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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: rajiv@luthra.com. Evolution of Economic Liberalization. Phases of Indian Economy 1947-1980.

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foreign direct investment in india evolution 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: rajiv@luthra.com

evolution of economic liberalization
Evolution of Economic Liberalization

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phases of indian economy 1947 1980
Phases of Indian Economy1947-1980
  • 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
Phases of Indian Economy1991-2000
  • 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
Phases of Indian Economypost 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
Progressive Liberalisation

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consensus on economic liberalisation
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
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
Entry Process & Entry Strategies

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the industrial policy
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 policy11
The Industrial Policy
  • Industries reserved for the Public Sector: (1) Atomic Energy and (2) Railway Transport
  • Compulsory licensing needed in the following industries:
    • 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 policy12
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 policy13
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
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
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
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
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 hadany 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
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
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 investment20
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 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 collaboration22
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 collaboration23
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
The Entry Strategy
  • Forms in which Business can be conducted in India
      • Wholly owned subsidiary
      • Joint Venture Company
      • Branch Office
      • Project Office
  • India Presence: Liaison Office

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the entry strategy joint venture company
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 company26
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 company27
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
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 office29
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 office30
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
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 strategy32
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
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
Legal Structures facilitating FDI

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facilitating fdi in india
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 india36
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 india37
Facilitating FDI in India

Labour laws – a more contractual approach.

  • Move towards: hire and fire
  • Progressive use of discretionary executive powers
    • 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
Investment Incentives

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incentives for investment in telecom sector
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
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 e-commerce

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incentives for investment in power sector
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 sector42
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
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
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
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
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
Thank You

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