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Title: Foreign%20Direct%20Investment%20in%20India:%20Evolution%20

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

Evolution of Economic Liberalization
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

Phases of Indian Economy1991-2000
  • Liberalization and Globalization of Indian
  • Increased emphasis on private sector
  • Limited extent of FDI participation
  • Gradual improvement in the enabling environment

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

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.
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)

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
  • 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

Entry Process Entry Strategies
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
  • If the proposal attracts locational restriction
  • Industrial Entrepreneur Memorandum

The Industrial Policy
  • Industries reserved for the Public Sector (1)
    Atomic Energy and (2) Railway Transport
  • Compulsory licensing needed in the following
  • Distillation and brewing of alcoholic drinks
  • Cigars and cigarettes and manufactured tobacco
  • Electronic aerospace and defence equipment of all
  • Industrial explosives including detonating fuses,
    safety fuses, gun powder, nitrocellulose and
  • Certain hazardous chemicals

The Industrial Policy
  • Locational Policy
  • Industrial undertakings are free to select the
  • 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).

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
  • 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.

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
The Entry Process Automatic Route
  • All items/activities for FDI investment up to
    100 fall under the Automatic Route except the
  • 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
  • All proposals falling outside notified sectoral
    policy/ caps or under sectors in which FDI is not

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

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
  • New Trend FIPB examines objections by the
    earlier partner objectively.

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

Other modes of Foreign Direct Investment 
  • Indian Companies allowed to raise equity capital
    in the international market through the issue of
    GDRs/ ADRs/FCCBs.
  • No ceiling on investment

Other modes of Foreign Direct Investment
  • GDR, ADR, FCCB (Contd.)
  • No end-use restrictions on GDR/ ADR/ FCCB issue
  • 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.

Foreign Technology Collaboration
  • Foreign technology collaborations are permitted
    either through the automatic route or by the
  • 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

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
  • The aforesaid royalty limits are net of taxes and
    are calculated according to standard conditions.

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.

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

The Entry Strategy Joint Venture Company
  • Advantages
  • Limited liability
  • Market Penetration
  • Local Partners Expertise and Experience
  • Vital Considerations
  • Choice of Joint Venture Partner
  • Due Diligence

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
  • Disproportionate voting Rights Veto
  • Non-compete

The Entry Strategy Joint Venture Company
  • Vital Considerations (Contd.)
  • Agreement for future issue of share capital
  • Dispute Resolution
  • Non-disclosure of confidential information post

The Entry Strategy Branch Office
  • Purpose/Viability of a Branch Office
  • Represent the business interest of foreign
  • For the purpose of execution of the Project
  • Project Office is in the nature of a Branch
    Office set up for a particular project.

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

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

The Entry Strategy Liaison Office
  • Liaison office for
  • Promotion of business interest spreading
    awareness of companys products explore
    opportunities work as channel of communication
  • 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.

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

Exit Issues
  • Transfer of shares from non-resident to
    non-resident does not require RBI approval for
  • 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
  • RBI permission not required if sale through Stock
  • Mauritius Route Capital Gain Advantage

Legal Structures facilitating FDI
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

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

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
  • Amendment to Contract Labour (Regulation
    Abolition) Act, 1970 under consideration.

Investment Incentives
Incentives for investment in Telecom Sector
  • Movement towards technology neutral Unified
    Licensing Regime
  • Permission for Inter-Circle Intra-Circle
  • Exemplary growth in teledensity, subscriber base
  • 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

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

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.

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.

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

FDI in Real Estate Policy Issues
  • Press Note 4 (2002 Series)
  • 100 FDI under Automatic Route PERMITTED FOR
    Integrated Townships, subject to following
  • 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
  • Conditions post acceptance of FDI proposal
  • Minimum capitalization norms
  • Upfront payment
  • Minimum lock-in period
  • Time bound completion of project

FDI in Hotel and TourismPolicy 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.

  • 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

Thank You