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Investment in India Overview
MADHURENDRA NATH JHA
Destination India
Amongst Fastest growing market Economies in the World, @ over 7% p.a. last 4 years
Liberal FDI Policy Framework FDI up to 100% allowed in most sectors
Rationalization of Tax Structure to promote Investment High Foreign Exchange ReservesLiberal outbound investment Currency appreciation
Entry Routes for Investment in India Approval Automatic
Foreign Investment in IndiaThe Driving Force
Well diversified Industrial Base
A large & sophisticated financial Architecture
A healthy GDP composition
An acknowledged strength in knowledge driven Industry
FDI and Portfolio Flows to India
Source: RBI, 2007
Investor Confidence
India Ranked 2nd by AT Kearney's Foreign Direct Investment Confidence Index 2007
Has progressively moved ahead in the rankings; was ranked 15th in 2003
Attractive location across all broad sectors especially Manufacturing and high value-added services industries like financial services and information technology.
Investor Attractiveness Source: 2007 A T KEARNEY
0
10
20
30
40
50
60
70
80
90
Manuf. Service Telecom& Utility
retail
India
US
UK
Poland
Germany
Sectors Attracting Highest FDI Equity
Flows
0
500
1000
1500
2000
2500
3000
2004-05 2005-06 2006-07 2007-08
Computer Software &Hardware
Construction Activities
Automobile Industry
Housing & Real Estate
Power
Drugs and Pharmaceuticals
Mettalurgic Industries
All Figures in US $(Million)
Advantage IndiaOne of the Largest Free Market Democracies in the world
Unparalleled resource of educated, hard-working, skilled and ambitious workforce
Youngest workforce in the world
- Working age population estimated to rise 70% of the total population by 2030
- 70 million new entrants to its work force every 5 years
Advantage India
English the language of business in India- one of the largest Pools of English Speaking Manpower
after the US
Manpower- Over 3 million scientific and technical manpower- Over 2.5 million graduates added to the workforce
every years- 3rd largest pool of educated personnel
A large and Growing Middle class with per capita income of more than 1000 US $ p.a.
Advantage India
Amongst the largest and ever growing domestic market
Abundant Resources
Sound economic Fundamentals; Stable Economic reform regime
Vibrant Financial Sector
M&A Band WagonFrenzied Activity in the field of M&A in recent years
In 2007 out of Total 348 Cross Border Deals:Outbound: 240 ($32.37 billion) Inbound: 108 ($15.61 billion)
In First Quarter of 2007 while Inbound FDI flows were at an all time high they still exceeded by outbound investment
Increase in M& A
0
100
200
300
400
500
600
700
2006 2007
No. of DealsAmount (USD million)
India Inc. Goes Global
Tata Motors acquired Jaguar & Land Rover for 23 billion
Tata Steel acquired UK based Corus for $ 8 billion.
Suzlon Energy Ltd acquired German firm Repower Systems AG for $ 1.7 billion.
United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion
Hindalco acquired Novelis for $ 6 billion
Inbound Transactions Sistema, Russian Joint Stock
Company’s acquisition of 74% stake in Shyam Telelink – Telecommunications
French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million
Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million
Fursa Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem
UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million
EMC Corporations Acquisition of Valyd Software Pvt. Ltd.
Orkla’s Acquisition of MTR foods for $ 100 Million
Indian Overseas Investment
Favourable Policy framework- Overseas Investment Limit – 400% of Net
Worth for Companies Incorporated in India including Subsidiaries of Foreign Co.
- Overseas portfolio investment - 50 per cent of Net Worth
- RBI approval on case by case basis if in
excess of the above specified limit
FundingPermissible Funding: Drawal of foreign exchange from an AD; Capitalization of exports; Swap of shares Utilization of proceeds of External Commercial
Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);
in exchange of ADRs/GDRs Balances held in EEFC account of the Indian
party; Utilization of proceeds of foreign currency funds
raised through ADR / GDR issues.
India’s Direct Investment Abroad
Source: RBI 2007
Entry Routes Investing In India
Automatic Route Approval Route
General PermissionNo Prior Permission RequiredRBI to be informed within 30 days of inflow/issue of shares
DiscretionGovt. Approval requiredDecision generally within 4-6 weeks
Entry Strategies for Foreign Investors
Incorporation of a company (governed by companies Act)
As a Foreign Company through: Liaison office/Representative office Project Office Branch Office foreign company
As an Indian company through: a Joint Venture Wholly Owned Subsidiary
Joint Ventures As An Entry Strategy
JV’S regulated by Policies and Laws governing FDITwo Tier Approval Mechanism for JV’S:
- Automatic Approval Route
- FIPB Approval RouteIf the Foreign Partner has entered into JV in the same field before then NOC of the previous JV partner and approval of the Government also required
Joint Ventures …… Cont’d‘Same Field’ may be defined as the 4 digit National Industrial Classification (NIC) Code
Illustration: If the foreign investor has collaboration
for the manufacture of tarpaulin Code 268.3, he can invest in the manufacture of rubberized cloth Code 268.2 as there is no restriction to enter into JV’s in allied fields. The restriction shall apply to any item whose code NIC code is 268.2.
