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 Reserves
Liberal outbound investment
Currency appreciation
Entry Routes for Investment in India


Approval
Automatic
Foreign Investment in India
The 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 valueadded services industries like financial
services and information technology.
Investor Attractiveness
Source: 2007 A T KEARNEY
90
80
70
60
India
US
UK
Poland
Germany
50
40
30
20
10
0
Manuf.
Service Telecom
& Utility
retail
Sectors Attracting Highest FDI Equity
Flows
Computer Software &
Hardware
Construction Activities
3000
2500
Automobile Industry
2000
Housing & Real Estate
1500
Power
1000
Drugs and Pharmaceuticals
Mettalurgic Industries
500
All Figures in US $(Million)
0
2004-05
2005-06
2006-07
2007-08
Advantage India
One of the Largest Free Market Democracies
in the world
Unparalleled resource of educated, hardworking, 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 Wagon
Frenzied 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
700
600
500
400
No. of Deals
Amount (USD million)
300
200
100
0
2006
2007
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
Funding
Permissible 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
General Permission
No Prior Permission Required
RBI to be informed
within 30 days of inflow
/issue of shares
Approval Route
Discretion
Govt. Approval required
Decision generally within
4-6 weeks
Entry Strategies for Foreign
Investors
Incorporation of
companies Act)
a
company
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
(governed
by
Joint Ventures As An Entry
Strategy
JV’S
regulated
by
Policies
and
Laws
governing FDI
Two
Tier
Approval
Mechanism for JV’S:
- Automatic
Approval
Route
- FIPB Approval Route
If the Foreign Partner
has entered into JV in
the same field before
then
NOC
of
the
previous JV partner and
approval
of
the
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 sector
2) Investments made by multinational
financial institutions
3) 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 Exchange
Remittance of Sale Proceeds:
i. NOC from Income Tax Authority required
ii. 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, 2002
Combination
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 Policy
Sno.
Sector
Sectoral Cap
1.
Manufacturing (ExceptionsDefense 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.
TelecomBasic & Cellular, Unified Access
Services
ISP 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 Procedures
-
Establishment
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 rise
367 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
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 DevelopersIncentives
-
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 EstateForeign 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
Wal Mart
Marks & Spencer
Nike
Christian Dior
Jimmy Choo
French Connection
Lee Cooper
Retail Activity
Whole Sale Cash & Carry
Operations
Single Brand Retail
Single Brand Retail
Single Brand Retail
Single Brand Retail
Single Brand Retail
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 noncompete 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 YOU
Should 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 Jha
Paras Kuhad and Associates, Advocates
Tel:
+91 (0) 11 46562525, 46562727 Fax: +91 (0) 11
46562000
Mob: +91(0)-9811319922
Email : mnjha@paraskuhad.com, mnjha@hotmail.com
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.
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© Paras Kuhad and Associates, Advocates
2008