
both in Debt and Equity
• FDI cap in private sector banks raised to
74%
– 10% cap on voting rights
• The Mutual Fund market is also open now
to foreign players.
• Equity issue pricing is market determined
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FDI in Real Estate: Policy & Issues
• Press Note 4 (2002 Series)
– 100% FDI under Automatic Route PERMITTED FOR Integrated
Townships, subject to following conditions:
• Foreign company to be registered as Indian company under Companies Act,
1956
• Core Business - Integrated Township Development with a successful track
record.
• Minimum area of development: 100 acres as per local bylaws/rules. In absence
of such by laws/rules, minimum of 2000 dwelling houses for about 10,000
population to be developed by the investor.
• Conditions post acceptance of FDI proposal
•
•
•
•
Minimum capitalization norms
Upfront payment
Minimum lock-in period
Time bound completion of project
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FDI in Hotel and Tourism:Policy
and Issues
• 100% FDI under Automatic Route
• “Hotel” includes Restaurant, beach resorts and other tourist
complexes providing accommodation and/or Catering
• “Tourism related industries” includes travel agencies, tour
operating agencies, units providing facilities for cultural,
adventure and wild life experience to tourists; surface, air
and water transport facilities to tourists; leisure,
entertainment, amusement, sports and health units for
tourists and Convention/ Seminar units and organizations.
• Automatic approval for Technical, Consultancy, Marketing,
Publicity, Managerial services subject to specified limits.
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Conclusion
• Economics occupies centre stage in 2004
elections
• Rising expectations; rising prosperity
• Legal regime: more stable and predictable
• Bureaucracy: changing with the times
• The Future beckons
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Thank You
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