Joint Ventures …… Cont’d
A ‘Conflict of Interest’ clause advisable in the JV/Collaboration agreement in case one of the Partners to the JV wants to set up another JV or wholly owned subsidiary in the same field
Joint Ventures …… Cont’d
The Following are exempted from the restriction of entering into JV in the same field:
1) Information Technology sector2) Investments made by
multinational financial institutions3) mining sector for the same
area/mineral
Joint Ventures …… Cont’d
Prior government approval not required in certain cases:
- Investment to be made by venture capital funds is registered with SEBI
- Existing JV investment is less than 3%
- Existing venture is defunct or sick
Remittances
Determination of sale Price of Shares- Listed Company- Unlisted Company/Shares Thinly Traded
on the Stock ExchangeRemittance of Sale Proceeds:
i. NOC from Income Tax Authority requiredii. If the security has not been sold on a
recognized stock exchange then prior approval of the RBI in form TS 1 has been obtained
Regulatory Framework
Some applicable Indian Laws- Companies Act - Competition Act- SEZ Act- Income Tax Act- Indian Stamp Act- SEBI Takeover
Code- FEMA- FDI Policy
Competition Law, 2002
Salient Features: Anti-competitive agreements; Prohibition of abuse of dominant
position Regulation of Combinations
including mergers Unfair Trade Practices
India : Merger Law
Monopolies and Restrictive Trade Practices Act, 1969 Inadequate Obsolete
Still Prevailing
New Merger Law
Competition Act, 2002Combination The Indian law uses the word combinations to cover acquisition of control, shares, voting rights and assets, and mergers and amalgamations
Relevant Sections: 5-6 & 29-32
Areas of Concern
Applicable threshold Limits Based on: Value of Assets Turnover
Notice Requirement Mandatory Within 30 days of
Approval of proposal by BOD Execution of agreement/ document
Competition proposals
Mandatory waiting Period for Approval 210 Days
Extra Territorial Jurisdiction of CCI CCI has power to inquire about
combinations taking place outside India
Intent of National Security Legislations
Right to Intervene in case of perceived threat to National Security
Discretionary powers to prevent certain foreign companies from doing business in the country
Foreign Investments & National Security Legislations
United States- Foreign Investment & National Security Act, 2007 (Exon-Florio Provision)
China- Anti Monopoly Law
European Union- Members are free to regulate International Mergers (Articles 81-85 EC Treaty regulates Competition)
National Security … Cont’d.
United Kingdom- Enterprises Act 2002
India- National Security Exception Bill yet to be passed by the Parliament
FDI PolicySno. Sector Sectoral Cap
1. Manufacturing (Exceptions- Defense products, Products reserved for Small Scale Sector
100%
2. Coal Mining 100%
3. Electricity (Generation, Transmission, Distribution and Power Trading)
100%
4. Roads & Highways 100%
5. Airport Projects (Greenfield) 100%
6. Telecom-Basic & Cellular, Unified Access ServicesISP without Gateway Infrastructure Provider providing Dark fibre, right of way, duct space, tower etc.
74%
100%
FDI Policy
7. Hotels & Tourism 100%
8. Shipping & Ports 100%
9. Industrial Parks 100%
10. Hospitals 100%
11. SEZ’S 100%
FDI Policy – Prohibited Sectors
Atomic Energy
Lottery Business
Betting & Gambling
Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)
Special Economic Zones “Fuelling India’s Economic Growth”
FDI- 100% permitted under automatic route
Regulated by the SEZ Act 2005
Objectives
Investment Promotion
Engine for economic growth
Development of infrastructure
SEZ (Objectives)… Cont’d.
Promotion of Export of Goods & Services
Generation of Employment oppurtunities
minimum possible regulations. attractive fiscal package
both at the Centre and the State
SEZ ProceduresEstablishment
- By Central/State or any other entity
Requirements- Minimum Area Requirements for different class of
SEZ’s- SEZ divided into Processing area (for units) and
Non Processing Area (for supporting infrastructure)
Single Window Clearance available
SEZ – Current Statistics
496 SEZ’s Approved after SEZ Act 2005
- 282 EH/IT/ITES SEZ’s- 9 Multi Product SEZ’s- 13 Pharmaceuticals and chemical SEZ’s- 4 Bio Tech SEZ’s- 8 Textile/Apparel/Wool SEZ’s
136 In principle approvals
207 SEZ’s have been notified
Incentives: SEZ Developers
Customs/Excise exemptions
Income Tax exemption - On export Income for 10 years out of 15
Exemption from Dividend Distribution Tax
Exemption from Sales Tax/Service Tax
Incentives: SEZ Units
Duty free import/domestic procurement of goods
Income Tax exemption
Exemption from minimum alternate tax
External commercial borrowing by SEZ units up to US $ 500 million in a year without any maturity restriction through recognized banking channels.
Exemption from Central Sales Tax/VAT/State Acts & Service Tax
Single window clearance.
Real Estate“Developing India’s Tomorrow”
Overview
- Amongst the largest employers only after agriculture
- US $12 Billion Industry- 30% growth rate- Housing Sector contributes 5% of
GDP
Real Estate- Growth Potential
Requirements of housing, commercial and industrial infrastructure bound to rise367 Million Sq. Ft. of additional office space needed by 2012-13 ( Estimated by Ernst & young)Indian Ministry of Tourism forecasted requirements of 2.9 and 6.6 Million hotel rooms to meet the tourism and business by 2010 and 2020.Fast growing Medical tourism will become US$2 billion industry by 2012 Asian Development Bank estimates requirements of 10 million units by 2030 and will require huge investment in Health Services sector
Real Estate- FDI Policy
FDI not permitted in Business of buying & selling property
FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) subject to:
- Minimum Area requirements
- Minimum Capitalization requirement - Divestment clause i.e. No repatriation before 3 years
Real Estate Developers- Incentives
Tax exemptions up to 100% on profits derived by an undertaking
- Developing/operating/maintaining Industrial Parks
- Developing & Building Housing Projects- Developing/operating/maintaining
SEZ’s- Constructing Hotels & Hospitals in Tier
2 cities
Real Estate- Foreign Players in India
Investor Country
Emmar Group U.A.E
Kontur Bintang/ Westport
Malaysia
Singapore Housing Board
Singapore
Keppel Land Singapore
Salim Group Indonesia
Lee Kim Tah Holdings
Singapore
Retail Sector
Overview- Amongst the largest employers in
the country at par with Real Estate- Amongst the highest outlet density
in the world with around 12 mn Outlets
- Largely unorganized; Large no. of local players;
- Scope of Market consolidation
FDI in Retail
FDI not allowed in Multi-Brand Retail
100% permitted through the Automatic route in Wholesale Cash & Carry operations
51% in Single Brand Retailing- Requires FIPB Approval- Product to be single brand only- Should be sold under same Brand Internationally- Covers only Products Branded during Manufacturing
Retail Sector -Foreign Players
Player Retail Activity
Wal Mart Whole Sale Cash & Carry Operations
Marks & Spencer Single Brand Retail
Nike Single Brand Retail
Christian Dior Single Brand Retail
Jimmy Choo Single Brand Retail
French Connection Single Brand Retail
Lee Cooper Single Brand Retail
Areas of Concern
Transfer Pricing Issues- Method of escaping Tax Liability- Tax Avoidance hence Illegal
RBI approval required- Source of Funds
National Security issues
Judicial System
Robust, well-developed legal and administrative system
Derived from the Common Law System
Commercial Disputes:- Arbitration Preferred mode of settlement - International Commercial Arbitration Possible
Strong Intellectual Property laws
Investing in India
It is advisable to have a thorough Due Diligence done before investing
Non-Compete clause- It is advisable to have a clearly worded non-
compete clause if entering into a JV
Dispute Resolution clause- Must be clearly worded in terms of Governing
Law, Jurisdiction, Mode of Dispute Resolution
Investing in India…cont’d.
Intellectual Property Clause- To protect IP rights from
Infringement
THANK YOUShould you have any questions on issues reported here or on other areas of law, you may contact Paras Kuhad and Associates at the following co-ordinates:
Madhurendra Nath JhaParas Kuhad and Associates, AdvocatesTel: +91 (0) 11 46562525, 46562727 Fax: +91 (0) 11 46562000Mob: +91(0)-9811319922Email : [email protected], [email protected]
Delhi Mumbai Kolkata Chennai Jaipur Pune Jodhpur
Disclaimer
The contents of this document are intended for informational purposes only and are not in the nature of a legal opinion or advice. They may not encompass all possible regulations and circumstances applicable to the subject matter and readers are encouraged to seek
legal counsel prior to acting upon any of the information provided herein.
This Note is the exclusive copyright of Paras Kuhad and Associates, Advocates and may not be circulated,
reproduced or otherwise used by the intended recipient without the prior permission of its originator.© Paras Kuhad and Associates, Advocates
2008